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                    THE MONEY MARKET

                           BY
                       F. STRAKER

    FELLOW OF AND LECTURER TO THE BANKERS’ INSTITUTE
       AND LECTURER TO THE EDUCATIONAL DEPARTMENT
            OF THE LONDON CHAMBER OF COMMERCE

                      THIRD EDITION

                   METHUEN & CO. LTD.
                  36 ESSEX STREET W.C.
                         LONDON

         _First Published_      _June 1904_
         _Second Edition_       _January 1911_
         _Third Edition_        _1920_




CONTENTS


                                                                  PAGE
                               CHAPTER I
    THE BEGINNING OF BANKING IN ENGLAND                              1

                              CHAPTER II
    THE FOUNDATION AND GROWTH OF THE BANK OF ENGLAND                 7

                              CHAPTER III
    THE EARLY PRIVATE BANKERS                                       19

                              CHAPTER IV
    THE BANK CHARTER ACT OF 1844, AND ITS SUSPENSIONS               28

                               CHAPTER V
    THE DEVELOPMENT OF LONDON AS THE FINANCIAL CENTRE OF THE WORLD  41

                              CHAPTER VI
    FACTORS OF THE MONEY MARKET                                     47

                              CHAPTER VII
    THE BANK RETURN                                                 56

                             CHAPTER VIII
    THE GROWTH OF JOINT-STOCK BANKS                                 76

                              CHAPTER IX
    JOINT-STOCK BANK BALANCE SHEETS                                 87

                               CHAPTER X
    THE BILL-BROKERS                                               105

                              CHAPTER XI
    THE CLEARING HOUSE                                             115

                              CHAPTER XII
    FOREIGN EXCHANGES                                              122

                             CHAPTER XIII
    THE MONEY ARTICLE OF THE PRESS                                 144

                              CHAPTER XIV
    CONCLUSION                                                     161

                               APPENDIX
    THE GOLD RESERVE                                               169
    INDEX                                                          179




THE MONEY MARKET




CHAPTER I

THE BEGINNING OF BANKING IN ENGLAND


The present position of the Money Market in this country so enters
into the life of the people as a thing that _is_, that few trouble
themselves to inquire how our monetary system came to be what it
is, how it was founded, grew, and developed into its present state.
Whether people are aware of it or not, the stability and condition of
the Money Market of a country influences the lives of all—rich and
poor alike—and the material well-being of all is largely dependent
upon it. Before proceeding to any examination of the methods in which
present-day business in the London Money Market is conducted, we will
look back into the past, and trace the rise of our financial system
from its early beginnings.

Trade is, of course, the foundation of, and reason for, the need of
money; and trade commenced with the first division of labour. With the
earliest men one was more fitted for one thing and one for another; one
was a hunter and one a husbandman. When the hunter handed over to the
husbandman so many skins for so much corn, trade was established; but
this trade was, of course, only a system of barter. As men grew more
civilised and trade developed, the inconveniences of this system became
apparent and pressing, and gradually more suitable modes of settling
transactions were evolved; although in certain remote and uncivilised
parts of the world trading by barter exists to the present day. As a
reminder of bygone times there is, in the Royal Exchange, a picture of
the Phœnicians trading with the men of Cornwall fine cloth for tin and
skins.

We know that the early inhabitants of this country had coinage of a
kind, but the earliest record of any definite business in monetary
transactions was in the reign of William the Conqueror, who first
introduced Jewish traders to this country. From that time on, for
hundreds of years, the Jews were more or less intimately connected with
our finances; but they led a very chequered career in England, being
frequently treated with great cruelty and barbarity. They were required
for the help which could be obtained from them, but hated by the people
for their usurious practices. The exactions which the kings and nobles
of the time put upon them were largely conducive to these practices,
however, as unless the Jews could make large profits out of the people
they would not have been able to meet these exactions.

The financial importance of the Jews appears to have declined in this
country towards the end of the thirteenth century; but about the
same time their place was taken by the Lombards, the early Italian
merchants, who came over and settled here in the street which still
bears their name. These Lombards were men of some attainment, being
skilled in arts and trade, and they possessed the only knowledge of
banking then in existence. They combined the art of the goldsmith with
the business of the banker, and gradually obtained a firm and sound
footing in the country.

The reign of Elizabeth was notable, among many other things, for a
great and important increase in the trade and commerce of the country.
Many causes contributed to this, among others being the capture of
Antwerp by the Duke of Parma, when it is said a third of the merchants
of that flourishing city found a refuge on the banks of the Thames.
The newly awakened national energies found fresh outlets and markets,
and London gradually became the general mart of Europe and of the then
known world. That the knowledge of banking and the foreign exchanges
had by this time considerably developed we can gather from many
sources; but the knowledge and wisdom exhibited by Sir Thomas Gresham
during the reigns of Edward VI., Mary, and Elizabeth is remarkable,
and his influence had a far-reaching effect on the public and private
finances of the time.

In spite of this increase of the knowledge of monetary matters,
however, no settled banking business developed for some time. As our
merchants gradually accumulated riches they fell into the custom of
sending their surplus funds to the Tower of London for safe custody.
This custom was brought to an abrupt end in 1640 by Charles I. taking
possession of £200,000 which had thus been lodged at the Tower; but
this sum was shortly after repaid. For a time the merchants kept their
moneys in their own possession, but owing to the unsettled condition of
affairs ruling through the whole period of the civil war, they adopted
a system of depositing their cash with the goldsmiths, who were by this
time a wealthy and responsible body.

In addition to the presumed safety of funds so deposited, the
goldsmiths offered an extra inducement for further funds to be
placed in their hands by allowing interest on such moneys. With this
additional borrowed cash at their disposal, the goldsmiths commenced
the business of discounting bills and lending money; and they also
lent money to the king on the security of the taxes. The receipts they
issued for the money lodged with them circulated from hand to hand, and
were known as Goldsmiths’ Notes, and these may be considered the first
kind of notes issued in England. Scott, in the _Fortunes of Nigel_,
makes Heriot to say, “I am a goldsmith, and live by lending money as
well as by selling plate.”

In 1672, however, this gradually developing banking business received
a rude shock. As we have already seen, the goldsmiths, or bankers, of
the time lent their money to the king; that is, they deposited their
moneys with the Treasury on the security of the revenue, from which
they were afterwards reimbursed, obtaining a good rate of interest on
their money in the meanwhile. A king or a government, however, can
no more live beyond their income without getting into difficulties,
than can an individual. The necessities and extravagances of Charles
II. led him to a memorable step when, in the year 1672, he suddenly
ordered the Exchequer to be closed, and refused to pay out any of the
sums deposited. The amount thus annexed was about £1,300,000, and this
drastic measure had the effect of bringing ruin on nearly half of the
goldsmiths, and consequently on their clients who had money deposited
with them. The injustice of this seizure raised such universal protest
that the king agreed to pay interest at the rate of 6 per cent. per
annum on the principal sum out of the hereditary excise. This interest
was paid until the last year of his reign, and subsequently an
arrangement was made by which about one-half the sum owing was allotted
to the claimants in the form of stock. This was the real commencement
of our National Debt in its present form.




CHAPTER II

FOUNDATION AND GROWTH OF THE BANK OF ENGLAND


In tracing the history of our financial system we now come to the
important event of the establishment of the Bank of England.

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. His scheme, though
well received in official circles, produced very great opposition from
many classes of the public, who thought they would be prejudiced by
such an institution.

The goldsmiths thought they saw in it the destruction of their
business, the money-lenders a reduction in the rates of interest
obtainable, certain merchants a reduction of their profits on
Government contracts, while the political opponents of the Government
and the king saw that the scheme, if efficiently carried out, would
naturally strengthen the former and give the latter a firmer position
than he occupied at that time; and all these interested parties with
one accord joined forces and condemned the scheme.

But in spite of all opposition 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 £1,200,000 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 £4,000 per
annum for management and expenses; making in all £100,000 per annum.
It was also provided that the sum of £300,000 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 £1,200,000 was handed in to the Exchequer.

Such in brief was the foundation of the Bank of England, and though
its establishment quickly had a beneficial effect on the community at
large, in curtailing the ruling rates of interest, yet its early years
were marked by great trouble and many vicissitudes. Certain persons who
had opposed its establishment from personal motives saw some of their
worst fears being realised in the reduction of their profits, and they
were not slow to take advantage of every opportunity which presented
itself to throw obstacles in the path of their young though powerful
rival, and to unite in efforts to thwart its progress.

With a Government always wanting more financial help, in season and out
of season, with debased currency, and with enemies on every side, the
position of the directors of the Bank was no enviable one; and it was
only by great energy, united effort, and perseverance that they were
able to keep their heads above water, and struggle on until at last
they found themselves on safer and firmer ground.

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.”

In spite of its many embarrassments, the following extract from the
_London Magazine_ of 1737 shows how well the Bank of England had come
to be thought of by that time:—

    “There certainly never was a body of men that contributed
    more to the public safety than the Bank of England.
    This flourishing and opulent company have, upon every
    emergency, always cheerfully and readily supplied the
    necessities of the nation, so that there never have been
    any difficulties—any embarrassments—any delays in
    raising the money which has been granted by Parliament
    for the service of the public; and it may very truly be
    said that they have, in very many important conjunctures,
    relieved the nation out of the greatest difficulties, if
    not absolutely saved it from ruin.”

We pass on now to the end of the eighteenth century, when the country
was plunged in 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. On
the following day this Order was made public, and the Bank issued the
following notice:—

              “BANK OF ENGLAND, _February 27th, 1797_.

    “In consequence of an order of His Majesty’s Privy
    Council, notified to the Bank last night, a copy of which
    is hereunto annexed, the governor, deputy-governor, and
    directors of the Bank of England think it their duty to
    inform the proprietors of the bank stock, as well as the
    public at large, that the general concerns of the Bank are
    in the most affluent and prosperous situation, and such as
    to preclude every doubt as to the security of its notes.
    The directors mean to continue their usual discounts for
    the accommodation of the commercial interest, paying the
    amount in bank-notes, and the dividend warrants will be
    paid in the same manner.”

This suspension of cash payments was a very drastic measure to take;
but the public, recognising the difficulties of the situation, and
appreciating the means which were being taken for the general safety,
at once fell in with the spirit of the Order, and a meeting of
merchants and bankers was held and passed the following resolution,
which received very general support:—

    “That we, the undersigned, being highly sensible how
    necessary the preservation of public credit is at this
    time, do most readily declare that we will not refuse to
    receive bank-notes in payment of any sum of money to be
    paid to us, and we will use our utmost endeavours to make
    all our payments in the same manner.”

An Act was passed in the following May, confirming the action of the
Privy Council, but authorising the Bank to pay out sums under twenty
shillings in cash, and also allowing certain bankers to have a stated
amount of cash. This Act restricted the payment of cash for a period
of fifty-two days only, but before it expired a further Act was passed
extending the period of restriction, and subsequently other Acts were
passed greatly prolonging the period; and 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 1st, 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.

The year 1824 was notable for a very great increase in the number of
joint-stock companies which were promoted or suggested, and also of
loans to foreign countries; and a period of intense excitement and
speculation ensued. This was followed by the inevitable crisis, which
developed into a panic at the end of 1825, when a large number of
London and country bankers had to stop payment. The reserve of the
Bank was reduced to a merely nominal figure, and the Bank authorities
themselves suggested that they should again be “restricted” as to
payments; but the suggestion was firmly resisted by the Government.
Fortunately, at the lucky moment, an old box which had been stored
away was remembered. It contained a large quantity of £1 notes, and
these the Bank at once commenced to issue. This issue had very quick
and beneficial results. The notes were readily received by the public
in exchange for the notes of private bankers, the demand for bullion
ceased; and Mr. Harman, giving his evidence before a parliamentary
committee inquiring into the causes of the panic, stated it was his
opinion that this issue of small notes “saved the credit of the
country.”

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.

When the Bank of England first commenced business in 1694, it was
located in the Hall of the Grocers’ Company, in which building it
continued to conduct its operations until the year 1732. A slight
dispute then arising with the Grocers’ Company as to a renewal of the
lease of their hall, it was decided by the authorities of the Bank to
acquire a building of their own. Accordingly premises were obtained in
Threadneedle Street upon a portion of the present site, and Lawson in
his _History of the Bank of England_ gives the following details as to
the same:—

    “The original extent of the Bank comprehends the site of
    the house and garden belonging to Sir J. Houblon, one
    of the first directors. It was a comparatively small
    building, invisible from the street, and surrounded by
    other buildings, one being the church of St. Christopher
    le Stocks, and the others consisting of five inns and
    twenty private houses. As the business and importance of
    the Bank grew, the surrounding premises were acquired from
    time to time and demolished, and the present building was
    gradually erected. Although the church of St. Christopher
    shared a similar fate with the surrounding buildings, the
    churchyard was preserved, and now forms what is known as
    the ‘Garden’ of the Bank.”

Lawson states that one of the clerks of the Bank, of the name of
Jenkins, was buried in this consecrated ground. The cause of this
interment in such a place arose out of a fear, as expressed by his
relatives, that in consequence of his singular height (he was about
seven feet tall), his body would be exhumed by body-snatchers if buried
elsewhere. The sequel to this episode is within the writer’s personal
knowledge. Having to pay a visit to a dentist some few years ago, he
was shown, as a curiosity, an enormous human lower jaw-bone with a full
set of perfect teeth. Judging from its size, the dentist said that it
had evidently belonged to a giant, and he added that it had been given
to him by a friend who was a builder and contractor, and that the
jaw-bone had been found by one of this friend’s workmen while carrying
out some alterations and excavations at the Bank of England!

Alas, poor Jenkins! to be buried in the “Garden” of the Bank of England
as a sure place of refuge against body-snatchers, and in the end to
have his jaw-bone exhibited as a curio in a dentist’s surgery.

Having shortly sketched the history of the Bank of England from its
inception to the time when it was to be opposed by strong competitive
establishments, we now will briefly examine the development of private
banking up to this period.




CHAPTER III

THE EARLY PRIVATE BANKERS


We have already seen that elementary banking operations in the country
were carried on by the Jews, who in course of time were succeeded by
the Lombards, and that then the business, such as it was, drifted
into the hands of the goldsmiths. During the more settled years of
the Commonwealth the need of banking accommodation was keenly felt by
merchants and traders to enable them to carry on their business, and as
demand creates supply, the goldsmith bankers increased in number—and in
wealth.

There was, indeed, at this time a demand made by certain persons for
the establishment of joint-stock banks, on the system already in vogue
in several parts of the Continent; and we find that an eminent London
merchant, named Lamb, presented an address to the Lord Protector with
this object in view. After enumerating all the advantages to be derived
from the establishment of such institutions, his address concluded in
the following quaint form:—

    “Lastly, a bank with a certain number of sufficient men
    of estate and credit, joined together in a joynt stock,
    being as it were the general cashkeepers or treasurers
    of the place where they are settled, and divers others,
    tending much to the tranquility of your highness and the
    welfare of the English nation, which, with your highness’s
    favourable encouragement, I shall in all humility be ready
    to make known to you, and remove any objections as can be
    alledged in the premises, and propound a way how it may
    be effected, and the evils remedied and prevented, being
    unwilling to bury the talent in a napkin which it hath
    pleased the Giver of all blessings in his great goodness
    and mercie to bestow upon me, hoping that I shall not
    offend by tendering this with my best services to your
    highness.”

Although this matter was referred to a Parliamentary Committee, nothing
came of the proposal.

In 1667 the gradually developing banking business received a check by
what is known as a “run” taking place, and this appears to be the first
episode of the kind of which we have any record. This event lessened
the credit of the bankers, but the action of Charles II. in closing the
Exchequer in 1672 nearly brought their business to an end.

By the time of the establishment of the Bank of England, however,
many bankers had again regained a position of credit and wealth, and
they continued to carry on and develop their business in spite of the
competition of the new bank. About the same time several joint-stock
banks were founded and carried on successfully until they were obliged
to wind up their affairs in 1708, in consequence of the monopoly
granted to the Bank of England in that year. Although the London banks,
which continued in existence after the granting of this monopoly,
were not prohibited by the Bank Charter from issuing their own notes,
yet this part of their business gradually declined in the presence of
their all-powerful rival, and it ceased altogether about the year 1750
(though some writers give the date as about 1793).

About the year 1775 the City bankers, finding great inconvenience in
settling their mutual transactions, established what is called the
“Clearing House,” to facilitate their exchanges with each other; of
this we shall have more to say later. It may be noted that the two
oldest banking houses in London are those of Messrs. Child and Company
and Messrs. Hoare, both of which were established before the Bank of
England.

In the early days of which we are now speaking, the personal relations
of banker and customer were rather different from those of the present
time of keen competition: only the merchants and wholesale dealers were
personally known to their banker, who was scarcely acquainted with even
the names of the retail dealers favouring him with their patronage.

The following amusing anecdote is related, bearing on the lighter side
of banking, of an interview between a certain banker in Lombard Street
and one of his customers who was a baker:—The baker having one day
paid in £500 to his account, left the bank and stood on the doorstep
debating in his mind which way he should turn, when the banker came up,
and as there was no room for him to pass in without soiling his clothes
against the baker’s working ones, he haughtily said, “Move away,
fellow!” The baker, feeling of some importance, was naturally nettled,
and replied somewhat rudely, which led to high words, and finally the
banker was sent spinning into the gutter. Rising up full of wrath, he
loudly called for someone to fetch a constable and arrest the fellow,
when the cashier who had just received the baker’s money came forward
and, to the banker’s surprise, whispered in his ear that the baker was
one of his own customers. Retiring into his private room to recover
himself, he soon sent for the baker. Apologies were exchanged, and it
is said that the banker and baker were thereafter good friends.

Of the early history of country banks we have no very definite records,
but we know that after the passing of the Act in 1708, prohibiting
the foundation of banks having more than six partners,[1] a large
number of private banks having fewer partners than the prescribed
number came into existence to meet the necessities of the time; and
after the passing of the Bank Restriction Act in 1797 their number was
largely increased. At the time of the passing of this latter Act, it is
calculated that there were somewhat under three hundred country banks
in existence, but by 1813 we find that the number had increased to
nearly one thousand.

[Footnote 1: Under the Companies Act, 1862 (25 & 26 Vict. cap. 89),
private banks may now have as many as ten partners. Section 4 provides
that “no company, association, or partnership consisting of more than
ten persons shall be formed, after the commencement of this Act,
for the purpose of carrying on the business of Banking unless it is
registered as a company under this Act or is formed in pursuance of
some other Act of Parliament or of Letters Patent.” Re-enacted by
Companies (Consolidation) Act, 1908, sec. 1 (1).]

In the eighteenth century banking was essentially _free_, in the
fullest sense of the word, except for the one prohibition as to the
number of partners constituting a bank. Anyone was at liberty to put up
the magic word “Bank” over his door and commence business. We cannot
say very much as to the solvency of these banks; some were doubtless
sound and ably managed, but every wave of distress which swept over the
country unfailingly overthrew large numbers of these so-called banks,
and occasioned much local suffering.

The gradual evolution of country shopkeepers into country bankers,
which was the usual course of the foundation of such institutions in
the days of which we are speaking, is well exemplified in the following
case, which is related in Lawson’s _History of Banking_:—

    “In a borough town of importance in one of the north
    midland counties dwelt a respectable draper, possessing a
    good connection with the farmers frequenting the market
    of the town. Although the name of Robin Hood had long
    lost its terrors, those of Turpin and Nevison filled all
    men’s minds with fear—and with good reason, for they and
    their fraternity exercised their calling with such energy
    and success that it was always a matter of doubt with
    travellers whether or not they should arrive in safety at
    the next inn or their destination, whatever that might
    be. With the farmers above alluded to there were more
    than ordinary grounds of alarm; the town almost adjoining
    the scene of the far-famed exploits of Robin Hood and his
    merry men, was admirably situated for a levy by their less
    romantic successors of extemporaneous taxes. To avoid
    as much as possible the losses thus arising, farmers,
    having full confidence in the honesty of the draper
    with whom they dealt, made him the depositary of their
    ready cash. Ready cash of his friends was to our draper
    as valuable as capital of his own, and buying for ready
    money was profitable. Still, money remained idle in his
    hands, and by degrees he began to grant accommodation
    to his neighbours. Our draper now became famous for his
    extraordinary command of money, and his correspondence
    extended as far as Preston, in Lancashire. The profits
    thus arising seemed boundless, and the next step was taken
    by our adventurous shopkeeper: he allowed a small interest
    to his friends the depositors. The new business flourished
    to such an extent that it swallowed up the old one, and
    our draper at length became a _banker proper_, and no more
    a shopkeeper.

    “Such was the origin of the Smiths. First confined to
    the town of Nottingham, afterwards extended to Hull and
    Lincoln, the business of the firm required a London
    correspondent entirely in their interest, and such they
    found in the late Mr. Payne.”

And thus was founded the well-known firm of Smith, Payne, and Smith,
whose business has recently been amalgamated with that of the Union
Bank of London.

Many are the tales told of the wit and shrewdness of the early country
bankers, and the following anecdote, related in Mr. Maberley Phillips’s
interesting work on _Banks, Bankers, and Banking in Northumberland,
Durham, and North Yorkshire_, is on a par with the well-known tale of
the private Irish banker, who became so very unpopular, that to show
the contempt in which he was held, the inhabitants of his district
gathered together all his notes which they could lay hands on, and made
a bonfire of them in front of his house; much to the banker’s amusement
and gain.

Mr. Phillips’s story is of Jonathan Backhouse, a Quaker, who, though
originally a linen and worsted manufacturer in Darlington, founded
“Backhouse’s Bank” in 1774, in partnership with his father. This
institution only went out of existence in 1896, when it was amalgamated
with Messrs. Barclay and Company, Limited.

    “Before the time of railways, near the beginning of the
    century, the commercial traveller of that day made his
    visits to the towns of the county of Durham either by mail
    coach or other conveyance, and sojourned for some days in
    each town, where he was an important person, especially at
    the head hotel or hostelry of the place. It so happened
    that one of these gentlemen, after having dined freely
    at the ‘King’s Head,’ Barnard Castle, was boasting to
    a company present in the commercial room of his own
    importance and wealth, and exhibiting in proof a sheaf of
    bank-notes taken on his journey.

    “Jonathan Backhouse, attired in the usual dress of the
    Society of Friends, unknown to the rest of the company,
    was in the room quietly reading his newspaper, when he
    was attacked by the wealthy commercial, and by a series
    of sarcastic remarks held up to ridicule as a man out of
    harmony with the spirit of the time and place. Following
    up this raillery the commercial, displaying his handful of
    notes, offered to bet the Quaker £5, or any sum, that he
    could not produce as much money as he was exhibiting. Mr.
    Backhouse, after a great deal of banter, said _he did not
    bet_, but to show his indifference to money offered to put
    a £5 note in the fire if the commercial would do the same.
    Suiting the action to the word, Mr. Backhouse took out
    a £5 note and put it into the fire. The commercial, not
    wishing to be behind, did the same. Mr. Backhouse offered
    to repeat the process, but the commercial, considerably
    cowed, declined; when Mr. Backhouse quietly thanked him
    for having burned one of his (Mr. Backhouse’s) bank-notes
    for which he had received £5, while the note he (Mr.
    Backhouse) had burned was on his own bank, and only cost
    him the paper.”




CHAPTER IV

THE BANK CHARTER ACT OF 1844, AND ITS SUSPENSIONS


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
£29,000,000, while the cash was reduced to a tenth of that figure, and
stood at £2,936,000 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 £14,000,000 (including the 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
    £14,000,000 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 £3 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          28,351,295 | Government debt      11,015,100
                                     | Other securities      2,984,900
                                     | Gold coin and
                                     |   bullion            12,657,208
                                     | Silver bullion        1,694,087
                         ----------- |                     -----------
                         £28,351,295 |                     £28,351,295
                         =========== |                     ===========

    _Dr._                   BANKING DEPARTMENT                  _Cr._
    ---------------------------------+--------------------------------
                               £     |                           £
    Proprietors’ capital  14,553,000 | Government
    Rest                   3,564,729 |   securities         14,554,834
    Public deposits        3,630,809 | Other securities      7,835,616
    Other deposits         8,644,348 | Notes                 8,175,025
    Seven-day and                    | Gold and silver coin    857,765
      other bills          1,030,354 |
                         ----------- |                     -----------
                         £31,423,240 |                     £31,423,240
                         =========== |                     ===========

For comparison we append the Return of the 2nd September, 1903.

    _Dr._                    ISSUE DEPARTMENT               _Cr._
    ---------------------------------+----------------------------
                               £     |                     £
    Notes issued          51,831,835 | Government debt  11,015,100
                                     | Other securities  7,434,900
                                     | Gold coin and
                                     |  bullion         33,381,835
                                     | Silver bullion      Nil
                          ---------- |                  ----------
                         £51,831,835 |                 £51,831,835
                          ========== |                  ==========

    _Dr._                   BANKING DEPARTMENT              _Cr._
    --------------------------------+-----------------------------
                             £      |                       £
    Proprietors’ capital 14,553,000 | Government securities
    Rest                  3,740,209 |                   18,260,841
    Public deposits       7,393,580 | Other securities  24,969,260
    Other deposits       41,872,061 | Notes             22,322,875
    Seven-day and                   | Gold and silver coin
      other bills           113,465 |                    2,119,339
                         ---------- |                   ----------
                        £67,672,315 |                  £67,672,315
                         ========== |                   ==========

The provisions of the 1844 Act, above noted, are the principal
ones which affected banking in general, and the Bank of England in
particular—they were the food for much debate and discussion before
they became law, and it may be added that several of the provisions
then enacted have been the food for much debate and discussion ever
since. 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 regulations as to the country bank-note issues were framed with
the idea of ultimately eliminating entirely such issues; but though
the amount of private notes in circulation has decreased, and also the
number of bankers who have the power of issue—by lapses, bankruptcy,
and amalgamations—the time when there are no country bank-notes has
not arrived, notwithstanding that the framers of the Act confidently
anticipated that such a result would be achieved long before now.

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.

Under the laws regulating the Imperial Bank of Germany such procedure
would not have been necessary. The German Bank Law has been framed
largely on the same lines as our own, but it gives the Reichsbank power
to increase the amount of notes issued against securities on a payment
to the Government of a fine of 5 per cent. per annum on the excess
issue. This fine is sufficient in ordinary times to act as a complete
check on overissue, but in times of trouble it acts as an efficient
safety-valve by relieving the minds of business people from the fear
that “there will not be enough to go round.” If it is known that money
can always be had at a price, the probability of a crisis developing
into a panic is almost entirely obviated.

We will now briefly review the three 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 £340,000,000. 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 £1,600,000, 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 reserve
of the Bank of England had been allowed to fall dangerously low during
the course of the year, and large financial operators had carried
on vast transactions with hardly any capital—only credit—relying
for assistance on the Bank. Bad news came to hand from America in
September, detailing how there had been a serious financial collapse
in that country; failures had occurred, shaking commercial credit to
its core, and about one hundred and fifty banks had stopped payment.

A heavy drain of gold from here to America commenced, and by the middle
of October credit was curtailed, and distrust was rife in England.
Within a very short space of time many of our banks and financial
houses were crippled and failed. In November heavy demands were made
for gold for Scotland and Ireland, and on the 11th November the failure
of Sanderson and Company—a great London discount house—was announced,
with liabilities of upwards of five millions. Utter rottenness appeared
to pervade the commercial world, and general bankruptcy seemed
imminent, when for the second time the Bank Act was suspended. This
took place on the 12th November, and at once had the effect of quieting
the public mind. On this occasion the Bank had to make use to a large
extent of its temporary authority to issue notes above the normal limit
without holding gold against them. The severity of this crisis can
be seen by the fact that in November the Bank reserve fell to under
£600,000, while the bankers’ balances at the Bank of England alone
stood at about five and a half millions, and the Bank Rate was as high
as 10 per cent. This was also the rate charged by the Bank of France
at the time, showing that the panic had spread, and was not solely
confined to ourselves and America.

The third suspension of the Bank Act took place in 1866. 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.

Speculators tried to sell their securities and found no market for
them, several large railway contractors failed, and many of the newly
formed limited liability companies succumbed and were wound up. The
failure of the Joint Stock Discount Company, followed shortly by that
of Barned’s Bank of Liverpool, brought matters to a head; the distrust
became universal and culminated in panic. 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. Among these failures
may be mentioned the Bank of London, the Consolidated Bank, and Agra
and Masterman’s Bank. All these three institutions were perfectly
solvent as a matter of fact, but they found themselves in the dangerous
position of having no _available_ assets. The two last-named banks
subsequently resumed business.

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. Although a period of nearly half a century has
elapsed since the time of the last suspension, the position remains the
same, and it is only owing to greater knowledge and greater caution
that such catastrophes have been averted.

In contemplating any future catastrophe of the kind which may come upon
us, it is generally assumed that the Act would be again suspended; but
delays are dangerous. By the time the situation had developed to such
an extent that the Government might deem it expedient to give the Bank
the necessary powers, a panic such as has never before been known might
overtake us; whereas if the suspension of the Act were to a certain
extent automatic, and responsible people knew for certain that money
could always be had at a price, the probability of such a termination
of any crisis would be very remote.




CHAPTER V

THE DEVELOPMENT OF LONDON AS THE FINANCIAL CENTRE OF THE WORLD


Before proceeding to examine the Money Market and banking system
of more modern days, it will be well to glance at the causes which
contributed to the predominance of London among international financial
centres, and made it the clearing house of the world. At the present
time this predominance is being assailed from several quarters—notably
Paris, Berlin, and New York—but there is no doubt that London still
holds a good lead, and with knowledge, activity, and perseverance
there appears to be no reason why it should not continue to be in the
forefront in the future.

In the _Wealth of Nations_ Adam Smith points out that the increase
and riches of commercial and manufacturing towns contribute to the
improvement and cultivation of the countries to which they belong, and
that commerce and manufacture introduce order and good government, and
with them the liberty and security of individuals.

In our own history we can trace the truth of these remarks. We have
already drawn attention to the flourishing state of trade which
developed during the reign of Elizabeth. New industries were started,
villages grew into towns, and new markets for our wares were opened
up in various parts of the then known world. In consequence of the
wars on the Continent, many wealthy merchants came or were exiled to
our shores, and settling here, helped to swell the growing business
of London. We were fortunate in the fact that this “greater liberty
and security of individuals,” enabling our forefathers to devote their
attention and wealth to the further development and expansion of the
commerce of the country, came about with us long before a similar state
of affairs began to have effect with our continental neighbours, and
this gave us a good start commercially. While our neighbours were still
in the throes of continual disputes and unrest, we were laying the
foundations of a world-wide system of trade. We were in a position to
supply the Continent with their various needs as they arose, to our own
immediate benefit and the further advancement of our commerce.

In connection with the more rapid development of commerce with us than
with continental nations must be remembered the energy and activity of
the race forming the population of our country—an energy and activity
not only in starting and conducting new industries, but in spreading
abroad to new lands and forming new colonies, thus enlarging the sphere
of our operations and the number of our markets.

Our geographical position has assisted materially in our commercial
development. The disturbances arising from the fear and risk of
invasion have been less pronounced than with continental nations,
and our extended coast-line, embracing many natural shelters, has
engendered our vast shipping industry, without which we could never
have attained to our present position. We have also had the advantage
of another natural circumstance in the proximity of our coal and iron
fields to each other. This gave us for a long period an unparalleled
command of certain trades dependent on this fact. Thus we see that,
owing to good government, national character, and natural conditions,
our trade was built up on a firm foundation, and was spread abroad
until its ramifications extended into every country of the world.

Turning now from the trade point of view to the monetary position, we
find that as our trade grew, so did our means and capacity of dealing
with that trade. Although in early days we were rather backward in
our banking system, yet that system developed quicker with us than
with other countries. The eighteenth century embraced many periods of
financial distress, but the Government never defaulted in any of its
engagements, and our leading merchants became renowned as men of honour
and integrity. During the early part of the nineteenth century our
position improved by leaps and bounds, our gold standard of currency
was firmly established, our merchants’ names became known and honoured
throughout the world, and direct financial operations between London
and all foreign parts became matters of daily occurrence.

These monetary transactions were very essential in the financial
growth of London, and were a large factor in our capital becoming the
centre of finance. Owing to the vast extent of our trade, both as to
its amount and diffusion, we were in a position to conduct financial
transactions the world over. From this it followed that when commerce
began to expand and grow among continental nations, it was found that
the easiest way of settling the financial business arising therefrom
was through the intermediary of London. England bought from and sold
to all nations, but in the first half of the nineteenth century
_reciprocal_ transactions between foreign centres of trade were few and
far between. For instance, suppose a New York merchant shipped produce
to Hamburg, he would draw on some appointed London house for payment;
the merchant in Hamburg who had bought the goods would then have to
find the means of providing this London house with the necessary funds
to meet the draft from New York. This he would do by buying a draft
in Hamburg from some merchant there who had shipped goods to London
and was wanting payment. This draft he would remit to the London house
on which the American exporter had drawn, and the London house would
collect the money represented by the Hamburg draft, thus settling both
transactions. This is only a rough example, but it is typical of what
came to be a regular custom.

Various countries may trade together, but unless they have direct
mutual financial transactions, they cannot settle their indebtedness
without remitting precious metal of one kind or another, or employing
the agency of another country which has direct financial dealings
with both. In the time of which we are speaking London was the only
centre which was in a position to carry out such transactions. In the
latter half of the past century, and especially towards the close of
the century, our position suffered through direct financial operations
between various countries becoming established, thus eliminating the
need of a middleman; but it may still be said of London that it has
direct financial and trading connection with _every country of the
world_, which at present cannot be said of either Paris, Berlin, or New
York. The very fact of the establishment in London of branches of the
leading banks and finance houses of France, Germany, and the United
States, emphasises the position which London has attained and still
holds in the financial world.




CHAPTER VI

FACTORS OF THE MONEY MARKET


Having now surveyed the history and development of our financial system
up to a point when “system” can really be said to have started, and
also having glanced at the causes which have placed London in the
forefront of all financial centres, we will consider the formation, as
a whole, of what is called the “Money Market”; and then more carefully
examine certain of the more important factors which help to form that
market.

There is no definite “market” for money in the sense of a “place of
purchase and sale,” like a cattle market or a corn market; when we
speak of the “Money Market” we refer to the body or aggregation of
large dealers in money—bankers, bill-brokers, etc.—who either have
money to lend or who require to borrow money, and by whom the rate to
be charged for the use of money is largely settled, as a result of
their mutual transactions.

This body of money-dealers is not clearly defined into two
classes—lenders and borrowers—as an ordinary market is divided into two
classes—buyers and sellers; but with money-dealers all are practically
both buyers and sellers; that is, all are ready to sell the use of
money at a certain price, and to buy the use of money at another price.

The Bank of England in bygone days was the predominant factor in the
Money Market; but now, in ordinary times, it has somewhat fallen from
its high estate in that respect. It is only at certain times that its
funds find their way into the Money Market to any large extent. But the
Bank still has the power, when occasion arises, to make its influence
predominate, as it constitutes the final reserve, in case of need,
of our banking system. The Bank likewise has the power to make its
influence felt when the directors deem it advisable to obtain control
of the Money Market, for the purpose of maintaining the monetary
position on a basis of safety. As we shall see when dealing with the
subject of the foreign exchanges, if, in order to check an outflow
of gold, the directors of the Bank wish to raise the value of money
in London—that is, to raise the rate at which money can be borrowed
or lent—they raise the official rate of the Bank of England. If the
outside market lags behind, or does not keep in line with the movement,
they force it to do so by themselves borrowing large sums from the
market, thus reducing the available supply of money in the hands of the
market, and consequently enhancing the value of money.

The chief factor in the formation of the Money Market is the body of
the joint-stock and private banks of London, and through them of the
bankers of the kingdom. Practically all the working capital of the
country and the floating money of private individuals, together with
moneys awaiting permanent investment, are now in the hands of our
bankers.

Of this vast accumulation of capital held by bankers—amounting in
the United Kingdom to some £800,000,000—a certain part is retained
in actual cash, besides a balance which is kept with the Bank of
England or a London agent, some is invested in securities, and the
balance is used in lending to those that require the use of further
capital for their business or private needs. Of this balance so lent,
a large percentage is advanced to individual customers by way of loan,
overdraft, or in the discounting of bills; and the remainder is used in
the Money Market proper, or what has been aptly called “The Short Loan
Fund.” The rate of interest which private individuals have to pay for
advances from time to time is largely based on the prevailing official
rate of the Bank of England as regards loans, and on the “market rate”
as regards the discounting of first-class bills.

For the greater part of the money in a banker’s hands no interest
whatever is paid, that is, for practically the whole of the current
account balances. For the remainder, the money on deposit, only a small
interest is paid; but a banker must always keep before him the fact
that nearly all his liabilities are repayable in cash on demand. Thus
he must _always_ keep himself prepared for eventualities, and his first
line of defence consists of cash and balance with the Bank of England
or London agent, and he reckons his advances to the Money Market as his
next most quickly convertible and available asset.

For the money advanced to the Money Market bankers are content to
receive a low rate of interest, provided that the advances are
absolutely safe, and can quickly be called in when necessary. These
conditions can be obtained by lending money at “call” (that is,
repayable on demand) or at a few days’ notice to the bill-brokers, who
deposit as security for such loans, first-class bills, or certain of
the highest class of securities, such as Consols, etc.

The bill-brokers and discount houses of London form the second most
important factor in the Money Market. These firms and institutions
practically act as middlemen or intermediaries. Many of them possess
large capital themselves with which to conduct their business, but
the bulk of the funds which they employ consists of borrowed money.
This money is borrowed from various sources; the greater part from the
banks, some from the India Council, and some from our merchant princes
and finance houses, who of themselves really constitute another factor
in the Money Market. Besides these sources for borrowing money, the
bill-brokers further increase their working funds by receiving money on
deposit from the public. With the funds so collected they buy bills,
usually only those of a first-class character, and these they either
hold until maturity or rediscount with the banks, and occasionally with
the Bank of England.

The British Government is at certain times a factor in the Money
Market, that is, when on account of any extraordinary outlay, or when
expenditure is temporarily exceeding revenue, it issues Treasury Bills
and Exchequer Bills. If these bills are bought by the Money Market, it
follows that the amount of money in the hands of the Market is, at
least for the time, decreased by the amount of money paid for the bills
(which goes into the Bank of England and helps to increase “Public
Deposits”), and consequently the rates for money in the open market
are inclined to rise or “harden.” When these bills are repaid the
contrary effect is produced, market supplies are increased and rates
are inclined to droop.

Another factor which has to be taken into account in this matter is the
India Government. The India Government has, from time to time, large
funds lying here which are not required for immediate use, nor are they
available to lend for long periods; these funds practically constitute
a floating balance. Use is made of this money by lending it out to the
market through a well-known house, much in the same manner that banks
lend their floating balances. The money is usually lent in sums of not
less than £50,000, for periods from a fortnight to a month; and it is
generally stipulated that the securities deposited against the advances
shall consist of either Consols, or Indian Securities of certain kinds,
such as rupee paper and the guaranteed debentures of a few of the
first-class Indian railways. The India Government generally manages to
obtain a very fair return for the money so lent.

The Stock Exchange is another element which requires consideration,
although it is a rather one-sided element, inasmuch that it is nearly
always a borrower. In busy times on the Stock Exchange enormous sums
are borrowed from the banks for the purpose of speculation of one kind
or another. Stocks are bought by various persons who have not the money
to pay for them, in the anticipation that they will increase in value;
and these persons arrange with their brokers to “take up” the stock for
them—that is, that the brokers shall find the money to pay for these
purchases—and this ultimately results in a banker advancing the money.
During periods when the rates of interest are low also, large amounts
of stock bearing a higher interest are then “taken up,” for the purpose
of securing the difference in the amount of the interest paid for the
loan and the interest received from the stock, and the money for these
purchases is largely borrowed from banks. These Stock Exchange loans
are made from “account to account”—that is, from one settling day on
the Stock Exchange to the next—and as there are two settling days every
month, the loans are nominally granted for about a fortnight each. The
interest charged is fixed at the beginning of each account for that
account, and varies according to the prevailing conditions at each
renewal.

Lastly, we have a somewhat new factor entering into the Money
Market, but one which is increasing in importance, and that is
the establishment in London of branches of many powerful and rich
continental banks, who make use of the London Money Market for
employing their surplus funds when they can do so to advantage. They
lend money to the bill-brokers much as do ordinary London banks; and at
times, when the conditions are favourable, they invest their funds in
English bills, occasionally absorbing considerable amounts of Treasury
and Exchequer bills. These purchases of English bills increase the
money in the market for the time being, and the competition of these
foreign bankers tends to depress the rate charged for discount. It must
be remembered, however, that this course of business gives the banks
in question power to draw gold from us heavily on the maturity of the
bills, or at any time when they see fit, by selling their bills before
maturity.

From a consideration of these various factors, we see how largely they
are interwoven together and dependent on each other. The banks gather
in deposits from all quarters and lend to the bill-brokers, while
leaving a large amount with the Bank of England; and the bill-brokers
borrow from the banks and buy up bills from all quarters; but if the
banks “call” their money from the bill-brokers the latter are driven
into the arms of the Bank of England, to reborrow the money which
the banks have called from them. This is also the case if the India
Government call in their loans, and the money to repay the same cannot
be borrowed from the banks. Similarly with the Stock Exchange, if
much money is absorbed in this quarter, the banks will reduce their
accommodation to the bill-brokers, who may by this action again have to
rely on the Bank of England; and again, lastly, if the foreign banks
commence to draw money from us, the strain comes as usual on the Bank
of England.

All these factors work round the Bank of England as a centre, and
the need of strength on the part of that institution becomes at once
apparent when it is seen what mighty interests are dependent on it,
that the financial credit of the country rests ultimately upon its
stability, and that its policy and actions involve consequences of weal
or woe to the community at large.




CHAPTER VII

THE BANK RETURN


We will now examine the weekly “Return” issued by the Bank of England
in accordance with the requirements of the Act of 1844, and consider
the significance of the various items appearing therein. The Return is
made up to the close of business on every Wednesday, and is published
on Thursday. Though the figures given always attract attention, and are
regularly made the subject of analysis and criticism in the financial
articles of the Press, yet the interest taken in the Return varies
considerably from time to time. During periods of financial quiescence
this interest is somewhat of an academical character; but in times of
doubt and distrust a very real and practical interest is exhibited, not
only by the group of bankers, bill-brokers, and merchants constituting
the “Money Market,” but by that section of the general public who
have financial transactions at stake, and who possess the requisite
knowledge to understand the true import of the figures of the Return.

For the purpose of our analysis we will take the Return of the 2nd
September, 1903.

                             ISSUE DEPARTMENT
    --------------------------------+------------------------------
                            £       |                       £
    Notes issued       51,831,835   |  Government debt  11,015,100
                                    |  Other securities  7,434,900
                                    |  Gold coin and
                                    |    bullion        33,381,835
                       ----------   |                   ----------
                       £51,831,835  |                  £51,831,835
                       ==========   |                   ==========

                           BANKING DEPARTMENT
    --------------------------------+--------------------------------
                             £      |                           £
    Proprietors’ capital 14,553,000 | Government securities 18,260,841
    Rest                  3,740,209 | Other securities      24,969,260
    Public deposits       7,393,580 | Notes                 22,322,875
    Other deposits       41,872,061 | Gold and silver coin   2,119,339
    Seven-day and                   |
    other bills             113,465 |
                         ---------- |                       ----------
                        £67,672,315 |                      £67,672,315
                         ========== |                       ==========


ISSUE DEPARTMENT

In a previous chapter we saw that under the Act of 1844 the Issue
Department was to be separated from the Banking Department, and that
it was at liberty to issue £14,000,000 of notes against securities,
of which the Government Debt, amounting to £11,015,100, was to form
a part. Any issue of notes above this amount of £14,000,000 was to
be secured by an equal amount of coin or bullion, with the proviso,
however, that the issue of notes against securities might be increased
from time to time to the extent of two-thirds of the amount of any
lapsed country issue.

In the return before us we see the result of nearly sixty years of the
working of the Act. The notes issued stand at £51,831,835, and are
secured by the Government Debt of £11,015,100 (as at the passing of the
Act) and other securities amounting to £7,434,900 (against £2,984,900
in 1844), the balance being made up of gold coin and bullion, no silver
being now held. We thus see that advantage has been taken of the
lapsing of country bank issues to increase the issue against security
by £4,450,000; but it must be remembered that the net profit on this
additional issue against securities is credited to the public account.

The actual amount of notes issued, as shown in the returns of 1844
and 1903 respectively, as shown on pages 32 and 33, has increased by
the sum of £23,480,540; but if we compare what is called the “Active
Circulation” now with that of 1844 we see that the increase is only
£9,332,690.

The Active Circulation is arrived at by deducting the amount of notes
held by the Banking Department from the total of notes issued by the
Issue Department, and it represents the notes actually in the hands of
the public. This increase in the Active Circulation is a fluctuating
one, but at any time it is totally out of proportion to the expansion
of our trade and financial system which has taken place during the
last fifty years. The comparative insignificance of the increase
is explained by the fact that during the period under review our
manner of effecting payments has changed so vastly, cheques having
almost completely taken the place of notes in settling our various
transactions, both in business and private affairs.

The old idea that a note issue was of vital importance to the life of
a bank, and that a mere bank of deposit could not be profitably and
usefully conducted, was exploded in the early part of last century,
as already explained. The new ideas which then began to prevail, and
which led to the formation of our joint-stock banks, have expanded and
developed in a manner that was probably not anticipated by the banking
pioneers, who successfully assailed the Bank’s presumed monopoly of
joint-stock banking.

In such a manner have these new ideas and methods expanded, that the
use of the bank-note has practically been done away with, except for
special reasons and in certain cases.

These exceptions divide themselves into two heads. Firstly, the large
number of Bank of England notes held in place of actual coin in the
tills of our banks; and secondly, notes used in settling certain
transactions when it is not the custom, or it is not convenient, to
pass cheques; such as the settlements arising from the purchase of
property, travelling expenses, and for effecting payments and purchases
with the non-banking class—a class which is diminishing day by day
under our present system of banking.

The amount of notes held by bankers as “till money” is of paramount
importance in point of amount compared with the amount of notes in
circulation for the other purposes mentioned. The average amount
held by bankers from time to time usually remains at a fairly steady
figure, whereas the amount of notes in the hands of the people varies
considerably; increasing at the end of each month on account of
salaries paid by notes, at the end of quarter for payment of rents,
etc., and largely increasing during the holiday season by reason of
notes carried by travellers to the Continent and elsewhere.

As regards the items appearing on the credit side of the Issue
Department’s weekly balance sheet, the _Government Debt_ stands at the
same figure as at the passing of the Act.

_Other Securities_ have risen in accordance with the provisions of
the Act, and are doubtless of a first-class character, although no
information is vouchsafed to us as to the actual securities held.

The remaining item of _Gold Coin and Bullion_ of course fluctuates
with the amount of notes issued; the department is something like an
automatic machine in this respect—you put in gold and take out notes,
and you put in notes and gold comes out. The Issue Department is not
only compelled to issue notes in exchange for sovereigns, but also for
gold bullion—in bars or foreign coin—at the rate of £3 17_s._ 9_d._
per ounce of standard fineness. Any bullion the Bank acquires in this
manner it is at liberty to send to the Mint and have converted into
coin; but as a matter of fact, a large amount is retained in the form
in which it is received, that is, in bar gold and foreign coin. If
an export of gold is in progress the exporter can, of course, obtain
five sovereigns for every £5 note he presents; but it frequently suits
his purpose better to draw bar gold or foreign coin in exchange for
his notes, and the Bank is at liberty to charge what it likes for so
accommodating him. The price usually charged by the Bank for its bar
gold is £3 17_s._ 10½_d._ per ounce, but if the demand is pressing it
will raise its price to perhaps £3 17_s._ 11_d._ Above this figure
it is not effectual to raise the price, or sovereigns would, in that
event, be drawn and melted down. A similar course as regards sale is in
vogue for dealing with foreign coins, and the Bank makes a small profit
on such transactions.


BANKING DEPARTMENT

Turning now to the return of the Banking Department, the first item
which appears is _Proprietors’ Capital_, which stands at the enormous
figure of £14,553,000—enormous in itself, and enormous in comparison
with the capitals of other and competing banks. From the original sum
of £1,200,000 with which the Bank commenced business in 1694, the
capital has gradually increased until it amounted to the present figure
in 1816, since which year there has been no alteration.

The _Rest_ in the Bank of England Return is an accumulation of
undivided profits, and compares with the Reserve Funds of other banks.
It now stands at about the same figure at which it stood in 1844; and
it is never reduced below the sum of £3,000,000. The Bank has also a
further reserve in the valuable asset of its premises in the City—the
very finest site in London—no credit being taken for the value of this
item.

Taking the Proprietors’ Capital and Rest together, we see that the Bank
has a total working capital of about seventeen and a half millions,
which is far above that of any other Bank, both in amount and in
proportion to liabilities. This large capital forms, of course, an
element of great strength, but the profit which is earned is so spread
out on such a sum, that the actual dividend paid is small in comparison
with that of many ordinary joint-stock banks. The dividend paid during
the last ten years has averaged 9½ per cent., having been at the rate
of 10 per cent. since the end of 1896. The price of Bank Stock has
fluctuated between 311 and 367 during the same ten years.

_Public Deposits_ include the balances of the Exchequer, Savings Banks,
Commissioners of the National Debt, and Dividend Accounts. This is a
very variable item, and its fluctuations at certain seasons of the year
have a marked effect on the Money Market. On the 14th of January, 1903,
Public Deposits stood at just over eight millions, and on the 25th
March, 1903, at over sixteen millions, this increase being due to the
collection of taxes at this season of the year, which gradually sweeps
away a portion of the balance of other banks, and draws a large sum
from the pockets of the people. The increase of the balance of Public
Deposits reaches a maximum about the end of March, when the collection
of taxes comes to an end.

This gradual accumulation of an extra sum of £8,000,000 in the hands of
the Bank of England naturally affects the amount of money which other
bankers have at their disposal for lending purposes, and money being
thus scarcer, borrowers have to pay more for the use of it. Hence it
follows that during this season of the year a tightening of the rates
charged by bankers for accommodation is generally seen. After the
end of the financial year on the 5th April, the Government generally
commences to disperse its large balance by paying its various bills;
and this disbursement, together with the dividends on public stock
which are paid at the beginning of April, quickly alters the position;
money becomes plentiful in the hands of ordinary bankers, and the rates
charged for the use of it consequently fall away. From this time on to
about the beginning of December, Public Deposits gradually decrease,
although there is generally a slight rise at the end of each quarter,
followed by a fresh fall immediately after the quarter, this movement
being due to the payment of dividends.

_Other Deposits_ include the balances of the ordinary customers of
the Bank, both in London and the country, and also the balances kept
by bankers with the Bank of England. The balances of the ordinary
customers of the Bank are subject to the same conditions and
fluctuations as are the balances of the customers of other banks, but
the bankers’ balances are of another class. Every “clearing” bank
_must_ keep an account with the Bank of England, in accordance with
the rules of the Clearing House, as will be explained later. Most
other London bankers also keep an account there, as well as many
country bankers. The aggregate of the bankers’ balances forms a large
proportion of the “Other Deposits.” Up to the year 1877 the total of
bankers’ balances was stated as a separate item in the Weekly Return,
but this practice was discontinued at that time. In the year 1877—the
last year of separate publication—these bankers’ balances averaged
about nine and a half millions, but the amount has doubtless largely
increased since that time.

Bankers’ balances form, as we shall see, the ultimate reserve on
which our banking system rests. Hence the subject is one of great
importance. Every “clearing” banker keeps a balance for the purpose of
settling the difference which may arise with each day’s settlement at
the Clearing House. In addition to this, they, as well as other London
and country banks, maintain a large balance at the Bank of England for
the purpose of meeting any sudden or extraordinary demands which may be
made on them. This is done in place of keeping cash in their tills for
the purpose, though of course a sufficient sum in ready cash is kept
in hand to meet the ordinary daily requirements. In the case of those
country banks which do not keep an account at the Bank of England, the
custom is adopted of keeping a reserve balance with a London agent.
This reserve swells the amount under the control of the latter, and
consequently of the balance he deems it prudent to maintain with the
Bank of England. Thus our system is so knitted together that a demand
for cash, in whatever part of the country arising, has a prompt effect,
to a less or greater degree, on the bankers’ balances at the Bank of
England.

From this can be seen the great importance of bankers’ balances, and
the great responsibility thrown on the Bank of England of keeping
itself strong enough to meet demands from all quarters. The system is
certainly a peculiar one, that results in all banks keeping a large
part of their surplus funds with another bank, and that not a State
bank, though the banker of the State. It is an interesting fact that
on many occasions since the passing of the Act in 1844 the “reserve,”
or actual cash held by the Bank of England, has been less than the
bankers’ balances alone.

This custom of the reserves being held by a central bank has been,
and is, the subject of much criticism, principally on the ground that
a “one reserve system” is not a sufficient guard against disaster in
time of crisis, and that it would be a much safer method were each
bank to keep its own special reserve in cash against sudden need. The
discussion of the subject during the last few years, combined with
other circumstances, has led to some increase in the cash held by
bankers in general, and several banks are understood to have commenced
keeping a special reserve in cash, on a small scale. The whole subject
is a very intricate one, and one that cannot be more than glanced at in
the course of this small book.

Taken as a whole, and in ordinary times, “Other Deposits” indicate
the state of the Money Market. They rise and fall fairly regularly at
certain known seasons of the year; but if they rise above the average
for the time of year, it may be taken as an indication that money is
abundant, and that bankers and others have funds in hand for which they
cannot find profitable employment, and therefore the interest rate
charged for the use of money is likely to fall. On the other hand, if
“Other Deposits” are below the average, money is evidently in request,
and rates are likely to rise. _This is in ordinary times._ In times
of trouble, however, “Other Deposits” will rise considerably, and at
the same time interest rates will also advance. The reason of this is
that on any note of alarm being sounded in the financial world, bankers
will at once begin to strengthen their position—to “keep their powder
dry”—and consequently will begin to increase their balances at the Bank
of England. Owing to the curtailment in their loanable funds resulting
therefrom, money will increase in value, and a higher rate will have to
be paid for the use of it by borrowers.

Together with the bankers, other large customers of the Bank of England
will increase their balances against emergencies, and possibly, if
the trouble become acute, money will be transferred to the Bank from
other banks for greater safety. Thus in such times we see the “Other
Deposits” of the Bank increasing, while the deposits of other banks
are decreasing. It is related that during one crisis a customer of
a certain bank became alarmed, and drew out his balance. Not knowing
what to do with his money when he had got it, he wrote to the financial
editor of one of the great daily papers, asking him where it would be
safe to put it, and quickly got back the reply, “Put it in the——,”
naming the same bank from which the customer had withdrawn it!

The remaining item on the liability side of the Banking Department,
namely, “Seven-day and other Bills,” largely explains itself by its
title. The item is not a growing one, as can be seen by referring to
the first return issued after the passing of the Bank Act in 1844, when
the amount under this heading was over one million pounds.

The seven-day bills referred to are what are known as Bank Post Bills,
and are practically drafts on the Bank of England. The custom of
issuing these bills appears to have originated about the year 1738,
when, in response to representations, the Bank announced that it would
give “bills payable at seven days’ sight, that, in case of the mails
being robbed, the proprietors might have time to give notice thereof.”
The changes which have occurred since this date, and even since 1844,
amply account for the falling off in this item. It may be noted that
the Bank does not take advantage of the customary three days’ grace in
respect of these bills.

_Government Securities._—As an ordinary bank in issuing its balance
sheet roughly summarises the classes of securities in which its funds
are invested, so does the Bank of England in its Weekly Return. The
item “Government Securities” comprises, as its name indicates, the
amount of all securities held which are guaranteed by the British
Government, and it also includes any temporary advances made to the
Treasury on “Ways and Means” or “Deficiency Bills.” Advances which are
made on the security of “Deficiency Bills” are generally required at
the end of each quarter, excepting the March quarter, when, as we have
seen, the Public Deposits are large, and the advances are required
to meet the interest due on the public funds at the beginning of the
ensuing month. The advances are repaid in the course of a few weeks
from the incoming revenue. While in force they have the effect of
increasing the figure at which Government Securities stand, and also,
on the other side of the account, of increasing the total of Public
Deposits.

_Other Securities._—Under this heading are included all the investments
of the Bank other than Government Securities—investments in general
securities, loans, bills under discount, and advances to bill-brokers.

No particulars are given as to the amount invested in the various
items above mentioned; the investments in general securities, and the
loans to ordinary customers of the Bank, may be presumed to be fairly
steady in amount, as is the case with other banks; but the amount of
investments in bills under discount and of advances to bill-brokers
are subject to wide fluctuations from time to time. These fluctuations
are due to the complicated system of our Money Market. As will be
explained later, ordinary banks employ a certain portion of their
funds in advances to bill-brokers. These loans are either repayable
at “call,” or are fixed for a certain number of days, and the amount
lent varies with each particular bank from day to day, and from week
to week. In the aggregate, however, the amount advanced in this way by
all the banks combined is not subject to much fluctuation, for this
reason—what one bank may lose in available lending balance another will
gain, and so the total is not materially altered. At certain seasons
of the month and of the year, however, or during periods of threatened
disturbance in the Money Market, this is not the case. Circumstances
may compel several or even all the banks simultaneously to call on the
bill-brokers to repay their advances or part of their advances. Thus
the aggregate of the money lent in this manner is materially reduced.

The bill-brokers, finding that they cannot obtain the funds from the
ordinary sources wherewith to repay the amounts “called” from them,
must have recourse to the Bank of England—both for discounting bills
and for short loans. These facilities are there granted to them on
certain conditions. The accommodation thus granted to the bill-brokers
amounts to very large figures when the resources of the Money Market
become locked up, owing to some special cause, such, for instance,
as the issue of a big loan like the Transvaal loan of May, 1903. For
this loan the “application money” alone, in the hands of the Bank of
England, amounted to over £35,000,000, the bulk of which had been
temporarily taken from the balances of other banks, thus reducing their
lending powers and compelling them to call their advances from the
bill-brokers.

_Notes, and Gold and Silver Coin._—These two items together form what
is known as the “Reserve” of the Bank, and the Reserve is the most
important item appearing in the Weekly Return, and the item on which
the attention of the Money Market is constantly fixed.

On looking at the balance sheet of one of our joint-stock banks,
we find that the first item appearing among the assets of such an
institution is “Cash in hand and Balance at the Bank of England”; but
it is impossible to tell from this how much is actual cash, and how
much balance at the Bank. The average proportion of “Cash and Bank of
England balance” to “liabilities to the public” held by our leading
joint-stock banks is about 15 per cent., while the proportion of “Cash”
(Notes, and Gold and Silver Coin) to “liabilities” with the Bank of
England has averaged 50 per cent. during the last ten years, and the
fall of its reserve to anything like 15 per cent. would doubtless
be coincident with a world-shaking panic. The reason of this great
divergence in the proportion of cash in hand held by the Bank of
England in comparison with other banks needs explanation, as do also
the means taken to maintain the Reserve at a figure of presumed safety.

The “Reserve” is the reserve of the Banking Department only, and has no
connection with the Issue Department as regards the convertibility of
its notes. The great importance that is attached to the Reserve being
maintained at a large figure is due to the fact that not only can this
Reserve be drawn upon for home requirements, but that it is open to
attack, and serious attack, from abroad.

As regards home requirements, the needs of the public in usual times
follow a regular course, and one that is known and can be provided for
beforehand; but this is not the case as regards foreign demands, and
it is in connection with these demands that most of the changes in the
Bank Rate owe their origin. If the directors of the Bank of England
had to deal with home demands only, the question of fixing the Bank
Rate would be an easy one—that is, of fixing the rate at which they are
nominally prepared to discount for the public and for bill-brokers, and
the rate which, by custom, governs the interest allowed on deposits and
in many cases the rate charged for loans by other banks. But London
is the most open market for gold in the whole world, and any country
which requires gold for any purpose can draw it from London with more
ease than from any other quarter. Hence our stock of gold is peculiarly
open to attack, and in fixing the Bank Rate from time to time, the
directors have to consider the question of whether gold is coming to us
or leaving us. If gold is coming here in large quantities, the Reserve
will improve, money will be plentiful with ordinary banks, who will
consequently be prepared to lend at cheaper rates—considerably below
the advertised rate of the Bank of England—and that institution will
gradually lower its rate so as to keep in line with the prevailing
conditions. On the other hand, if gold is leaving us in considerable
quantities, the Reserve will of course fall, and this will be followed
by a gradual tightening of rates in the Money Market, and the Bank Rate
will be raised, not only in order to check the export of the metal, but
to attract imports. Why a high Bank Rate is likely to attract foreign
gold to our shores, and a low rate to have the contrary effect, will be
explained in a later chapter dealing with the Foreign Exchanges.




CHAPTER VIII

THE GROWTH OF JOINT-STOCK BANKS


We have already seen in dealing with the Bank of England that the
formation of a bank with more than six partners was _supposed_ to have
been expressly prohibited by the Bank’s Charter. The direct result
of this presumed prohibition was the establishment throughout the
country of a large number of small private banks. Many of these were
institutions of credit, ably managed and backed with a fair capital;
but the majority of them were weak, and in times of trouble proved
a source of danger and loss to the community. The various financial
crises of the later part of the seventeenth and the early part of
the eighteenth century gradually brought home to the people and the
Government the unwisdom of the system whereby the growth of small banks
was fostered, and the establishment of large and wealthy institutions
was forbidden. At length—in 1826—the Bank of England was by Act of
Parliament compelled to part with a portion of its presumed monopoly,
and joint-stock banks were allowed to be established outside a
sixty-five-mile radius from London.

It is somewhat remarkable that after the formation of joint-stock
banks was at last permitted, very small advantage was at first taken
of the permission thus afforded; one joint-stock bank was founded at
Lancaster, another at Bradford, and a third at Norwich. But it was not
until a period of commercial prosperity set in that any considerable
number of such banks were founded. In the year 1833, however, and for
a few following years, a large number of provincial joint-stock banks
sprang into existence.

The presumed monopoly of the Bank of England within the sixty-five-mile
radius was next called in question in London, and it was asserted that
the monopoly consisted only of a prohibition of the formation of banks
of issue, and steps were taken to found a joint-stock bank in London.
This was strongly opposed by the Bank, which tried to have its Charter
so amended that its monopoly might be complete. This proposal of the
Bank of England was, in its turn, strongly opposed by the Government,
which not only refused to alter the Charter, but, at the next renewal
thereof, in 1833, actually inserted a clause expressly permitting
joint-stock banks to be established within the sixty-five-mile limit,
provided that such banks did not borrow or take up in England any sum
or sums of money on their bills or notes payable on demand or at less
than six months from the borrowing thereof.

No sooner had this clause become law than advantage was taken of
it, and the formation of the first joint-stock bank in London was
commenced. This bank was the London and Westminster, which was
established in 1834, and it was quickly followed by the London Joint
Stock Bank in 1836, and the Union Bank of London and the London and
County Bank, both in 1839.

The London and Westminster Bank commenced business in the city of
London and at Westminster in March, 1834; at that date the paid-up
capital was £50,000 only; but that the bank quickly commanded
confidence, and began to gather together a lucrative connection, can be
gathered from the fact that by the close of that year its balance sheet
showed that it held balances belonging to the public of over £180,000.
The paid-up capital had by then been increased to about £180,000.

The earlier joint-stock banks which were established in London had to
contend with many disadvantages. They were not allowed by the Bank of
England to open current accounts with that institution, and the private
bankers would not allow them the facility of being represented in the
Clearing House—an institution to which we shall refer later.

They were likewise troubled with legal difficulties, as the position
of the shareholders of such banks was merely that of a common law
partnership; and consequently, in any action, the exact names of all
the shareholders had to be given, and all were parties to the action.
This inconvenience was remedied by an Act passed in 1838, which allowed
a banking company to sue or be sued in the name of any of its members;
but the position of its shareholders still remained the same as to
their unlimited liability, and it was not until the year 1858 that
an Act was passed allowing joint-stock banks to take advantage of
the system of limited liability; a system which was first allowed to
ordinary joint-stock companies by an Act passed in 1855.

Another inconvenience with which these banks had to contend was
occasioned by the enactment providing that no such partnership could
accept bills having a less date than six months. Various expedients
were tried to circumvent this difficulty, but none were successful, and
it was not until the year 1844 that joint-stock banks were released
from this incubus.

In spite of so many embarrassing and hindering circumstances the
joint-stock banks more than held their own, and gradually increased
their wealth and importance. From small beginnings they gathered
strength as the years rolled on, and little as the originators of the
movement may have imagined to what colossal proportions the business
would attain to-day, the joint-stock banks of England and Wales
together hold deposits from the public exceeding the enormous sum of
£600,000,000; a sum nearly equal to our National Debt.

The number of our banks, both private and joint-stock, has been
decreasing for many years. This is owing partly to the failure of the
weaker banks of both classes, but chiefly to the numerous amalgamations
of recent years. At the close of the year 1849 there were ninety-nine
joint-stock banks established in England and Wales, at the close of
1892 there were one hundred and two, and at the close of 1902 only
sixty-eight, not including the Bank of England. These banks then held
deposits amounting to no less a sum than £600,333,000. The decrease
in joint-stock banks in the last ten years, from one hundred and two
to sixty-eight, is remarkable; but this does not necessarily imply
any lessening of banking accommodation to the public; on the contrary,
the reverse is the case, owing to the great increase in the number of
branches which have been established.

According to the _Economist_, there were 2,336 banking offices
belonging to joint-stock banks open to the public in England and Wales
on the 31st of December, 1891, whereas on the 31st of December, 1901,
the number had nearly doubled and stood at 4,146. The network of banks
thus spread over the length and breadth of the land has resulted in
tapping new sources of business. An enormous number of people now keep
banking accounts who previously did not do so, but who used to pay
cash for all their purchases and keep their money in the proverbial
stocking. Though the average balances maintained by this new class of
customer may be small, it is a case of “many a mickle makes a muckle,”
and the aggregate of new balances so obtained has largely helped to
swell the total balances in the hands of the banks. In 1892, one
hundred and two joint-stock banks of England and Wales held balances
amounting to nearly £400,000,000, whereas now, as already mentioned,
a sum exceeding £600,000,000 is in the hands of the banks. It must be
remembered, however, that a considerable portion of this increase is
due to the fact that a large number of private banks have been absorbed
by joint-stock banks during the ten years in question, and that the
balances held by the private banks so absorbed were not included in the
figures of ten years ago.

Some of the joint-stock banks of London established branches in
certain mercantile districts of the town early in their career, but
they were slow to see the advantage to be gained by opening branches
in the suburbs, and by catering for the wants of private individuals,
tradesmen, and the smaller classes of merchants and manufacturers.
But the conspicuous success which attended the efforts of one or two
institutions in this direction, drew the attention of other banks to
the advantages to be gained by keeping level with the growth of Greater
London, and providing what is required by its inhabitants. The result
is that the suburbs of London are now as well, or better, provided
with banking accommodation than any other part of the kingdom; and so
great is the competition among various banks in this direction, that
the limits of discretion appear to be overstepped in certain districts,
as to the number of branches which can possibly obtain a profitable
business from those localities.

As regards capital invested in banking companies, we find an increase,
but not anything like the same proportionate increase that the balances
exhibit. The paid-up capital of the joint-stock banks of England and
Wales at the end of 1892 (not including the Bank of England) was about
forty-four million pounds, and by the end of 1902, or in ten years, it
had only increased to about forty-seven and a half million pounds; and
this in spite of the capital represented by absorbed private banks not
appearing in the former total.

The “Reserve Funds” of the banks, however, show a fairly satisfactory
increase of six millions, from twenty-eight millions to thirty-four
millions in the ten years.

Adding together the two items of Capital and Reserve, so as to arrive
at the total working capital, we find that this has increased from
seventy-two millions in 1892, to eighty-one and a half millions in
1902, or an increase of little more than 13 per cent., while the
balances increased about 50 per cent. in the same time. The uncalled
and reserved (_i.e._ capital which can only be called up in the event
of failure) capital of the banks increased from one hundred and fifty
millions to one hundred and sixty-three millions, or an increase of
slightly under 10 per cent.

Turning from the consideration of the amount of funds which the
joint-stock banks have at the present time within their disposition
and control, to the question of how they employ those funds, it is
interesting to note the changes which have taken place during the last
ten years. The main portion of a banker’s assets is divided between—

    1. Cash, and the balance maintained at the Bank of England or with
       a London agent, and money at call or short notice.
    2. Investments.
    3. Discount and Advances.

As regards these three items, we find the following changes have taken
place during the last ten years. At the end of 1892 the joint-stock
banks held nearly ninety-four millions in cash, etc.; they now have
nearly one hundred and sixty-five millions. This represents an
increase of about 75 per cent., and is a very satisfactory feature in
present-day banking, indicating that the question of keeping a stronger
cash reserve is receiving attention, the liabilities in the time
having increased only 50 per cent. As regards investments, ninety-five
millions was held in this form in 1892, against one hundred and
thirty-one millions ten years later, an increase of 38 per cent.; while
Discount and Advances have increased from two hundred and eighty-three
millions to three hundred and eighty-seven millions—which represents
an increase of about 37 per cent. These proportionate increases of
Cash, Investments, and Advances and Discounts have taken place while
the balances have proportionately increased 50 per cent. In the next
chapter we shall proceed to examine in more detail the composition of
the balance sheets of banking companies, and the relative proportions
which the items appearing therein bear to each other, or should bear to
each other, to be in accordance with the system of business maintained
by our leading banks.

For ready reference we append on the next page a short table relating
to the figures which we have been considering in the present chapter.
These figures amply show the advance made by joint-stock banks during
the last ten years.

              AGGREGATE FIGURES OF THE JOINT-STOCK BANKS
                  OF ENGLAND AND WALES (EXCLUDING THE
                           BANK OF ENGLAND)

           ,000,000 omitted (except in the last two columns)
    ----------+--------+--------+-------+--------+--------+-----------
              |        |        |       |        |  Cash  |
              |        |        |       |Uncalled|  Bank  |
              |Balances|Paid-up |Reserve|  and   |Balances|Percentage
      Date.   |  Held. |Capital.| Funds.|Reserved|and Call|    of
              |        |        |       |Capital.|  Money.|(5) to (1).
              |  (1)   |  (2)   |  (3)  |   (4)  |   (5)  |    (6)
    ----------+--------+--------+-------+--------+--------+-----------
    Dec. 1892 |  397   |   44   |   28  |  150   |   94   |   23·7%
     ”   1902 |  600   |   48   |   34  |  163   |  165   |   27·5%
    ----------+--------+--------+-------+--------+--------+-----------

    ---------+-------+-------+---------+-------+-------+------+--------
             |       |  Per- |         | Per-  | Per-  |      |
             |Invest-|centage|Discounts|centage|centage|Number|Number
             | ments.|  of   |   and   |  of   | of (5)| of   |  of
      Date.  |       |  (7)  |Advances.|  (9)  |+ (7) +|Joint-|Banking
             |       |  to   |         |  to   |(9) to |Stock |Offices.
             |       |  (1). |         |  (1). |  (1). |Banks.|
             |  (7)  |  (8)  |   (9)   | (10)  |  (11) | (12) | (13)
    ---------+-------+-------+---------+-------+-------+------+--------
    Dec. 1892|   95  | 23·9% |   283   | 71·3% |118·9% | 102  |  2,326
     ”   1902|  131  | 21·8% |   387   | 64·5% |113·8% |  68  |  4,146
    ---------+-------+-------+---------+-------+-------+------+--------














CHAPTER IX

JOINT-STOCK BANK BALANCE SHEETS


The object of a joint-stock bank is to pay a dividend on its share
capital at a rate as high as can be earned consistently with the
performance of the main obligations of such a bank, that is, the
safeguarding of moneys deposited with it by customers, and of capital
subscribed by shareholders.

With regard to moneys deposited, it must be borne in mind that the
relation of banker and customer is that of debtor and creditor; and
as the bulk of a banker’s liabilities is repayable in cash on demand,
without notice of any kind, it behoves him so to conduct his business
that he may be in a position to meet any demand, and that without delay
or hesitation—or ruin stares him in the face.

We have already seen that before banking—as we understand it—was
practised in England, moneys were deposited with the goldsmiths for
safe keeping only and that in course of time the goldsmiths realised
that they were never called upon, at any one time, to repay the whole
amount deposited with them; that an undemanded portion always remained
in their hands which they could safely use for their own profit. This
principle, indeed, constitutes the foundation of modern banking. But
the question of what demand _may_ be made on any particular day, or
during any given period, has to be considered and provided for by
each banker for himself. Experience teaches that on an average over
any lengthened period the payments are met in the aggregate, and more
than met, by new deposits. This is evidenced by the steady growth of
balances held by the banks.

The receipts for any one particular day, or during any short period,
however, may, and frequently do, fall short of the payments. At the
end of each week, for example, bankers lose a large amount of cash,
which is drawn for wage-paying purposes, and it is not for several days
that this cash gradually dribbles back through tradesmen paying in the
money they have received from the wage earners. A similar depletion of
cash takes place at the end of each month for the payment of salaries.
Again, about the middle of each month suburban and provincial banks
have their balances depleted owing to retail customers paying the
monthly accounts of their wholesale houses. (This latter demand is not
for cash, however, but is satisfied from the Bank of England balances,
which, of course, has the same ultimate effect as if actual cash were
drawn.) At the end of each quarter there is also a disturbance of
balances for rents then falling due; and finally, in the summer and
autumn months much actual cash is taken temporarily from the banks
for harvest and holiday requirements. Thus the banks lose a portion
of their cash or bank balance on certain days and at certain seasons
of the year. These demands are all _known demands_, and the banker is
prepared accordingly.

It is not sufficient, however, that a banker should be in a position
to meet _known_ demands; unforeseen demands may be sprung upon him
at any moment, and he must be prepared to meet them immediately they
arise. Mr. Bagehot, in his _Lombard Street_, writes as follows of these
unexpected demands:—

    “Any sudden event which creates a great demand for actual
    cash may cause, and will tend to cause, a panic in a
    country where cash is much economised, and where debts
    payable on demand are large. In such a country an immense
    credit rests on a small cash reserve, and an unexpected
    and large diminution of that reserve may easily break up
    and shatter very much, if not the whole, of that credit.
    Such accidental events are of the most various nature:
    a bad harvest, an apprehension of foreign invasion, the
    sudden failure of a great firm which everybody trusted,
    and many other similar events have all caused a sudden
    demand for cash.”

A banker therefore fortifies himself against any sudden or unexpected
call by keeping much more cash in his till than he is ever likely to
require in normal times; by maintaining a large balance with the Bank
of England—which to all intents and purposes is equivalent to “cash”
in the till; and by lending out large amounts to bill-brokers, which
advances are fully secured, and are repayable either on demand or at
short notice. He is able to arrange the amount advanced in this way
from day to day—by lending further sums or calling in loans—according
to the circumstances of the moment, so that he can maintain that amount
in “cash” or “bank balance” which he considers necessary for his safety.

So we see that “cash” and “balance” at the Bank of England together
constitute a banker’s first line of defence—they are, so to speak,
his “firing line”—and the money which he lends to the bill-brokers
constitutes the “supports” to the “firing line.”

The next defence which a banker maintains against possible pressure is
represented by the amount invested in securities. Investments yield on
an average a higher return than sums lent at short notice or call; but
it must be remembered that securities are not so easily realised, if
the necessity should arise.

Of these investments a large portion is represented by Consols, as, in
case of need, these can always be sold for cash at very short notice,
or in case of great pressure doubtless the Bank of England would be
willing to make advances on the security of this stock. Of securities
guaranteed by the British Government, other than Consols, there will
probably be a large holding, although these securities might not in
time of panic be so readily realisable as Consols. Yet it is probable
that the Bank of England would, in order to avert disaster, accept such
stocks as security against advances. Other high-class securities which
yield a somewhat higher return will also probably be held to a large
amount. A banker, however, should not rely too much on these securities
for purposes of realisation in time of monetary pressure, it being
quite possible that at such times there would be no buyers of any class
of securities with the probable exception of Consols.

After making due allowance for “cash,” “bank balances,” “call money,”
and “investments,” a banker employs the balance of his funds in
discounting bills, buying bills from the market, and making advances to
customers.

As the dates when bills fall due for payment are fixed, if for any
reason a banker deems it prudent to increase his “cash” and “bank
balance,” he can readily do so by letting his bills in hand mature, and
not taking up new bills in their place. It is open to the banker to
sell the bills he holds, that is, to rediscount them, if he choose to
do so; but this course is not practised at the present day, except by a
few country banks. Moreover, in the event of a panic, probably no one
can be found to buy bills, so that they are not in practice realisable
before the maturity dates. As an illustration of this, it may be
mentioned that on one occasion during the crisis of 1847, it was found
to be impossible in the city of London to discount even an Exchequer
Bill of the English Government.

Of the various investments of a banker, “advances to customers” are the
most difficult to realise in time of pressure, as the wherewithal for
the customers to repay their advances is then wanting, and in their
efforts to obtain necessary funds the danger would only be aggravated.
In such times, indeed, the commercial world requires extra assistance
to avert an actual crash.

“Premises” is an item appearing among the assets in balance sheets
of joint-stock banks. It is probable that in many cases the value
of the premises largely exceeds the figure at which they are put in
the accounts, and hence they constitute a hidden reserve; but the
investment, by its nature, is one that cannot readily be made available
to meet sudden demands.

We see, therefore, that a banker’s assets usually consist of the
following six classes of investments:—

      I. Cash in the till and balance with Bank of England
           (or London agent).
     II. Money lent at call or short notice.
    III. Investments—
            (_a_) Consols;
            (_b_) securities guaranteed by the British Government;
            (_c_) other securities.
     IV. Bills under discount.
      V. Advances to customers.
     VI. Premises and sundries.

The first three of these classes constitute what is known as a banker’s
“liquid assets.”

    TABLE SHOWING, IN THE CASE OF NINE REPRESENTATIVE JOINT-STOCK
          BANKS, THE PERCENTAGES OF THE VARIOUS CLASSES OF ASSETS
          RESPECTIVELY TO THE AMOUNT OF LIABILITIES TO THE PUBLIC.

     -----+--------+-------+------------+-----------+-----------+-------
          |        |       |            |           |   Bills,  |
          |  Cash  | Call  |            |           | Advances, |
          |   and  |  and  |            | Total of  | Premises, | Total
     Bank.|  Bank  | Short |Investments.| “Liquid   |    and    |Assets.
          |Balance.| Money.|            |  Assets.” | Sundries. |
     -----+--------+-------+------------+-----------+-----------+-------
       A  |  14·9  |  13·4 |    20·4    |    48·7   |     60    |   109
       B  |  16·4  |   8·7 |    16·8    |    41·9   |     66    |   108
       C  |  18·3  |   6·5 |    22·0    |    46·8   |     59    |   106
       D  |  13·8  |   5·4 |    30·3    |    49·5   |     68    |   117
       E  |  14·6  |   5·6 |    26·6    |    46·8   |     66    |   113
       F  |  17·0  |  23·0 |    16·0    |    56·0   |     60    |   116
       G  |  12·4  |  25·0 |    17·1    |    54·5   |     60    |   114
       H  |  14·4  |   8·7 |    31·5    |    54·6   |     50    |   105
       I  |  16·5  |  16·1 |    11·0    |    43·6   |     66    |   110
     -----+--------+-------+------------+-----------+-----------+-------

The averages of these percentages[2] respectively are as follows:—15·3,
12·6, 21·3, 49·2, 61·6, and 111.

[Footnote 2: These averages are not the percentages which would be
shown by a _combined_ account of the nine banks.]

On examining this table it will be noted that the proportions of funds
invested in “liquid assets” do not vary materially with the different
banks. When we examine, however, the separate classes of investments
making up the total of “liquid assets,” we see that the case is
different, and a wide divergence is shown. This is especially so in
“call and short money,” where the proportions vary from 5·4 per cent,
to 25 per cent, and in “investments,” where they vary from 11 per cent
to 31·5 per cent.

The figures given are those of one particular day, and that a day on
which, according to popular belief, some of the banks indulge in what
has been called by the Press “window dressing”—that is, adjusting to
a greater or less extent the amounts held in the respective classes
of securities, with a view to the presentation of more impressive
figures in the balance sheet to be published as at that day. Had we
the actual daily records of the various banks at our disposal, it is
not improbable that a greater variation would be shown in the items of
“cash” and “call money”; but these figures are not available. It is
true that most of the banks now publish monthly statements as to their
position, and it is a noticeable fact that while some banks issue these
monthly statements as on the close of business of the last day of each
month, others vary the day on which the statements are made up; and it
is open to conjecture that this variation of date is with the object of
making a better showing.

It must not, however, be inferred that such a course as this (“window
dressing”) is the usual one adopted by our banks; but it is a method
of business which is possible, and which rumour has it is pursued in
certain cases. This explains such remarks in the money articles as,
“Money was in request to-day, owing to a large amount being called off
the market by the banks for window-dressing purposes.”

As regards “call and short” money, it is possible that in time of
actual panic a considerable portion of it would not be repaid when
“called,” especially as regards the “short” money. It is generally
believed, though not stated in any balance sheet, that a large part
of this “short” money is not lent to the bill-brokers, but to the
Stock Exchange—that is, to stock-brokers. Loans to the Stock Exchange
are fixed from one account to the next (about a fortnight ahead), and
are then supposed to be paid off if required. In time of difficulty,
however, would—or rather could—this money be repaid by the various
brokers to whom it is lent? Supposing a broker had a loan of £100,000
secured on American railroad shares, and a crisis suddenly developed,
from where could the broker obtain the money to repay the advance if it
were called in? He would not be able to sell the shares without serious
loss, if at all; and he would have great difficulty at such a time to
induce another banker to make him a fresh loan. In all probability
the loan would _not_ be repaid, however much the lending banker was
desirous, or in need of regaining possession of his money.

Therefore such loans to the Stock Exchange (excepting, perhaps, amounts
secured on Consols or such like) cannot fairly be entered under the
heading of “call and short” money in a balance sheet. It is desirable,
for these reasons, that balance sheets should give more explicit
information than is usually the case; and more particularly they should
specify separately the amounts lent to the bill-brokers at “call” and
“notice,” and the amount lent to the Stock Exchange from account to
account.

Turning to the question of “investments,” it may be noted in our table
that those banks which show only a small proportion of “call” money,
in most cases show a large proportion of “investments”; while, on the
other hand, those which show a large amount at “call” hold only a small
amount in “investments.”

The table exhibits a wide divergence in the proportions of
“investments” held. These proportions vary from 11 per cent, to 31·5
per cent. The actual proportion of investments held, however, is not
of so much concern as the nature of the securities which compose the
investments; that is, whether or not they are readily realisable in
case of need. The classes of investments are fairly shown in most bank
balance sheets, and from a study of these some useful information can
be gained. As an illustration of this, bank E in the table on page 94
shows in its balance sheet approximately the same holding in Consols
as bank I, but the latter bank has deposits from its customers of
twice the amount shown by the former. Now if bank E were to reduce its
Consols by one-half (giving the same proportion as I), and put the
proceeds in “cash” and “call money,” its position would appear thus
(using the actual figures of Consols shown by the balance sheets of the
two banks)—

    Cash and call money     23 per cent.
    Investments             24 per cent.

while bank I (as shown by the table) stands—

    Cash and call money     32 per cent.
    Investments             11 per cent.

This somewhat reduces the wide disparity at present shown in the
respective figures, and it is quite possible that this difference could
be still further reduced if we knew the actual amount held by each
of these banks in securities, other than Consols, guaranteed by the
British Government, and made the same assumptions with regard to these
as in the case of Consols. As a matter of fact, considerably more than
half of the 26·6 per cent. of investments held by bank E appears in the
balance sheet of the bank as being composed of such securities, and
these might prove a more valuable asset in time of trouble than so much
money nominally at “call” or “short notice.”

From this example we can see that in examining the balance sheet of
any bank, particular attention must be paid to the composition of the
investments, whether they are of such a character that one may fairly
rely on being able in time of stress to realise them immediately, or,
in the alternative, borrow from the Bank of England on their security.
We may repeat, as the matter is of importance, that the actual amount
of securities held, or the proportion which they bear to the total
balances, is not of such importance in the case of a bank, as the
nature of the securities which form the investments. One London bank’s
investments simply consist of a large holding of Consols; and though
times might conceivably come when it would be impossible to realise
even such a holding at short notice, yet such an investment forms a
backbone and reserve which cannot be overestimated.

Having considered the securities which constitute the “liquid assets”
of bankers, we will now briefly turn our attention to the manner in
which the remainder of bankers’ funds are usually utilised. As we have
already seen, this remainder is used mainly in discount operations
and advances to customers, while a certain amount is generally sunk
in premises, etc. These three items have been classified together in
our table, as the necessary information is not given in some of the
published balance sheets to enable us to specify them separately.
As regards “premises,” it may be repeated that though they form a
valuable asset, yet they are not an available one, and would, generally
speaking, only be realised in the event of a winding-up.

The bills held under discount comprise bills which are discounted for
the customers in the ordinary course of business, and also bills bought
from bill-brokers; and they constitute a fairly available asset.

The “Advances” to customers is a security of a very fixed nature. In
times of trouble it is the asset most difficult of realisation, and it
is the rock on which the majority of banks which have come to grief
have struck.

No information respecting this asset is vouchsafed in any balance
sheet beyond the bare total. It is a known fact that banks are lenders
on practically any kind of security which has a fairly steady value,
and in which there is a “market”; stocks, shares, produce, houses,
lands—all are offered as security, and all are accepted under various
conditions. But it is of the utmost importance that bankers should
closely watch and scrutinise the aggregate of advances which they may
make upon any one kind of security, so as to keep the amount within
due limits. If too large a sum is advanced on one kind of security,
and that security should become much depressed in value, the banker
may be caught between two fires: on the one hand, the customers who
have deposited this security will, from its fall in value, have become
financially weakened, and perhaps not be in a position to repay the
advances; and on the other hand, if the banker wish to repay himself
by realising the securities, he may find that the margin of value has
run off, and what can be obtained by selling the securities in the
market will not cover the advances, or possibly, for the time being,
they will prove to be unsaleable. Thus he will be left in the dangerous
position of having a considerable proportion of his assets indefinitely
locked up, and a certain number of his customers in a weak and reduced
condition financially.

Neglect of the precaution of spreading advances over different
suitable classes of investment has brought many banks to ruin in the
past, and under similar conditions would do so in the future. This
danger is not now so pressing as in former times. Owing to the present
custom of establishing branches, and to amalgamations, the operations
of banks are now frequently spread over wide areas, and therefore
automatically their advances tend to spread over many more industries
and securities than was formerly the case. When banks were more local,
their prosperity rose or fell with the industry and conditions of their
particular district.

We see then there is danger in locking up too large amounts in advances
on any one class of security. But there is an equal danger in advancing
too large sums to a few customers. A firm may be of very good standing
and report, and keep a first-class and highly remunerative account with
its banker. From time to time it has advances from its banker, which he
is very glad to make, and which are regularly repaid. But a time may
come when an advance may not be repaid when due; instead, a further
advance is asked for. This is made without question, and probably
further advances, always increasing and never reducing. After a time
the banker may become a little fidgety, and cautiously suggest a
reduction, but will probably be told that ample funds will come to hand
shortly. When this time comes the funds may not have been received,
and the customer may insist that he _must_ have further help, or he
will not be able to meet his obligations. The banker should require
ample cover before advancing further sums; but if he is weak and yields
to pressure, matters will go from bad to worse, until the customer
may practically rule and command the bank, the two concerns will be
involved together, and when the customer “goes” the banker will go too,
or at the best suffer a big and weakening loss—not only loss of money,
but loss of credit, which will affect him seriously in the future, and
may ultimately cause his fall.

This danger is not a hypothetical one. It is unfortunately founded on
fact. It was this cause which led to the disastrous and all-reaching
failure of the City of Glasgow Bank. When the position of that bank
was examined it was found to have lent as much as six million pounds
among four customers. Gilbart says: “Almost every bank that has failed
can point to some one, two, or three large accounts to which it mainly
attributes its failure.”

On looking at the last column of our table we see that all the banks
hold assets in excess of liabilities to the public; the excess is in
respect of the capital and reserve fund. As an additional security for
the depositors, each bank has only a part of its subscribed capital
paid up. The remainder, the uncalled capital, constitutes an extra
reserve for the benefit of the depositors.

The profits made by joint-stock banks are high, the majority of
dividends varying between 10 and 20 per cent.; and notwithstanding such
satisfactory dividends, large reserve funds have been accumulated from
undivided profits. These reserve funds in some cases equal, and even
exceed, the total of the paid-up capital. It may be added that many of
the banks are popularly credited with holding other reserves which do
not appear in their balance sheets.




CHAPTER X

THE BILL-BROKERS


The business of the bill-broker is one that has grown up during the
past century—chiefly during the latter part of it. A bill-broker
acts the part of an intermediary between banker and merchant. At
first glance the need of such an intermediary is not very apparent,
considering the large number of banks now in existence which keenly
compete for business. On looking further into the matter, however,
the importance and utility of the bill-brokers, both to banker and
merchant—that is, to those who wish to buy bills and those who have
them to sell—become apparent.

To undertake the business of discounting bills successfully great
knowledge and discrimination are necessary; knowledge that can only be
obtained by experience, and discrimination by keeping in touch with
the changes occurring in the standing and position of the mercantile
and financial community. As with the rest of the world, merchants
and financiers do not stand still; they progress or they fall back.
Many bills which in 1893 would have been treated as first-class paper
are now, in 1903, looked at askance; while the acceptances of many
firms who were unknown ten years ago are now readily taken. It is the
business of the bill-broker to keep himself thoroughly informed of the
“standing” and “position” of the mercantile community, so that he can
readily discriminate good bills from doubtful ones.

A bill-broker does not confine his operations to what is called “bank
paper”—that is, to bills accepted or endorsed by one of our well-known
banks or leading finance houses—but he is prepared to deal in bills
accepted or endorsed by members of the ordinary mercantile community,
provided he is satisfied as to the position of the parties whose names
appear on the bills. These latter bills are called “trade bills.” The
rate for discounting such bills is always somewhat higher than the rate
for bank paper because of the slightly greater risk.

The bankers of the present day discount a large number of bills for
their customers in the ordinary course of business. Bills obtained
from this source, however, do not meet a banker’s requirements in
several particulars. For one thing, the amount of bills offered
directly to bankers for discount is not sufficient, as a general rule,
to satisfy their demands; and, moreover, a banker has no power of
regulating the supply of bills offered to him in this way. One day he
may be asked to discount bills to a very large amount, when he is not
anxious to increase the amount of his holding of bills; on another day
he may wish to increase his holding, but none may come forward. And
lastly, with bills offered for discount by ordinary customers a banker
has no power of so picking his bills that he can ensure having a large
amount of bills maturing at any given period, when he anticipates that
he will require to increase his cash. But all these conditions can be
met by dealing with the bill-brokers. A banker can obtain bills to any
desired amount from the bill-brokers, he can regulate the supply of the
same according to his wishes, and he can stipulate that the bills sent
in by the bill-brokers are to mature within any given time—thirty days,
sixty days, ninety days, and so on; and he is thus in a position to
provide automatically for an expected demand for cash at certain times,
by the maturing of bills.

Bankers therefore find it easier, and, owing to the broker’s
specialised knowledge of the position of parties, on the whole safer,
to buy bills from the bill-brokers than to try to obtain directly all
that they require. Bills so purchased possess a further advantage, for
not only are they secured by the names on them, but, in addition, they
usually carry the guarantee of the bill-brokers as well; and this, when
dealing with large and wealthy firms, is a distinct advantage. It must
also be remembered that there are a large number of banks—principally
country banks—who are so situated that in the ordinary course of
business they never have what is called “A1 paper” offered to them for
discount, and yet they require to invest a certain amount of their
funds in such bills. These institutions of necessity make use of the
bill-brokers to satisfy their needs.

In consideration of the bill-broker’s guarantee, and of having had the
advantage of his knowledge in selecting and collecting bills, a banker
is content to buy bills from a broker at a slightly lower rate than the
ruling market rate, usually ⅛th or ¹/₁₆th per cent. per annum lower.
For instance, if bank or first-class paper is quoted in the market at
2⅜ths per cent. per annum for bills due in three months’ time, bankers
would buy such bills from the broker at 2¼ per cent. The broker thus
makes a turn of about ¹/₃₂nd per cent. on the deal, but in active times
this “turn” is often divided with the merchant from whom he buys. This
profit may seem small, but when the enormous turnover of a bill-broker
is taken into consideration, it is apparent that the total profits
derivable from this business are very considerable. This is confirmed
by the satisfactory dividends paid by the two or three public companies
conducting discount business.

Looking at the other side of the question, persons who have good bills
to discount find they have a readier market in the bill-brokers than
in the banks, and practically all the first-class bills throughout the
country find their way to the London market for discount.

In order to keep their connection, bill-brokers must be prepared to
do business in good bills at any time, to practically any amount; and
to be in a position to do this, they rely either on borrowing the
necessary funds from the banks, or on selling some of their stock of
bills in hand to the banks. The interest on the call and short-notice
money borrowed from banks is on an average materially lower than the
rates at which bills are discounted, and consequently a profit is made
by the bill-broker (who holds the bills he buys), of the difference
between the two rates; and when bills are sold to the banks a turn is
made on the transaction, as we have already seen. Competition among the
various brokers, however, is always tending to keep down rates, and
consequently the profits of the business.

Bill-brokers also buy very large amounts of trade bills from colonial,
and in some cases foreign banks, which are endorsed by the banks in
question. These bills, when not held by the brokers, are sold to
various banks throughout the country, and of course form a first-class
security. It may be mentioned that it is not the custom now for any
London bank to rediscount bills which they may have discounted for
their customers, and only in very rare instances do country banks adopt
this course, though the names of two or three of such sometimes appear
as endorsers.

Unlike a banker, a bill-broker has to pay interest on all his working
funds, and this makes him anxious always to utilise those funds to
their fullest extent. Unlike a banker also, he has no large reserve
of idle funds to keep for meeting sudden demands. Should such demands
arise, he relies on being able to borrow from banks or elsewhere,
sufficient funds to meet those demands, or, as a last resort, to obtain
assistance from the Bank of England.

As regards the funds with which the bill-brokers conduct their
business, we have already seen that they are largely borrowed from
various banks. The business is very simple, and is marked by an absence
of any kind of red tape. Every morning the representatives of the
brokers call on the banks with which they do business, and ascertain
whether the latter wish to lend any more money, or if any of the money
already borrowed is required to be repaid; at the same time usually
arranging the rate to be paid for money. They also ascertain if the
banks wish to buy any bills, and arrange the rate for such business.

In the case of money being lent to a broker, he simply sends in
security to cover the advance, and draws a cheque on the banker for the
agreed amount. In the case of money being “called in” by a banker, the
broker sends in his cheque on some other banker for the sum called, and
takes away a corresponding amount of security.

The securities deposited by bill-brokers for loans of this class
consist either of first-class bills or what are known as “floaters.”
“Floaters” are bearer securities of the highest class, such as Consol
certificates, the debentures of certain Indian railways, the bonds of
the Corporation of London and the London County Council. They obtain
the name of “floaters” from the fact that they float from bank to bank,
as one bank calls and another lends.

In the case of a banker buying bills from a broker, the broker sends
in a parcel of bills which roughly amount to the agreed figure, and
draws a cheque for the amount less the discount. It is not usual for
brokers to endorse the bills they so sell, but they give the banker a
continuing guarantee in respect of all the bills which he may buy from
them from time to time.

It frequently happens at certain seasons of the year when there is a
pressure for money, or on special occasions—such as on the issue of
a big public loan, when a large amount of bankers’ floating balances
is temporarily withdrawn—that heavy demands are made on brokers to
repay money they have at “call” from the bankers. The brokers are then
placed in the position of having large sums to repay, and as none of
the banks are lenders, they are forced to apply to the Bank of England
for assistance. The brokers are then said to be “in the Bank,” and they
usually try to get out as soon as they can, in order to escape the
higher interest there demanded from them. Formerly the Bank of England
declined to discount any bills for brokers and would only make them
temporary advances. This rule, however, is now relaxed, and the Bank
will either discount approved bills at the “official” rate, or make
temporary advances. The bills discounted with the Bank of England are
not supposed to have more than sixty days to run before maturity, and
must bear the names of at least two British firms, one of which must be
the acceptor.

The advances made by the Bank of England are not at “call,” as with
other banks, but for a fixed number of days, never less than three, and
sometimes for as many as ten. The rate charged varies from Bank Rate to
½ per cent., or even 1 per cent., above that rate.

It follows from this that when brokers have to obtain assistance from
the Bank, the rate for money in the open market at once begins to
stiffen, as demand exceeds supply; and if any considerable amount has
to be borrowed from the Bank, the outside rate will rise until it is on
a level with the Official Rate; or even slightly higher, if the Bank is
charging above the Official Rate for its advances.

Generally speaking, the aggregate amount of money from all sources
available for the use of the market keeps approximately at a level
figure, but a portion of it is not always in the same hands; and it is
this shifting balance of market money which really controls the rates
charged for the use of the whole of the money. If this shifting balance
finds its way into the Bank of England, all rates harden, owing to the
competition among brokers to obtain money without applying to the Bank.
On the other hand, if the shifting balance passes into the coffers of
the bankers, the competition among them to lend their funds will tend
to reduce the rate of interest which can be obtained for the use of the
money.




CHAPTER XI

THE CLEARING HOUSE


A work dealing with the subject of the Money Market would not be
complete without reference to the Clearing House—the institution by
which our enormous financial operations are adjusted. Without such
arrangements as are carried out so practically and automatically by the
Clearing House, it would be impossible to carry on our present trade,
and our banking system could not have developed into such a high state
of efficiency as we at present find.

Although our Clearing House has now been established for more than a
century and a quarter, London cannot lay claim to be the originator of
the clearing system. Edinburgh established such a system some years
before its adoption in London, and a somewhat similar arrangement
appears to have been in vogue in certain continental towns, it is said,
since the sixteenth century.

Up to the year 1775 all the cheques which a London banker held on
other London bankers were presented daily to the bankers on whom
they were drawn, and paid in cash or notes. Such a system was very
inconvenient to both the collecting and the paying bankers, as not
only did it entail the trouble of sending out clerks to present the
various cheques, but every banker was bound to keep an unnecessarily
large stock of cash and notes in his till, in order to be prepared to
meet in cash any demand which might be made upon him. There was also
considerable risk in the clerks’ carrying about such large amounts of
notes and gold.

In the year 1775 certain of the private bankers of London arranged a
scheme between themselves whereby to minimise this inconvenience and
risk. They hired a room in which the representatives of each bank met
daily, and exchanged the cheques and bills which they held on each
other. The _balances only_ which each bank had either to receive or pay
were settled in cash. By this means a great saving was effected in the
use of actual cash, and the risk of transfer of large sums from bank to
bank was to a large extent reduced.

At a later date the use of actual cash was still further economised.
Each of the banks represented in the Clearing House was compelled by
regulations to keep an account at the Bank of England. After this
regulation came into force, instead of cash being paid or received at
the end of the day, as was formerly the case, each banker’s account at
the Bank of England was either credited or debited with the balance due
to or by him on the aggregate of his daily transactions.

When the Clearing House was first established it met with much
opposition, although its advantages were so apparent. Several of the
largest bankers refused to countenance it. In course of time, however,
the great advantages it possessed wore down all opposition, other
bankers joined the “clearing,” a regular set of rules was drawn up for
the conduct of its business, and a committee of bankers was appointed
to supervise its working.

On the establishment of joint-stock banks in 1833 they were prohibited
from enjoying the facilities of the clearing system, owing to the
jealousy of the private banks. It was not until 1854 that this jealousy
was overcome, and the joint-stock banks permitted to join the Clearing
House; but the Bank of England did not take advantage of the system
until ten years later.

In the year 1858 the Country Clearing system was established. Under
this arrangement all cheques on country banks held by other banks are
passed through the Clearing House into the hands of the London agents
of the banks on which they are drawn. The London agent sends by post
each night to the various country banks which he represents, a parcel
of cheques consisting of the whole of the cheques on each respective
country bank which have been passed to him through the clearing. Each
of the country banks has thus but one remittance to deal with each
morning, instead of numerous remittances from banks situated all over
the country. On the other hand, the trouble to which each bank was
formerly put of forwarding all country cheques received direct to the
various banks on which they might be drawn was done away with.

The West End and suburban banks of London cannot, by reason of
distance, be directly represented in the Clearing House. A system,
however, is in operation by which practically the total of their daily
transactions becomes merged in the total figure of each day’s clearing.
Cheques presented to these banks by other banks are paid by what is
known as a “payment.” A “payment” is in effect a draft on their head
office or clearing agent, and these drafts are passed through the
Clearing House.

By these various developments it has come about that the vast
majority of bills and cheques passing through the hands of bankers,
throughout the country, become focussed in the London Clearing House,
and the returns of that institution, showing the total of the daily
transactions with which it has dealt, consequently afford a good
barometer of the state of trade throughout the country, the figures
rising or falling as prosperity or depression affects our commercial
condition. The returns are now published weekly, and the figures there
shown are stupendous in their amount—the average daily clearing on
ordinary days for the year 1902 amounting to £15,559,600, and on Stock
Exchange settling days to £38,961,800, while the grand total for the
year amounted to the record figure of £10,028,742,000.

Without going into detail as to the exact mode of procedure carried out
in the working of the clearing system, we will roughly delineate the
manner in which the transactions are brought to a head at the close of
each day’s work.

The clerks of each bank represented in the Clearing House make
out a summary at the end of each day, showing the amount of the
“articles” (cheques, bills, and drafts) which they have handed to the
representatives of other banks, and the amount of the articles handed
to them by other banks, and the difference of these two figures shows
the net amount which has to be received or paid as the result of the
aggregate of all their transactions.

All the clearing banks must keep an account at the Bank of England, and
a nominal account is kept at the Bank, called the “Clearing Bankers’
Account.” At the close of each day the amount owing by each bank, which
on balance has to _pay_, is debited to that bank’s account at the Bank
of England, and credited to the “Clearing Bankers’ Account”; while as
regards those banks which have to _receive_ on balance, the “Clearing
Bankers’ Account” is debited, and the account of those banks credited.
Thus while the Clearing Bankers’ Account at the Bank is automatically
balanced each day—as, in the aggregate, the credits of one set of
banks must be balanced by the debits of the other set—the whole of the
enormous total of transactions thus brought to one head is settled by a
few dozen entries in the books of the Bank of England.

Quite recently, and not before it was absolutely necessary, the
building of the Clearing House was largely extended, and the internal
arrangements reorganised, giving greater facility for the work carried
out there; and an innovation has been made in supplying Burroughs’
Automatic Adding Machines for the use of the clerks of the house. About
one hundred and forty of these machines are now in use, and though when
they are all at work the Clearing House is certainly not the quietest
spot in the City, yet the convenience and great economy of time and
labour resulting from their use cannot be fully appreciated by any
except those in daily touch with the work.[3]

[Footnote 3: Since the first edition of this book was published a new
clearing has been established, called the “Metropolitan Clearing.”
By means of this new system, cheques on various branch and private
banks situated within a certain radius of Lombard Street are collected
through the medium of the Clearing House and the head offices of the
various banks, and the total of such collections is brought into the
daily general settlement of the “House,” thus swelling the already
enormous figures. This system has certainly increased the efficiency
and unification of the Clearing House, and it has almost entirely
eliminated the well-known “walk clerk.”]




CHAPTER XII

FOREIGN EXCHANGES


In the course of this book reference has been made on several occasions
to the influence on the Money Market of the foreign exchanges. It
will be impossible in the course of a short treatise such as this to
enter fully into details and technicalities. Anyone wishing to obtain
a fuller explanation of the subject cannot do better than study Mr.
George Clare’s book entitled _The A B C of the Foreign Exchanges_.

Bills of exchange have been used in settling commercial transactions
since very early times. The Romans appear to have employed them to some
extent, but it is to the early Italian, and even more to the early
Jewish merchants, that we owe the development of the system. By the
fourteenth century the use of bills was firmly established, and their
form, and the laws and customs relating to them, were much the same as
at the present day.

Before inquiring into the effects which the foreign exchanges have on
our Money Market, we will state clearly what a foreign bill of exchange
really is. When a foreign bill is bought, what is it that is bought?
The transaction is simply this, that so much money is paid here for
the right to so much currency of a certain country to be delivered at
once, or at a given date, at a certain place, to the buyer of the bill
or to his nominee. The bill itself is merely an order to pay, and the
transaction resolves itself into bartering so much money of one country
for so much money of another country, to be delivered at a specified
place and time.

The value of the imports of the United Kingdom for 1901 was 522
millions of pounds, and of the exports 348 millions, together nearly
900 million pounds; and to understand how these huge transactions were
settled financially, it is necessary to have some knowledge of the
principles and customs of foreign exchanges. It is common knowledge
that we do not pay gold for our imports nor receive gold for our
exports. The imports are paid for mainly by the exports, the balance
being made up of sums due to us for interest on capital invested
abroad, for repayment of money invested abroad, and for freights,
etc. _Some_ gold, however, does enter into the settlement of these
transactions. This gold is sent from country to country, centre to
centre, and further on in this chapter we shall see the causes of these
movements and the effects arising from them.

There are certain technical terms used in connection with the foreign
exchanges which must be clearly understood before it is possible to
follow the various fluctuations in exchange rates, and the effect on
our monetary position which such fluctuations produce.

We will consider one or two transactions between London and Paris as
a practical illustration of these terms. Suppose a London merchant,
A, owes to a Paris merchant, B, 25,000 francs. How can he pay that
debt, and how much will it cost him to do so? He may either buy a
draft on Paris and remit it to B, or instruct B to draw on him, or he
may actually send gold. For the moment we will assume that he decides
to send gold. How many sovereigns will A have to send so that B may
receive the equivalent of the 25,000 francs due to him?

There are two ways of looking at a sovereign: one is that a sovereign
_is_ a sovereign, a coin of the realm, which everybody is pleased to
possess; the other is as a piece of the precious metal which, by our
English law, contains 7·988 grammes of standard gold—standard gold, by
our law, consisting of eleven parts pure gold and one part alloy. A
franc, or rather a twenty-franc piece, can be looked at in the same two
ways. According to French law, a kilo of gold, containing nine parts
pure gold and one part alloy, is coined into 155 twenty-franc pieces.
From these two sets of figures, by a simple calculation, we find that
the pure gold in one sovereign is equal to the pure gold contained in
25·2215 francs; that is, that as regards intrinsic worth, one sovereign
is equal to 25·2215 francs, and this exchange of 25·2215 (usually
regarded as 25·22) is what is known as the “Mint Par” between England
and France. A Mint Par represents the fixed intrinsic value of the
currency unit of one country, expressed in terms of another country,
which uses the same metal as a standard of value.

Thus when A sends gold to Paris to liquidate the debt, he must, on this
basis, send sovereigns containing in the aggregate just the quantity of
pure gold contained in 25,000 francs. This at the Mint Par of 25·22 is
about £991 5_s._ 6_d._ But A must also pay for carriage and insurance
of the parcel of coins, and these charges, we may assume, will amount
together to 10 centimes per £, which, on the remittance in question,
would amount to £3 18_s._ 7_d._ The total cost will therefore be £995
4_s._ 1_d._, which represents an exchange at the rate of about 25·12½.

Therefore if A liquidates his debt to B by sending gold, for each
sovereign expended he only obtains the right to 25·12½ francs in Paris.
This rate is called the “Export Specie Point,” or “Export Gold Point,”
between England and France, and when the Paris exchange falls to this
figure, we may expect gold to leave us for Paris, as gold is then as
cheap a mode of remittance as bills.

Let us now reverse the position and assume that B in Paris owes A in
London £1,000, and that he decides to send gold to pay his debt. What
rate of exchange will result from this transaction?

To pay in gold he will have to send such a number of twenty-franc
pieces that the gold in them shall be equal to the gold in 1,000
sovereigns; that is, as we have seen, 25,220 francs. But B will have to
pay for carriage and insurance at, say, an average rate of 10 centimes
per £1—that is 100 francs—making a total cost of 25,320 francs. This
is an exchange of 25·32, and is called the “Import Specie Point” from
France to England. When the exchange reaches this figure, gold should
leave Paris for London. As a matter of fact, gold does not always
come to us when the exchange is at this figure, as the Bank of France
interposes difficulties in the way of the export of gold. This has the
effect of preventing gold coming in any large quantities unless the
exchange rises above the Import Specie Point of 25·32. So we see that
the Mint Par of London with Paris is 25·22 nominally—the Import Specie
Point (gold to us) about 25·32, and the Export Specie Point (gold from
us) about 25·12½.

In the same way the Mint Par and the gold points can be calculated with
any foreign centre which has gold as the basis of its currency. With
silver using countries these points cannot be fixed. Gold is with them
a commodity only, and its value is measured in silver prices. With
us and other gold using countries the reverse is the case as regards
silver. Hence with silver using countries no common measure exists for
determining the rates.

It is important for those concerned with this business to have firmly
fixed in mind the Mint Par and Gold Points of London with Paris,
Berlin, and New York; as of all exchanges these three are by far the
most important, and have the greatest effect on our Money Market.

The figures relating to Paris have already been given. Those of Berlin
are:—

    Mint Par 20·43 (marks to a sovereign).
    Import Gold Point about 20·52.
    Export Gold Point about 20·33.

As with France, the export of gold from Germany is hindered by the
Reichsbank. That institution, on the other hand, places facilities at
the disposal of importers of the metal. For this reason gold does not
come to us readily when the exchange rises to the figure at which we
should otherwise expect it to come, and conversely, gold frequently
leaves us before the rate has fallen to the nominal figure at which we
expect it to go.

    With New York the Mint Par is $4·866 to £1, or 49⁵/₁₆_d._ to $1;
    the Import Gold Point is $4·89½ to £1, or 49_d._ = $1;
    and the Export Gold Point is $4·83½ to £1, or 49⅝_d._ = $1.

When an exchange is between the Mint Par and the Import Gold Point,
it is said to be “for us,” or “favourable”; and when an exchange is
between the Mint Par and the Export Gold Point, it is said to be
“against us,” or “unfavourable.”

The reasons for these terms are apparent on giving the matter a little
consideration. If an exchange is tending to such a figure that gold
is likely to come to us, it is regarded as favourable, because if
gold does come, it strengthens the Reserve of the Bank of England;
and a strong Reserve means a low value for money here, which is
generally considered to be good for trade. The reverse applies to the
“unfavourable” exchange.

Having now arrived at an understanding of the terms Mint Par and Export
and Import Gold Points, we will consider how and why rates fluctuate
between these figures. As regards the merchants A in London and B in
Paris, we have so far assumed that they have settled their indebtedness
in gold. Such a mode of settling debts is unusual in international
transactions; the ordinary course for A to follow would be either to
buy a draft on Paris and remit it to B, or for B to draw a bill on A
and sell it.

If the aggregate of debts between England and France exactly balanced,
it can be assumed that in theory the exchange would stand at the Mint
Par, because the total amount of drafts for sale would exactly equal
the demand. But amid the multitudinous transactions of modern business
we never are in a position to know when the mutual transactions of
two countries balance, and the fluctuations in the rate of exchange
are primarily due to the relative degrees of urgency of buyers and
eagerness of sellers—to a question of supply and demand.

Let us suppose that as a result of the aggregate dealings between
France and England, France at one period owes us more than we
owe her. Now it will be apparent that in the settlement of the
transactions comprised in the aggregate, the merchants in France
will find a difficulty in procuring sufficient drafts to settle all
their indebtedness, and consequently there will be a likelihood of
some of the merchants there having to send gold and bear the cost of
remittance. Hence there will be competition among them to obtain what
bills are offering—demand will exceed supply—and rather than be forced
to send gold, buyers of drafts on London will be willing to pay more
for them than the face value represented; that is, they will be willing
to pay more than Mint Par.

For example, B in Paris owes A in London £1,000. He wishes to buy a
draft for that amount, and expects to pay only 25,220 francs for it.
He will find that there are many buyers who are competing for the
available drafts, and to secure a remittance he perhaps may offer
25,250 francs, that is, an exchange at the rate of 25·25. Possibly he
may obtain his draft at this price; but if buyers are urgent, sellers
will take advantage of the situation and raise their price still
further. If the demand continue, the price may be raised to such a
level that B will find that he can send gold without incurring extra
expense. When this level is reached, gold is likely to pass from Paris
to London.

Now we will suppose the contrary of this supposition; that is, that
England owes more to France than France to England. Under these
conditions a debtor in London will find a difficulty in procuring a
draft on Paris. He may try to procure it at the rate of 25·22 francs,
but he will find others competing for the available drafts, and he will
be forced to buy at a lower rate of exchange, say 25·17. Competition
will result in further reductions, until a point is reached when it is
as cheap to send gold and pay the cost of transmission; that is, when
the rate falls to about 25·12½.

Thus though one sovereign is always equal to 25·22 francs, coin for
coin, yet the price of bills expressed in these coins will vary within
certain limits according to demand and supply.

The exchange in London on Paris, or any other centre, will always
tend to keep approximately level with the exchange at that centre on
London. As an illustration, let us take an extreme case. Suppose
we quoted Paris at 25·20 and Paris quoted us at 25·30. A foreign
banker in London, on seeing these quotations, would wire to his
Paris correspondent to draw on him for, let us say, £1,000 and sell
the draft, which would realise 25,300 francs. At the same time he
would draw on his Paris friend for 25,300 francs and sell the draft
in London, for which, at the rate of 25·20, he would receive £1,004
nearly. The Paris correspondent would be cleared, as he has drawn and
sold a draft for 25,300 francs, and he has paid a draft drawn on him
for the same amount; but the foreign banker in London has received
£1,004, and only has to provide £1,000 to meet the draft drawn on
him, leaving a profit of £4. He would not be the only one to perform
this little operation, however, and the combined action of all such
arbitrage dealers would promptly level quotations.

We will now turn our attention from theories to some actual facts,
and examine how the business in foreign bills is conducted in London.
The usual meaning of the term “Bourse” or “Exchange” is a place
where merchants assemble to transact their business. We have our own
famous Royal Exchange, although nowadays it is hardly famous for the
meetings of merchants. It is a building which has survived its original
purpose, but it is of interest as being an historic relic of the place
where the foundation of our great commercial supremacy was laid.

In the early part of the sixteenth century the London merchants met
at regular times at some rendezvous in Lombard Street to transact
their business. As their transactions and the number of the merchants
represented increased, inconvenience arose, and in 1564 Sir Thomas
Gresham offered to erect a suitable building for the merchants’ meeting
house if the City would provide the site. This offer was accepted,
and the land where the Royal Exchange stands was purchased by a
subscription of the citizens—a Mansion House fund. The edifice was
duly built, and opened for business in 1571 by Queen Elizabeth. It was
unfortunately destroyed by fire in 1666; rebuilt, and again destroyed
in 1838. The present building was then erected, dating 1844, and the
late Queen Victoria attended in state to open it, as is commemorated in
one of the pictures exhibited in the building. The opening of the first
building by Queen Elizabeth is the subject of another of these pictures.

The merchants in various trades used to assemble in groups, in corners
and round the various pillars of the building; but it very soon became
too small for this purpose, and as the various groups waxed bigger and
wealthier, they gradually deserted the building and erected exchanges
of their own, such as the Stock Exchange, Coal Exchange, Hop Exchange,
Metal, Wool, Corn, etc., exchanges. At the present day the Exchange is
used only by the money merchants and a few dealers in some of the less
important industries who occasionally meet there in the afternoon.

The money merchants hold their meetings in the Royal Exchange on
Tuesdays and Thursdays, which days are called “post days.” This term
is a survival of the times when the foreign mails were despatched only
twice a week.

The principals of the great foreign banking houses and a few brokers
are the only persons who attend “’Change.” As a result of the business
then effected and the negotiations entered into, certain rates of
exchange are arrived at as the ruling rates of the day. After the
meeting the brokers publish a list of these rates, which is called
the “Course of Exchange.” A specimen “Course of Exchange” is here
appended:—

                       LONDON COURSE OF EXCHANGE
                     TUESDAY, SEPTEMBER 8TH, 1903
    ---------------------------------+---------+---------------------
                                     |         | PRICES AS NEGOTIATED
                                     |         |      THIS DAY.
                                     |  TIME.  |---------+-----------
                                     |         |   FROM  |    TO
                                     +---------+---------+-----------
    Amsterdam, Rotterdam, etc.       | Short   |  12·06½ |  12·07¾
      Ditto                          |3 Months |  12·3¾  |  12·4½
    Antwerp, Brussels, etc.          |    ”    |  25·37½ |  25·42½
    Paris                            | Cheques |  25·17½ |  25·18½
      Ditto                          |3 Months |  25·32½ |  25·37½
    Marseilles, Lyons, etc.          |   ”     |  25·32½ |  25·37½
    Zurich, Basle, etc.              |   ”     |  25·35  |  25·40
    Hamburg, Berlin, and German Bank |         |         |
      Places                         |   ”     |  20·58  |  20·62
    St. Petersburg                   |3 Months |  24¹⁵/₁₆ |  25¹/₁₆
    Moscow                           |   ”     |  24¹⁵/₁₆ |  25¹/₁₆
    Vienna, etc.                     |   ”     |  24·17½ |  24·22½
    Madrid                           |   ”     |  34¼    |  34½
    Other Spanish Bank Places        |   ”     |  34¼    |  34½
    New York                         | Demand  |  48·6½  |   48·7[4]
      Ditto                          | 60 Days |  48¹¹/₁₆ | 48¹⁵/₁₆
    Rome and Italian Bank Places     |3 Months |  25·40  |  25·45
    Lisbon and Oporto                |   ”     |  42     |  42⅛
    ---------------------------------+---------+---------+-----------

[Footnote 4: This quotation is for £10, and is not now in use. The
present mode of quotation is for dollars to the £ only—as 4·87.]

The rates quoted in the table indicate the number of foreign coins
given for one sovereign, with the exception of those on Spain,
Portugal, Russia, and the United States. For Spain the quotation is the
number of pence given for the peso, for Portugal the number of pence
for a milreis, for Russia the number of pence for a rouble, and for
America the number of pence for a dollar.

In London all rates are quoted _as they are quoted at the foreign
centres on London_, with the exception only of Spain, where London
quotes so many pence to the peso, while Spain quotes piastres to the
£1; Russia, where we quote so many pence to the rouble, and Russia so
many roubles to £10; and New York, where we quote so many pence to
the $1, while New York quotes so many dollars to the £1. With regard
to the New York quotation, however, London now as frequently uses the
quotation of dollars to the £1 as pence to the dollar.

Except when otherwise stated, the rates quoted in the “Course” are for
bills having three months to run, or in technical language, they are
the rates for the “Long exchange.” Rates quoted as “cheque,” “sight,”
or “demand,” are known as the “Short exchange.”

The rates of the Long exchange are arrived at as follows: We will
suppose that a merchant in London has to pay a debt in Paris of 25,000
francs, and for simplicity we will assume that the sight rate on Paris
is 25. If the merchant buys a sight draft on Paris for 25,000 francs
and remits it to his creditor, it closes the transaction, and the
remittance has cost the merchant £1,000.

But if instead of buying a sight draft at this rate he bought a three
months draft, what would be the result? When he sent this draft to his
friends in Paris they could not credit him with it at once, and so
close the transaction, as they would then be out of their money for
three months. So the parties in Paris to whom the draft was remitted
would discount it with their banker, and credit the London merchant
with the _proceeds only_. He would also be charged for a bill stamp,
and in addition, he would be liable for any contingencies which might
arise, interfering with the due payment of the bill, until payment was
actually made. So instead of the London merchant being credited with
25,000 francs, he would only be credited with 25,000 francs _minus_
discount at the French market rate, say 4 per cent. for three months =
250 francs, and _minus_ the bill stamp = 12·5 francs, that is 24,737·5
francs. Moreover, he would be under liability on his endorsement of
the draft until its maturity, and for this he ought to receive some
consideration. Consequently when the London merchant buys his bill,
if a three months bill is offered him instead of a sight draft, he
demands an allowance in the rate sufficient to cover interest at the
foreign market rate, plus stamp, plus allowance for contingencies. And
the rate for such a transaction will be arrived at as follows: First,
as the presumed sight rate is 25, to this must be added three months’
interest at the foreign market rate (say at 4 per cent.) on 25, which
is ·25, bill stamp at ½ per mille must also be added, say ·01¼, and an
allowance for risk which we may take at ·00¾. Thus the rate for such a
three months draft would be 25 + ·25 + ·01¼ + ·00¾ = 25·27.

Now at this new rate, or “long rate” of 25·27, let us suppose our
merchant to buy and remit a draft of 25,270 francs for £1,000. His
friends in Paris will then credit him with the full amount of his debt,
and a little more, being the allowance for risk.

It must be distinctly borne in mind that adding interest, etc., to the
“sight” rate to obtain the “long” rate only holds good when we are
dealing with rates quoted in _foreign currency_, and that when we deal
with rates quoted in _sterling_ we must deduct these allowances from
the short rate instead of adding them.

It will be noticed that two prices are quoted opposite each centre in
the “Course of Exchange.” These prices do not represent the figure at
which bills can be bought and sold, like Stock Exchange quotations. As
regards the “long” rates, the two prices indicate the price ruling for
different classes of paper, _bank_ paper and _trade_ paper. Bank bills
will discount abroad at a lower rate than commercial bills, as with us;
and therefore in calculating the long exchange on bank bills a smaller
amount has to be allowed for interest than with commercial bills.
Hence, of these two quotations the lower rate is for bank paper, and
the higher rate for trade paper.

As regards the two rates for short quotations, the explanation is that
“demand” bills are understood to mean any draft having up to ten days
to run. A bill which is not due for ten days is, of course, not worth
as much as a draft due at once. The standing of the parties to the
draft also affects the quotation to some extent.

There is still to be considered the important question of how the
Foreign Exchanges are connected with our Money Market, and how they
influence and are influenced by the Bank Rate and the value of money in
England.

It is evident that if the market rate of discount for first-class
paper is higher in London than in Paris, a French banker will earn
more interest on his money if he buys London bills than if he buys
Paris bills. But when dealing with foreign bills, “exchange” comes into
the question as well as interest. This further factor introduces an
element of speculation which is not present with the home article.

Suppose, for example, the Paris market rate to be 3 per cent. and the
London rate 4 per cent.—the cheque exchange standing at 25·22 and the
long rate in Paris of bills on London consequently at about 24·97. A
banker in Paris buys a three months bill _on_ London for £100, paying
for it 2,497 francs. When the bill falls due it can be sold as a
sight draft. If the _short_ exchange remains at 25·22 it will realise
2,522 francs, showing 25 francs as the interest for three months on
the amount invested, that is at the rate of 4 per cent. per annum, as
against 3 per cent. per annum, which is the rate which would have been
earned in France for these three months. If when the bill matures the
short exchange is, say, 25·12, for the £100 draft the interest will be
15 francs only, or at the rate of 2½ per cent. per annum. On the other
hand, if the short rate is 25·32 when the draft matures, the interest
will be 35 francs, or about 5½ per cent. per annum.

Thus there is a wide fluctuation in the interest that may be earned
on a foreign bill. When the French exchange is low, and the rate of
interest ruling in London is above that ruling in Paris, there is
consequently an incentive for a French banker to invest in English
bills; for not only is the rate of interest greater than would be
obtained in Paris, but the chances are in favour of a rise taking place
in the rate of exchange, which will, of course, be to his advantage.

From this it follows that when our _interest_ is _above_ that ruling at
foreign centres, and the exchanges on us are _low_, a heavy investment
demand from continental bankers sets in, in order to take advantage,
not only of the higher interest obtainable in London, but also of the
possible profit on the exchange. This demand will not only have the
effect of stopping a further fall in exchange rates, but will often
send them in the opposite direction. If, from some cause or other, the
rate remains low, the continental holders of our bills will keep them
until they become due and so earn the higher interest. If the rate
rises to any extent, certain holders will at once begin to sell, as
they will have earned their interest for the time they have held the
bills, and seeing their way to secure a certain profit on the exchange,
they think it well to take this, and employ their money in some other
centre which promises more profit.

We can now appreciate the value and importance of this investment
business. When our interest is high and exchanges low, it indicates
that we are having more or less of a money squeeze at home, and the low
exchanges threaten an export of gold, which would make matters worse.
The continental banker then steps in for his own profit, and benefits
us at the same time, as, by his action, he tends to support or raise
the exchange, and thus to stop the outflow of gold. He also places some
of his capital at our disposal, as continental bankers, when investing
in foreign paper, usually only buy first-class bills. There is only
a limited amount of these bills for sale on the Continent, and so
the continental bankers adopt the course of instructing their London
representatives to buy what they require, and remit funds to cover the
purchase.

When exchange rates rise and point to a possible inflow of gold to
London, continental bankers cease their investments and realise their
holdings, thus stopping the rise of rates and, for the time at any
rate, the possible inflow of gold.

Thus the investment business in foreign bills acts really as a pendulum
to the exchanges, steadying the fluctuations and having a most
important influence on the export and import of gold.

We are now in a position to understand how it is that a change in our
Bank Rate is so clearly allied with the question of foreign exchange.
If we find that exports of gold threaten us, which may reduce our
“Reserve” below the figure at which it is desired to maintain it, the
Bank of England will increase its official rate. If this increase in
rate is then followed by the Market, or, if the Market lags behind,
steps be taken to compel it to follow suit, we hold out the advantage
to the continental bankers of an increased interest over what they
can earn at home, and a prospective profit through a possible rise in
exchange. Then, in all probability, their purchases of London bills
will gradually have the effect of raising the rate and stopping the
outflow of gold.




CHAPTER XIII

THE MONEY ARTICLE OF THE PRESS


The Money Article of the daily Press is regarded so much as a part
of the usual information provided for the public, that few readers
pause to consider the large amount and far-reaching character of the
information which is supplied therein: information gathered from all
quarters of the globe—sifted, summarised, and placed before the public
in a concise form. The amount of practical and useful knowledge derived
from a perusal of Money Articles depends entirely upon the reader.
Without some knowledge of the Money Market and financial matters
generally, the articles resolve themselves into a mere record of the
rise and fall in price of various commodities—money, bills, stocks,
and shares. With knowledge, however, these articles may be said to
represent to the reader a mirror, in which the affairs of the whole
world are pictured, though in a somewhat mercenary manner.

The genesis of the Money Article was about the year 1825. Previous
to that date a few of the leading papers published a list of the
prices of the stocks and shares then dealt in on the Stock Exchange,
but practically nothing further than the list appeared. About the
above-mentioned year, however, public interest in Stock Exchange
matters received a great stimulus, and the editors of certain papers
then commenced to devote more attention to the matter than they had
previously done. As the subject gradually became of more and wider
interest to the public at large, the papers devoted more and more
attention to it. The advent of limited liability companies enormously
increased the number of persons interested in Stock Exchange matters,
and the Money Article then became an important and integral part of
every paper of standing. At the present time, as previously noted,
the Money Article really reflects the financial matters of the whole
world, and any event which causes a change in the natural or political
conditions of any country the world over is sure, sooner or later, to
have its effect noted in one of the paragraphs of the Money Article.

There are two ways of reading a Money Article. The first, and probably
by far the most popular method, is merely to glance at, or “skip
over,” the information respecting the condition of the Money Market,
the price of money, the discount of bills, foreign exchanges, Bank
Return, etc., and to turn to the supposedly more interesting subject of
the fluctuations in prices on the Stock Exchange, and especially of the
prices of those securities in which the reader has a pecuniary interest.

The other method of reading these articles, and certainly the most
profitable method, is to read thoughtfully _all_ the information, and
to note the connection of cause and effect in relation to the various
items mentioned; in fact, to read the articles as a homogeneous whole,
and not simply to dip into them here and there; and the reader who so
reads his Money Article will be surprised to find what an insight into
the present and, to a certain extent, the future financial position he
acquires thereby.

The City Editor of a paper has a vast amount of information to supply
to the public, and a limited amount of space in which to present
that information, and the result is that these articles are usually
decidedly “terse”—not to say abrupt—in style: a fact is briefly stated,
and the probable effect of such fact is added, though no information is
given as to why such an effect should result from such a cause, which
is left to the reader to fathom out as best he can.

Money Articles may be roughly divided into two sections: the first
deals with the Money Market proper, the foreign exchanges, gold
movements, etc., and the second with Stock Exchange matters. These two
sections may appeal to somewhat different classes of the community; but
the connection between them is so intimate, and they act and react on
each other so frequently, that they cannot be dissociated. The first
section of the article more nearly affects the subject-matter of this
book than the latter portion, which is amply dealt with in another book
of this series.

Money Articles almost invariably commence with a paragraph which
is really a general summary of the events which have transpired in
the Money Market on the day of writing. The first paragraph, though
consisting of only a few lines, often teems with information to those
that can read it aright. Nearly all the subjects with which it deals
have been dealt with in the course of this book, and therefore it will
only be necessary to enumerate them here.

The condition of the Money Market is first noted in reference to
the supply and demand of “call” and “short money,” as between the
bill-brokers, the banks, and the Bank of England; the rates are quoted
at which money was lent at “call,” “overnight,” or for “short periods,”
and mention is made of any transactions in this market entered into by
the India Council. Passing on from this, any facts are mentioned which,
on the day in question, _have_ had, or on the following day _will_
have, any important bearing on the position of the short loan fund.
These items comprise reminders of the falling due of any instalment
on large new public issues, the payment for or repayment of Treasury,
India, or Corporation bills, etc.

The question of discount rates is then dealt with, and a note is
usually made as to whether or no the banks are “working”; that is,
whether the banks are buying bills from the brokers, or refraining from
so doing. The paragraph then usually concludes with a reference to
exchange rates.

The article then proceeds to note any import or export of gold which
has taken place on the day in question, and any variation which may
have occurred in the price of gold. Importers of the metal know that
they can always sell their gold to the Bank of England at the minimum
price of £3 17_s._ 9_d._ per standard ounce, and therefore the price
never falls below this figure. If there is any foreign demand for gold,
the exporters will bid above this price, and secure what is offering,
unless the Bank of England raises its buying price, as it sometimes
does in times of stringency. It is of interest to note the origin of
imports and the destination of exports of gold; and, at the same time,
to follow the movements in the exchange rates of London with these
places of origin or destination. The action of the Bank of France and
of the Reichsbank in retarding exports will frequently become visible
in these figures, as will also the action of the latter institution in
facilitating imports of the metal into Germany. A note will at times
appear that so much gold has been sold for Germany at such a price, and
if the foreign exchange table in the same article be referred to, it
will often be found that this gold has left us for Berlin in spite of
the exchange being well above the nominal export specie point.

The expression that “the Bank bought so much gold to-day” appears to
cause difficulty in some minds, in that some people cannot understand
how the Bank benefits by buying gold. “What can be the use of the
Bank buying gold?” they say. “It must give gold for gold, which won’t
alter its position in the slightest!” This matter is a very simple one
really, and explains itself with a little thought. The usual procedure
of dealing with an import of gold is for the importer, or his agent, to
hand the gold to the Banking Department of the Bank of England, which
_credits_ him for the value of the gold. Of course, if the importer
were then to draw out this amount in gold the Bank would not be
benefited, but this does not happen under any ordinary circumstances.
The Banking Department passes the gold on to the Issue Department in
exchange for notes, and the extent to which the Bank benefits is shown
in the ensuing Return, when “Other Deposits” will be increased, owing
to some account having been credited for the gold received, and on
the other side of the account “Notes” will be so much higher; that
is, the Reserve and Ratio will both be increased. The figures of the
Issue Department will be increased on each side by the amount of gold
received and notes issued.

The question of silver is then dealt with in the article. This question
is not now of such importance as was the case a few years ago, when
the bi-metallic theory was so much to the fore. The position of silver
is very different now from what it was up to quite recent years. For
many centuries previous to about thirty years ago, the price of silver
as compared with that of gold was about as 15 is to 1; in other words,
an ounce of silver was worth about 5_s._, and an ounce of gold about
75_s._ to 80_s._ This state of things has now entirely disappeared,
however, and we find silver fluctuating rapidly and extensively in
price—having in the course of the year 1902 been as low as 21⁹/₁₆_d._
per ounce.

The reason for this fall in the price of silver is not far to seek;
supply has largely exceeded demand. Several countries which had been
large consumers of silver for currency purposes have, during the last
thirty years, thrown over their silver system and adopted gold in its
place, as a standard of value. This, of course, largely decreased the
demand for the metal, and in addition it threw a large amount of silver
out of circulation and on to the market. The supply of the metal has
also been largely increased, owing to extensive discoveries of new
mines, and to improvements in the method of mining, which have made it
possible for mines of a low grade of ore to be worked at a commercial
profit.

The paragraph in the article relating to silver is of chief interest
to those who have commercial transactions with silver using countries,
and also to those who are interested in companies whose business is
conducted in such countries. These companies earn their revenue in
silver, but pay their dividends in gold, in addition to often paying
for much of their material in gold. Therefore the rate of exchange
between such countries and London, which rate is of course subject to
the price of silver, is of material interest to the holders of such
stocks.

The price of the Mexican dollar is frequently noted in the “silver”
paragraph of Money Articles. Mexican dollars circulate freely on the
coast of China, in spite of many efforts which have been made to
supplant them. When the dollars arrive in China the merchants who
receive them put their “mark” on each coin, which thereafter circulates
freely; the merchants’ “marks” being looked on by the populace as
a proof of genuineness. In London, Mexican dollars are dealt in by
weight, and as they are coined in silver nine-tenths fine, their price
should consequently be a little less per ounce than the price of bar
silver; but demand sometimes exceeds supply, when the price of the
coins rises somewhat considerably above their intrinsic worth.

The Indian price of silver is also noted in the article: this price
refers to the number of rupees which have to be given for one hundred
tolas of silver; the tola being an Indian weight equal to ·375 ounce,
and the silver being about nine-tenths fine.

Up to this point the information given in Money Articles is of
daily occurrence, and attention is then turned to various items of
intelligence according to the day of the week or month. For instance,
the day after ’Change is held in London, a paragraph is inserted
dealing with the various alterations which have been established
in exchange rates since the previous post day, and the “Course of
Exchange” is usually printed, more or less in full. On Friday mornings
the Bank Return is published, and the City Editor adds his own notes
on the same, calling attention to, and explaining as best he can, any
alterations which have occurred since the previous return. On Friday
also, the return of the Bankers’ Clearing House makes its appearance.

On Wednesdays and Thursdays the traffic returns of various railways
are published. These returns are of interest as exhibiting the state
of trade throughout the country as a whole, as well as the position
of individual lines. In considering railway traffics, and comparing
them with previous results, care must be taken to bear in mind any
alteration which may have taken place in the price of labour, coal,
or material; as an increase in gross profit may be quite offset by an
increase in any one of these items, and _vice versâ_. It is also of
interest to note that an increase or decrease in the _gross_ earnings
of a railway, the chief business of which consists of passenger
traffic, has far greater effect on the _net_ earnings than does a
similar increase or decrease have on a line the chief business of which
consists of goods traffic. Passenger trains run whether they are full
or empty, and therefore an increase in the takings from passengers
means, very largely, so much more net earnings; whereas goods trains
usually run only when traffic offers, and therefore extra traffic means
considerable extra expense. In considering the probable results of
railways doing business in silver using countries, the influence of the
price of silver must not be overlooked.

On the seventh day of each month the Board of Trade publishes a return
showing the exports, imports, and re-exports of goods for the previous
month. This return is summarised in the following day’s Money Article,
and when this is read in conjunction with the Clearing House Return and
the Traffic Returns, the three together form a very good barometer of
the state of our trade. In studying the figures of the Board of Trade,
and comparing them with previous returns, it is important to remember
that _values_ only should not be considered, but _quantities_ as well
as _values_; we may have imported considerably more of a certain
commodity, but paid less for it, or imported less and paid more.

In many articles two tables relating to the foreign exchanges appear
daily; one of these is a table of the rates of interest for money
ruling in the principal financial centres of the Continent, and
the other is a table of the exchange rates prevailing in foreign
centres for drafts _on_ London. The first of these tables is of use
as providing one of the factors necessary to calculate the “long”
rate from the “short” rate; it is also of use as being a guide to the
comparative value of money in various centres, and thereby indicating
the likelihood of foreign bankers investing their funds in London
bills, or of withdrawing such investments. The second table indicates
the movements in rates which are taking place on the Continent
between our “’Change” days, and it is of use to those persons who
have considerable sums to pay to, or receive from, foreign centres.
As was noted in the chapter dealing with the foreign exchanges, the
rates between any two given centres always keep nearly on a level, but
there is at times a slight variation. Advantage can be taken of this
variation by persons having transactions with such centres, and this
table affords necessary information in the matter.

The foregoing items of news comprise the Money Market portion of the
article, and attention is then given to the Stock Exchange portion.
This portion is divided into several paragraphs, each one of which
deals with a special and well-recognised class of stock, or “market,”
as it is called.

First we have the paragraph dealing with the “gilt-edged market.”
This market comprises securities of, or guaranteed by, the British
Government (Consols, local loans, etc.), Bank stock, and colonial
and municipal issues. The whole of this market is largely under the
influence of the price of money, and, at present, of excess of supply
over demand. The supply of Government stocks has, of course, been
increased owing to the requirements of the late war, which led to a
further issue of Consols, in addition to the creation of the War Loan
and Transvaal Loan. In addition, a very large amount of colonial and
municipal loans has been offered to the public during the course of the
last few years. These issues have been far in excess of the demand,
with a consequence that the market has been glutted with securities
of this class, resulting in an all-round depression of prices. This
depression has been deepened by the knowledge of the many new issues
which are only awaiting a favourable opportunity to be launched on the
public.

The next paragraph in most Money Articles deals with the “Foreign
Market”—Spanish, Turks, Russians, Tintos, etc. In this section
securities are dealt with which have a more or less international
character, and in which dealings on foreign stock exchanges have often
considerably more importance than the dealings on our own Exchange.
Hence this section is not so much under the influence of the price of
money as it is under the influence of the attitude and condition of
foreign centres, especially those of Paris and Berlin.

Home railways are then dealt with, and then American rails, which
latter are, of course, largely under the influence of New York and its
magnates. Then comes a paragraph dealing with colonial and foreign
rails, which are largely under harvest influences, and the internal
condition of the country in which they do their business. Then follow
paragraphs on the miscellaneous and industrial sections, and lastly a
paragraph on the mining market.

The miscellaneous and industrial section is chiefly notable for the
large number and different character of the securities there dealt
in, comprising the shares of banks, breweries, insurance and finance
companies, iron, coal, and steel concerns, waterworks, etc., besides
the shares of numerous manufacturing and catering companies. Much
speculation exists in certain classes of these shares, but it is
a noticeable fact that the issues of many of the sound industrial
concerns have withstood the recent severe wave of depression far better
than have many securities which are supposed to be of a considerably
higher status.

Following this there usually appear dividend announcements, reports
of company meetings, and a number of miscellaneous notices. Although
these notices mostly explain themselves, and are of interest only to
persons connected with them, yet one or two items which appear from
time to time are of somewhat more general interest. It is of frequent
occurrence to find in this portion of the article a notice that
“tenders for Treasury Bills will be received at the Bank of England on
such a date.”

Treasury Bills constitute a Money Market and not a Stock Exchange
security, and they belong to the unfunded debt of this country. They
were first issued in 1877, and were promptly recognised, both in our
own and foreign markets, as being bills of the highest possible class.
These bills are issued from time to time to suit the necessities of
the Government; they have a currency of three, six, nine, or twelve
months, and are of great assistance to the Chancellor of the Exchequer
in enabling him to regulate the finances of his department.

Treasury Bills are always issued by the tender system, and those
persons who wish to acquire some of these bills must make their
application through a London banker. The tender must state how much per
cent. will be given for such an amount of bills, and those who tender
at higher figures will, of course, obtain an allotment in preference to
those tendering at lower ones.

Besides Treasury Bills, several other classes of security are, from
time to time, issued by tender; for example: India bills, London County
Council bills, Corporation and Colonial stock. This system of issue is
not a popular method so far as the general public are concerned, as it
is not properly understood; and when the public do endeavour to obtain
investments in this manner, they often make ludicrous and expensive
mistakes by tendering at a figure far above what would easily obtain an
allotment.

Another item of interest which appears among these “notices” is the
notice of issue of stock at _fixed prices_. Such notices appear plain
on the face of them; but, on comparing the price of issue with the
market price of similar stocks, care must be taken not to overlook the
fact that very frequently certain allowances have to be taken off the
nominal price of issue. These allowances are in respect of the stock
being only paid up by instalments, while interest is often paid on
the full nominal amount; and often, in addition, a full six months’
interest is paid only three or four months after the issue; besides
which the stock can frequently be paid up in full at any time, under
rebate. Such considerations as these should always be borne in mind, as
they have a material bearing on the _real_ price of issue.

The article concludes with a list of “closing prices,” and of “business
done” on the Stock Exchange on the day in question. The closing prices
are estimates only, supplied by certain members of the House, and
though affording a very good guide to the course of prices, they cannot
be relied upon for any out-of-the-way securities—actual dealings in
which may be impossible at the prices quoted.

From this brief examination of the usual contents of a Money Article,
the large amount of information embodied in such becomes apparent,
and also the necessity for a certain amount of technical knowledge to
enable a reader to grasp, and make full use of the information there
placed at his service.




CHAPTER XIV

CONCLUSION


In the course of this book we have briefly surveyed the rise and
development of the banking system of England. We have studied
the establishment and growth of the Bank of England, the gradual
elimination of the private banker, and the wonderful development of
joint-stock banking, and we have noted the causes which led to London
becoming the financial centre of the world, and also the various
factors which constitute our Money Market.

From a weak beginning we have seen our system of finance develop into
a mighty machine; but we have seen that, although it is mighty, it is
a machine of very delicate construction, and that it needs the most
careful attention on the part of those connected with its working. A
breakdown in one of its parts may mean wreck for the whole concern,
and bring with it, not only unparalleled individual distress, but
actual danger of an acute form to the whole nation.

The weakest spot of our system arises from the custom of the cash
reserves of the bankers being kept with the Bank of England, that is,
the one-reserve system. The total deposits held by the banks of the
kingdom may be roughly estimated at one thousand million pounds, and
practically the whole of this vast sum is repayable in cash on demand.
But banks conduct their business on the law of averages, assuming that
the demands for cash will be met by the deposit of cash—that what
is paid out to one set of customers will be paid in by another set;
and, while keeping sufficient till money to tide over the variations
of demand and supply from day to day, they maintain no other reserve
of cash, beyond the balance at the Bank of England,—or with a London
agent, through whom such balances are in effect passed on to the Bank
of England. Thus the Bank of England is the reservoir from which all
banks expect to be able to draw cash in time of need.

When we turn to the Bank Return, what cash do we find is retained to
meet such a heavy contingent liability? In the figures of the “Return”
given in chapter vii., the “Reserve” stands at about twenty-five
million pounds only; and with regard to this Reserve, it must be
remembered that the Bank is peculiarly open to foreign demands in
addition to home demands. Such a reserve is slender, to say the least
of it, and the strengthening of the “Reserve” to a figure more in
keeping with our increased liabilities is, or should be, constantly
before the authorities who have the control of our banks. This matter
will have to be faced some day, and the longer action is delayed the
more difficult will it become to grapple with it.

Various schemes for increasing our reserve have been put forward from
time to time: one suggestion was that banks should retain a safety
reserve of gold in their own keeping; another that a bankers’ bank
should be established, to hold the reserves of other banks in place
of the Bank of England; a third, that each bank should maintain a
larger balance with the Bank of England, on the understanding that that
institution should increase its reserve in respect of such increased
balances. These schemes have each their advocates and opponents, but
with each the result to the banks would be a loss of profit, for each
would involve more money lying idle. This loss of profit is at the root
of the whole difficulty.

This brings us to consider the question of competition among bankers,
which at present is very keen, and which quite conceivably may lead to
dangerous results unless kept within reasonable bounds.

The tendency of the time is towards the absorption of the smaller and
weaker banks of the country by the large joint-stock banks. In itself,
this is not an undesirable feature, in that it places the banking
system, as a whole, on a sounder footing. Another feature is the
establishment of branch offices throughout the length and breadth of
the land. This gives facilities for capital to flow readily from one
part of the country where it may be in excess, to another where it is
in demand.

The joint-stock banks, however, are keen competitors among themselves,
new branches being established wherever the possibility of securing new
business exists, or where existing connections are threatened by the
incursions of some other bank.

This multiplication of banking offices is of decided convenience to
customers; it saves them the trouble of sending long distances to pay
in, or to draw wages, etc.

In the race for business, however, rates are cut down to attract
custom, and risks are perhaps undertaken which would not be entertained
if competition were not so keen. These risks may not be large
individually, but collectively they may amount to a large sum. They
possibly tend to lock up resources in _one class_ of security, which,
as we have seen, is a source of danger. This is especially the case in
new and growing districts, where much accommodation is asked for on
the security of house property, and for the purpose of developing new
estates. There is, in fact, a growing tendency at the present day to
transfer to banks business which formerly went to building societies;
and if this system is encouraged, it is likely to result in a large
portion of a bank’s advances becoming of a fixed nature and unavailable
in case of need.

Mr. F. E. Steele, in a lecture recently delivered to the students of
the London Chamber of Commerce, called attention to another danger
resulting from undue competition. He said:—

    “There is another phase of competition which should be
    touched upon. This phase I do not remember to have seen
    specifically dealt with in treatises on banking. I refer
    to the growing tendency on the part of banks to ear-mark,
    for the benefit of particular depositors, securities
    which should form a free asset; a security to the general
    body of its depositors. You will find now in some balance
    sheets, either in the investment column or as a footnote,
    that a certain portion of the bank’s investments are held
    for public bodies, such as county councils, borough
    councils, corporations, etc. In order to secure the
    accounts of these bodies the banker hypothecates to them
    certain securities, such as Consols, which would otherwise
    be held for the benefit of its depositors in general.
    This tendency to tie up assets which should be free
    should be narrowly watched by the public, and carefully
    controlled by bankers. That it should be resorted to in
    some cases seems inevitable. It is done by some of the
    best and soundest banks. But it is a course which should
    be resorted to as little as possible.”

In conclusion, we will turn from the question of the Money Market
itself to the army of individuals who spend their lives in the service
of the various institutions forming the Money Market. By far the
largest number of these individuals are connected with our various
joint-stock and private banks. It is commonly thought that the life
of a bank clerk is an easy one. Jerome K. Jerome, in his amusing book
_Three Men in a Boat_, in referring to the occupation of his friend
George, says, “He sleeps in a bank from nine till four, when they wake
him up and put him outside.” Common ideas, however, are frequently
not quite correct, and though certain members of the fraternity, who
happen to be situated in country and suburban districts, do not suffer
from overwork, yet as regards those connected with London and the large
centres of industry, their life is an arduous one,—often tedious in
its sameness,—the hours of work are not short, and the remuneration,
although adequate, is not generally on the scale that some time ago
was popularly believed to be the happy lot of the bank clerk. Still,
one’s life is what he makes it, and the idea embodied in Napoleon’s
saying—that every soldier carried in his knapsack a marshal’s bâton—is
equally true of the banking profession.

Every junior on entering the service of a bank has before him the
prospect of ultimately rising to occupy a position of importance and
respect, even to the position of general manager of his bank, if he
so equips and conducts himself as to be fit for and worthy of such
promotion.

The facilities and inducements to self-improvement placed before bank
clerks of the present day are much greater than in bygone times. Many
classes are held and lectures given dealing with banking subjects.
Examinations are held, and many banks recognise and reward the success
of their clerks at these tests of knowledge. Technical knowledge,
however, is not everything; common sense, good judgment, tact, and a
cool head are also necessary in order to become a successful banker or
financier, but these qualities are of much more value when combined
with sound and good technical knowledge.

Greatness is not thrust upon any bank clerk, but it is in the power of
all, if they will, to achieve it, to a greater or less degree.




APPENDIX

THE GOLD RESERVE


Since the remarks concerning the Gold Reserve were written (chapter
xiv.) much interest has been aroused in the matter by a suggestion made
by Mr. J. Herbert Tritton, the President of the Institute of Bankers.

At the opening of the last session of the Institute (November, 1903)
the President, in his inaugural address, after referring to many
current and important topics, passed on to the subject of the visible
gold reserves, and made the following novel suggestion. By Mr.
Tritton’s courtesy his remarks on this matter are here reproduced in
full.


“VISIBLE GOLD RESERVES

“The ever-pressing question of this country’s visible reserves of
gold, quiescent during the war, is again attracting attention.
Theoretically, everyone would admit that larger reserves of gold in
this country are desirable; many would go further and say necessary;
but any, even the smallest, step in the direction of action is at once
barred on the ground of expense. At whose cost is the reserve to be
held? £15,000,000 at 3 per cent. is £450,000 a year, and this must
almost inevitably come out of somebody’s pocket. Bank of England
stockholders and ordinary bank shareholders would be mulcted, or
would think they were, to the extent, say, of a second income tax
of 1_s_. in the pound on their dividends. Of course, the question
is, in its essence, of national importance, but the Treasury of this
country never allows itself to be influenced by considerations of this
character—nor, indeed, have the English people for the last fifty
years expected either Government help or Government interference in
their financial or commercial affairs. Pardon the interjection, but
I, for one, say long may this country be not only self-reliant, but
free; free to trade as each member of it shall choose, unshackled and
uninfluenced by Government restrictions or Government encouragements!
We may, perhaps, cherish a faint hope that the new Chancellor of the
Exchequer may realise that he has taken with him from the Post Office,
liabilities as a banker, £144,605,088 in respect of Post Office Savings
Banks, and finds in his new office a further sum of £52,505,081 in
respect of Trustee Savings Banks, making together £197,110,169, liable
to be repaid in gold; and realising this as a banker, may be less
obdurate than his predecessors. But it would not be wise to expect
much from Downing Street: if the thing is to be done we must do it
ourselves. That a solution of the question is supremely necessary I am
convinced, however great the initial difficulties may be; and that it
is not beyond attainment if the best energies and the best brains of
the banking community be devoted to it, I am also persuaded. Mr. R.
H. Inglis Palgrave gives in his new book, _Bank Rate and the Money
Market_—a book which every banker should possess and read—page 104, the
following table:—

                                                         Proportion per
                                                           cent. of
           Capital, Deposits,     Average Reserve,        Reserve at
            and Circulation.      Bank of England.     Bank to Liability
                                                             as of
                                                          all Banks to
                                                           the Public.

       1872    £584,000,000            £12,100,000              2·06

             Deposits, Current
          Accounts and Circulation
          of all Banks publishing
              accounts in the
               United Kingdom
                   were:—

       1894    £721,400,000            £25,800,000              3·58
       1895     794,600,000             29,900,000              3·75
       1896     797,700,000             34,600,000              4·33
       1897     816,400,000             25,100,000              3·07
       1898     838,300,000             22,900,000              2·73
       1899     869,300,000             21,200,000              2·44
       1900     889,600,000             21,400,000              2·41
       1901     888,100,000             24,046,000              2·71
    [5]1902     904,100,000             24,166,000              2·67

[Footnote 5: _Banker’s Magazine._]

“The Bank of England reserve, which constitutes the only real reserve
of the country, is shown here in its true light from our present
point of view. A further outside reserve of, say, £15,000,000 would
only, it is true, serve to restore the proportion to that of the year
1896, but it would ensure the present maximum becoming, in effect,
the future minimum, and here would be a great gain in an extra sense
of security in troublous times. Should a gold panic at any time
seize upon the public, it would matter little whether the ratio of
Bank of England reserve to the aggregate liabilities were 2·50 or 5
per cent., suspension of cash payments would ensue. A credit panic,
as distinguished from a gold panic, can usually be assuaged by a
suspension of the Bank Act and an overissue of bank-notes. A further
object of an increased gold reserve is that not only the periodic and
well-recognised, but the unexpected and perhaps heavy withdrawals of
gold may be met without recourse to violent measures such as those to
which the market is too often subjected. If this were clearly seen to
be not only the intention, but the practical working of the fund, an
objection which, I admit, is of great weight would be fairly met, and
minor objections would almost disappear.

“The objection to which I refer is this. Gold is meant to circulate,
not to be hoarded, and any proposal permanently to withdraw such an
amount as £15,000,000 from circulation and, as it were, entomb it again
in the bowels of the earth, stands self-condemned. No such entombment
is suggested, as far as I know, but the formation of a fund for use—a
fund which, on occasions, would pass into circulation—international,
if not national—and would have a steadying effect on the pulse of the
Empire, the Bank of England rate. How can we set about securing it? Let
us glance at the tabulated bank balance sheets of the country. From
which of the items on the assets side could such a sum be withdrawn?
Loans and discounts? No. Investments? No. Buildings? No. Money at call?
No. Cash in hand and at Bank of England? This, _ex hypothesi_, is the
item to be increased. The reasons I need not give, but it appears
tolerably plain that no plan involving a permanent diminution of any
item on the asset side would meet with a favourable reception from
practical men. Is it possible, if these items cannot be conveniently
decreased, to obtain the amount by a fresh creation of credit, an
addition to loans and discounts, and an equivalent addition to the
other side of the account? Please understand that I am considering the
case quite apart from the Bank of England.

“Here I am directly and once again challenging critics, who do not
agree in my view of the non-elasticity of the Money Market, to show
how, in their view, the alleged elasticity of the market may be
utilised to produce a fund of £15,000,000. My contention is that only
by the increase of the note issue or by increase of capital can it be
reached. Suppose the bankers were authorised to issue £15,000,000 of
£1 bank-notes. How could these be kept in circulation unless they were
legal tender? Of what use would they be if they took the place of gold
in our tills? This plan, under which alone could credit be created,
would be futile to attain our end. There remains only the creation of
new capital, unless our friends, whom I am challenging, and to whom we
are looking to give us a discussion which cannot fail to be interesting
under the auspices of Mr. A. C. Cole, who has undertaken to read a
paper on ‘Notes on the London Money Market,’ can show us some adequate
alternative. If each bank of the kingdom increased its paid-up capital
20 per cent. by an issue of a Three per cent. Preference Gold Stock,
the fund could be attained. The proceeds should be devoted in each
individual case to the acquisition of a corresponding amount of gold,
in addition to present holdings, and this gold should be deposited
at the Bank of England, but not merged in the Bank figures, so as to
stand week by week intact, and shown under a separate heading in one
aggregate, though, of course, the absolute property of each bank in
detail. Carefully thought out arrangements whereby, under a joint
committee of the bankers and the Bank of England, whenever occasion
arises, a percentage of each holding should be transferable to the
credit of each bank in the books of the Bank of England should be
made, the gold thus forming an addition to their reserve until again
withdrawn and added to the Bankers’ Gold Fund.”

Needless to say, this suggestion, coming from such an authority,
caused much comment in monetary circles, and was generally received as
a valuable contribution to the various schemes having for an end the
settlement of this important matter.

In certain quarters, however, the scheme was held to be an
impracticable one; and at a subsequent meeting of the Institute of
Bankers, Mr. Cole, a director of the Bank of England, spoke as follows:—

    “As regards the proposal to increase the capital of the
    banks, my reply is that the floating of a loan in this
    market of £15,000,000, or of £100,000,000, will not add
    one single golden sovereign to the bankers’ cash reserves.

    “We can only increase our stock of gold in this country by
    getting it from abroad. To do that we must offer to the
    holders of gold abroad something that they will take in
    exchange for their gold.

    “A loan in this market to increase the capital of the
    banks, to be subscribed for by the public who have
    deposits with them, is merely transferring a liability
    now existing on the part of the bankers to the public,
    from their depositors to their shareholders. The only way
    the bankers can increase their cash in hand, or balances
    at the Bank of England, is by following the method now
    pursued, namely, calling in their short loans so that the
    market has to borrow at the Bank of England. To put their
    position permanently on a sounder basis they must agree
    that instead of calling in their loans temporarily, they
    must all keep permanently larger balances at the Bank of
    England. Then the gold reserves of the country will be
    increased, provided that the Bank of England maintains
    its usual ratio of cash to liabilities. Taking that as
    45 per cent.—the average proportion for the last twenty
    years ending 31st December, 1903, has been 46·6 per
    cent.—a permanent increase of £15,000,000 to the bankers’
    balances would increase the gold reserve of the country by
    £6,750,000, and bring the average holding of the Bank of
    England in the Banking and Issue departments combined up
    to about £40,000,000. The reason for desiring to have a
    rather larger stock of gold at the Bank is that the export
    then of a few millions is of relatively less importance.
    But we do not want more than is requisite for the easy and
    safe working of our system. To sit on a hoard of unused
    gold is to do away with the advantages of banking. What
    is requisite is for this country to retain the power of
    attracting gold when it is required. Neither the system
    of banking nor the bankers can give it that power, for it
    is dependent, not on them, but on the successful business
    energy and activity of the nation. Of course, in order
    to attract and retain here the amount of gold mentioned
    above, the Bank of England must adjust its rate to
    circumstances, but with the increasing supplies of gold,
    actual and prospective, a reasonable rate is likely to
    suffice.”

These remarks caused some discussion, during which it was pointed out
that under Mr. Tritton’s proposal the banks would collectively form a
gold fund of £15,000,000, at a cost to themselves of £450,000. Under
Mr. Cole’s proposal, however, for the banks to increase their balances
at the Bank of England by the sum of £15,000,000, the extra gold
held in the country would only be increased by the sum of £6,750,000
(according to the proportion of the reserve held to public liabilities,
which has been 45 per cent. on an average for the last twenty years),
while the Bank would make a considerable profit from the remainder of
the increased balances—a profit earned entirely at the expense of the
banks.

It was also pointed out that the requisite gold could be acquired by
offering a slightly higher price for it, thus retaining imports of the
metal which would otherwise be bought up by exporters. Finally, it was
stated by one speaker of eminence in the banking world, that in his
opinion the matter was not one for the banks to deal with alone, the
additional gold not being required for the sole benefit of the banks,
but for the security of the community at large.

The matter here rests for the present, but when it has to be settled,
as doubtless it must at some time, the ideas and suggestions contained
in these discussions will probably become of importance.




INDEX


    Active circulation, 59
    Advances to customers, 92, 100
    Amalgamations, 80, 164
    Arbitrage, 131

    Bank Act of 1844:
      Main provisions of, 29;
      suspensions of, 35, 36, 38
    — of France, 127, 149
    — paper, 139
    — post bills, 69
    — rate, 74, 139, 143
    — return: the first issued, 32
    Bankers’ balances, 65, 90
    Banking department, 62
    Berlin: specie points, 128
    Bill-brokers, 51, 90
    — — guarantees, 108
    Bills under discount, 92, 100
    Board of Trade Returns, 154
    Branch banks, 80, 164
    Buying gold, 149

    Call and short money, 50, 94, 147
    Cash payments: suspension of, 12
    ’Change, 134
    Circulation: active, 59
    Clearing House, 79, 115
    — — Returns, 119, 154
    Closing prices, 160
    Competition, 163
    Continental investment in London bills, 140
    Country clearing, 117
    Course of exchange, 135

    Deficiency bills, 70

    Exchange: favourable or unfavourable, 128
    — long, 136
    — short, 136, 139
    Exchequer bills, 51, 92
    — — closure of by Charles II., 5
    Export specie points, 126

    Favourable exchange, 128
    Fixed price of issue, 159
    Floaters, 111
    Fluctuations of exchange rates, 129
    Foreign bankers, 46, 54, 110, 139

    Gold movements, 123, 142
    — reserves, 162, 169
    Goldsmiths, 4, 19

    Import specie points, 127
    Indian Government, 52
    — price of silver, 152
    Investments, 91, 97, 99
    Issue department, 57
    — at fixed price, 159
    — by tender, 158

    Joint-stock banks, 19, 21, 49, 77

    Limited liability, 79, 145
    Liquid assets, 93
    Lombards, 3
    Long exchange, 136

    Mexican dollars, 152
    Money market, 47
    Monopoly of joint-stock banking, 10, 15, 23, 76

    New York specie points, 128

    One-reserve system, 67, 162

    Par of exchange, 125
    Paris: specie points, 127
    Post days, 134
    Premises, 93-100

    Rediscounting, 110
    Reichsbank, 34, 128, 149
    Reserve, 73, 143
    — capital, 83
    — funds, 83, 104
    Royal Exchange, 132

    Short exchange, 136, 139
    — loan fund, 49, 113
    Silver, 150
    Specie points, 126
    Stock Exchange, 52, 96, 156
    Suspension of cash payments, 12
    — Bank Charter Act, 35, 36, 38

    Tender system, 158
    Till money, 60, 90
    Tower of London: seizure of moneys, 4
    Trade bills, 106, 139
    Traffic returns, 153
    Treasury bills, 51, 148, 158

    Unfavourable exchange, 128

    Visible gold reserves, 169

    Ways and means, 70
    Window dressing, 95

W. BRENDON AND SON, LIMITED, PLYMOUTH




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