Lombard Street: A Description of the Money Market

Walter Bagehot
Bagehot, Walter
(1826-1877)
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Editor/Trans.
E. Johnstone; Hartley Withers, eds.
First Pub. Date
1873
Publisher/Editor
London: Henry S. King and Co.
Pub. Date
1873
Comments
Includes editorial notes and appendices from the 12th (1906) and the 14th (1915) editions.
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Appendix I

Note A.
Liabilities and Cash Reserve of the Chief Banking Systems.

AppI.1

The following is a comparison of the liabilities to the public, and of the cash reserve, of the banking systems of the United Kingdom, France, Germany, and the United States. For the United Kingdom the figures are the most defective, as they only include the deposits of the Bank of England, and of the London joint stock banks, and the banking reserve of the Bank of England, which is the only cash available against these liabilities is also the only cash reserve against the similar liabilities of the London private banks, the provincial English banks, and the Scotch and Irish banks. In the case of England, therefore, the method of comparison exhibits a larger proportion of cash to liabilities than what really exists.

(1) ENGLISH BANKING.
Liabilities. £
Deposits of Bank of England, less estimated Joint Stock Bank balances, at December 31, 1872 29,000,000
Deposits of London Joint Stock Banks at December 31, 1872 (see 'Economist,' February 8, 1873) 91,000,000
Total liabilities 120,000,000
Reserve of Cash. £
Banking Reserve in Bank of England. 13,500,000
Making proportion of cash reserve to liabilities to the public about 11.2 per cent.
(2) BANK OF FRANCE (FEBRUARY, 1873).
Liabilities. £
Circulation 110,000,000
Deposits 15,000,000
Total liabilities 125,000,000
Reserve of Cash. £
Coin and bullion in hand 32,000,000
Making proportion of cash reserve to liabilities to the public about 25 per cent.
(3) BANKS OF GERMANY (JANUARY, 1873).
Liabilities. £
Circulation 63,000,000
Deposits 8,000,000
Acceptances and Indorsements 17,000,000
Total liabilities 88,000,000
Reserve of Cash. £
Cash in Hand 41,000,000
Making proportion of cash reserve to liabilities to the public about 47 per cent.
(4) NATIONAL BANKS OF UNITED STATES (DECEMBER 3, 1873).
Liabilities. £
Circulation 67,000,000
Deposits 145,000,000
Total liabilities 212,000,000
Reserve of Cash. £
Coin and legal tenders in hand 26,000,000
Making proportion of cash reserve to liabilities to the public about 12.3 per cent.

SUMMARY.
Liabilities to the public Cash held Proportion of cash to liabilities
per cent
£ £
Bank of England and London Joint Stock Banks 120,000,000 13,500,000 11.2
Bank of France 125,000,000 32,000,000 25.0
Banks of Germany 88,000,000 41,000,000 47.0
National Banks of United States 212,000,000 26,000,000 12.3


Note B.
Extract from Evidence Given by Mr. Alderman Salomons before House of Commons Select Committee in 1858.

AppI.2

1146. Chairman.] The effect upon yourselves of the pressure in November was, I presume, to induce you to increase your reserve in your own hands, and also to increase your deposits with the Bank of England?—Yes, that was so; but I wish to tell the Committee that that was done almost entirely by allowing the bills of exchange which we held to mature, and not by raising any money, or curtailing our accommodation to our customers. Perhaps it may be interesting to the Committee to know that on the 11th of November we held discounted bills for brokers to the amount of 5,623,000l. Out of those bills, 2,800,000l. matured between the 11th of November and the 4th of December, and 2,000,000l. more between the 4th of December and the 31st. So that about 5,000,000l. of bills matured between the 11th of November and the 31st of December; consequently we were prepared, merely by the maturing of our bills of exchange, for any demands that might possibly come upon us.

AppI.3

1147. I understand you to say that you did not withdraw your usual accommodation from your own customers, but that you ceased to have in deposit with the bill-brokers so large a sum of money as you had before?—Not exactly that; the bills which we had discounted were allowed to mature, and we discounted less; we kept a large reserve of cash.

AppI.4

1148. That is to say, you withdrew from the commercial world a part of that accommodation which you had previously given, and at the same time you increased your deposits with the Bank of England?—Yes, our deposits with the Bank of England were increased. We did not otherwise withdraw accommodation.

AppI.5

1149. Mr. Weguelin.] Had you any money at call with the billbrokers?—A small amount; perhaps about 500,000l. or less, which we did not call in.

AppI.6

1150. Chairman.] What I understand you to say is, that the effect of the commercial pressure upon you was to induce you upon the whole to withdraw from commerce an amount of accommodation which in other times you had given, and at the same time to increase your deposits with the Bank of England?—So far only as ceasing to discount with strangers, persons not having current accounts with us.

AppI.7

1151. Or to give the same amount to the bill-broker?—For a while, instead of discounting for brokers and strangers, we allowed our bills to mature, and remained quiescent with a view to enable us to meet any demand that might be made on ourselves.

AppI.8

1152. Except what you felt bound to your own customers to continue to give, you ceased to make advances?—Quite so; perhaps I might say at the same time, that besides a large balance which we kept at the Bank of England, which of course was as available as in our own tills, we increased our notes in our tills at the head office and at all the branches.

AppI.9

1153. I suppose at that time large sales of public securities were made by the London joint stock banks, which securities were purchased by the public?—It is understood that some joint stock and other banks sold, but I believe it is quite certain that the public purchased largely, because they always purchase when the funds fall.

AppI.10

1154. Are you prepared to give the Committee any opinion of your own as to the effect, one way or the other, which the system of the joint stock banks may have produced with regard to aggravating or diminishing the commercial pressure in the autumn of last year?—I should state, generally, that the joint stock banks, as well as all other banks, in London, by collecting money from those who had it to spare, must of necessity have assisted, and could not do otherwise than assist commerce, both then and at all other times.

AppI.11

1155. You say that your discounts, either at your own counter or through the bill-brokers, are ordinarily very large, but that at the time of severest pressure you contracted them so far as you thought was just to your own immediate customers?—Yes; but the capital was still there, because it was at the Bank of England, and it was capable of being used for short periods; if we did not want it, others might have used it.

AppI.12

1156. Mr. Weguelin.] In fact, it was used by the Bank of England?—Undoubtedly; I should suppose so; there is no question about it.

AppI.13

1157. You, of course, felt quite certain that your deposits in the Bank of England might be had upon demand?—We had no doubt about it.

AppI.14

1158. You did not take into consideration the effect of the law of 1844, which might have placed the Banking Department of the Bank of England in such a position as not to be able to meet the demands of its depositors?—I must say that that never gave us the smallest concern.

AppI.15

1159. You therefore considered that, if the time should arrive, the Government would interfere with some measure as they had previously done to enable the Bank to meet the demands upon it?—We should always have thought that if the Bank of England had stopped payment, all the machinery of Government would have stopped with it, and we never could have believed that so formidable a calamity would have arisen if the Government could have prevented it.

AppI.16

1160. Chairman.] The notion of the convertibility of the note being in danger never crossed your mind?—Never for a moment; nothing of the kind.

AppI.17

1161. Mr. Weguelin.] I refer not to the convertibility of the note, but to the state of the Banking Department of the Bank of England?—If we had thought that there was any doubt whatever about it, we should have taken our bank-notes and put them in our own strong chest. We could never for a moment believe an event of that kind as likely to happen.

AppI.18

1162. Therefore you think that the measure taken by the Government, of issuing a letter authorising the Bank of England to increase their issues of notes upon securities, was what was generally expected by the commercial world, and what in future the commercial world would look to in such a conjunction of circumstances?—We looked for some measure of that nature. That, no doubt, was the most obvious one. We had great doubts whether it would come when it did, until the very last moment.

AppI.19

1163. Have you ever contemplated the possibility of the Bank refusing to advance, under circumstances similar to those which existed in November, 1857, upon good banking securities?—Of course I have, and it is a very difficult question to answer as to what its effect might be; but the notion appears to me to be so thoroughly ingrained in the minds of the commercial world, that whenever you have good security it ought to be convertible at the Bank in some shape or way, that I have very great doubt indeed whether the Bank can ever take a position to refuse to assist persons who have good commercial securities to offer.

AppI.20

1164. Mr. Cayley.] When you say that you have come to some fresh arrangement with regard to your allowance of interest upon deposits, do you speak of yourselves as the London and Westminster Bank, or of some of the other banks in combination with yourselves?—I think all the banks have come to an understanding that it is not desirable, either for their proprietors or for the public, to follow closely at all times the alterations of the Bank. I believe it is understood amongst them all that they do not intend following that course in future.

AppI.21

1165. Is that from a feeling that it is rather dangerous under particular circumstances?—I cannot admit as to its being dangerous, but there can be no doubt of this, that there is a notion in the public mind which we ought not to contend against, that when you offer a high rate of interest for money, you rather do it because you want the person's money, than because you are obeying the market rate; and I think it is desirable that we should show that if persons wish to employ their money, and want an excessive rate, they may take it away and employ it themselves.

AppI.22

1166. You think that there is now a general understanding amongst the banks which you have mentioned, to act upon a different principle from that on which they acted during last October and November?—I think I may say that I know that to be the case.

AppI.23

1167. Was not it the fact that this system of giving so high a rate of interest upon money at call commenced very much with the establishment of some banks during the last year or two, which, instead of demanding 10 days' or a month's notice, were willing to allow interest upon only three days' notice; did not that system begin about two years ago?—I do not think it began with the new banks; I think it began with one of the older banks; I know that as regards my own bank, that we were forced into it; I forgot to say, that with regard to ourselves in taking money on deposit, the parties must leave the money a month, or they lose interest. We do not take money from any depositor at interest unless upon the understanding and condition that it remains a month with us; he may withdraw it within the month, but then he forfeits interest; it will not carry interest unless it is with us a month, and then it is removable on demand without notice.

AppI.24

1168. Is it or is it not a fact that some of the banks pay interest upon their current accounts?—Yes, I think most of the new banks do so; and the Union Bank of London does it.

AppI.25

1169. At a smaller rate than upon their deposits, I presume?—I think at a smaller rate, but I believe it is a fixed rate on the minimum balance for some period, either six months or one month, I do not exactly know the period. I think I ought to add (and I believe it is the case with all the banks) that the London and Westminster Bank, from the day of its first institution until the present day, has never re-discounted a bill. No bill has ever left our bank unless it has been for payment.

AppI.26

1170. Is not that generally the case with the London joint stock banks?—I believe it is the case.

AppI.27

1171. Mr. Weguelin.] But you sometimes lend money upon bills deposited with you by bill-brokers?—Yes.

AppI.28

1172. And you occasionally call in that money and re-deliver those securities?—Yes; but that we do to a very small extent.

AppI.29

1173. Is not that equivalent to a re-discount of bills?—No; the discount of a bill and the lending money on bills are very different things. When we discount a bill, that bill becomes our property; it is in our control, and we keep it and lock it up until it falls due; but when brokers come to us and want to borrow, say 50,000l. on a deposit of bills, and we let them have the money and afterwards return those bills to them and we get back our money, surely that is not a re-discount.

AppI.30

1174. When you want to employ your money for a short period, do you not frequently take bills of long date, and advance upon them?—But that is not a re-discount on our part. Very often brokers in borrowing money send in bills of long date, and afterwards we call in that loan; but that is no more a re-discount than lending money upon consols and calling in that money again. It is not an advance of ours; we do not seek it; they come to us and borrow our money, and give us a security; when we want our money we call for that money, and return their security. Surely that is not a re-discount.

AppI.31

1175. Mr. Hankey.] Is there not this clear distinction between returning a bill on which you have made an advance and discounting a bill, that if you have discounted a bill your liability continues upon the bill until that bill has come to maturity?—Yes.

AppI.32

1176. In the other case you have no further liability whatever?—Certainly.

AppI.33

1177. Should you not consider that a very important distinction?—I think it is an important distinction. Take this case: suppose a party comes to us and borrows 50,000l., and we lend it him, and when the loan becomes due we take our money back again. Surely that is not a discount on our part.

AppI.34

1178. Is there not this distinction, that if you re-discount you may go on pledging the liability of your bank to an almost unlimited amount, whereas in the other case you only get back that money which you have lent?—Undoubtedly.

AppI.35

1179. Mr. Cayley.] The late Chancellor of the Exchequer stated before the adjournment, in a speech in the House of Commons, that during the Monday, Tuesday, Wednesday, and Thursday of the panic, the Bank was almost, if not entirely, the only body that discounted commercial bills; how can you reconcile that with what you have said, that you gave as much accommodation as usual to your customers?—I am not responsible for what the Chancellor of the Exchequer said; I am responsible for what I am now stating as to the course of our bank, that our advances to our customers on the 31st of December were nearly 500,000l. higher than they were on the 31st of October. With regard to our not discounting for other parties, it was in consequence of the discredit which prevailed, that it was necessary we should hold a portion of our deposits in order that they should be available in case persons called for them; a certain number of persons did so; in the month of November we had a reduction of our deposits, and if we had gone on discounting for brokers we should have had to go into the market ourselves to raise money on our Government securities, but we avoided that by not discounting, and leaving our money at the Bank of England.

AppI.36

1180. Then you did not discount as much as usual for your customers during that period?—Yes. we did, and more.

AppI.37

1181. But not to strangers?—Not to strangers; I make a distinction between our transactions with our customers, who of course expect us to give accommodation, and discounts for brokers, which is entirely voluntary, depending upon our having money to employ.

AppI.38

1182. How would it have been if the letter had not issued at the last moment?—That is a question which I can hardly answer.

AppI.39

1183. What do you mean by that general expression of yours?—It is impossible to predicate what may happen in time of panic and alarm. A great alarm prevailed certainly amongst the commercial world, and it could never have been alleviated, except by some extraordinary means of relief. We might probably have been in the state in which Hamburg was, where they have no bank-notes in circulation.

AppI.40

1184. Mr. Spooner.] What did you mean by the expression, 'the last moment'? You said that the letter came out at the last moment; the last moment of what?—It was late in the day; it was a day of great distress. For two days there was a great deal of anxiety, and everybody expected that there would be some relief; and it was when expectation, I suppose, was highly excited that the letter came, and it gave relief.

AppI.41

1185. Cannot you tell us what your opinion would have been, if that last moment had happened to have elapsed, and the letter had not come?—It is very difficult to say; it is too much to say that it could not have been got over. There can be no doubt whatever that what created the difficulty existed out of London, and not in it; and therefore it is much more difficult for me to give an opinion. I believe that the banking interest, both private and joint stock, was in a perfectly sound condition, and able to bear any strain which might have been brought upon it in London.

AppI.42

1186. Mr. Hankey.] Can you give the Committee any idea as to what proportion of deposits you consider generally desirable to keep in reserve?—You must be very much guided by circumstances. In times of alarm, when there are failures, of course all bankers strengthen their reserves; our reserve then is larger. In times of ordinary business we find, both as regards our deposits at interest as well as those which are not at interest, that there is a constant circulation; that the receipts of money very nearly meet the payments.

AppI.43

1187. You probably keep at all times a certain amount of your deposits totally unemployed; in reserve?—Yes.

AppI.44

1188. In a normal state of commercial affairs, is there any fixed proportion, or can you give the Committee any idea of what you would consider about a fair and desirable proportion which should be so kept unemployed?—I think the best idea which I can give upon that subject is to give our annual statement, or balance sheet, for the 31st of December.

AppI.45

1189. Does that show what amount of unemployed money you had on that day?—Yes. I will put in a statement, which perhaps will be the best means of meeting the question, showing the cash in hand on the 30th of June and the 31st of December in every year, as shown by our published accounts, together with our money at call and our Government securities; that will be perhaps the best and most convenient way of giving the information you desire to have. (See Table below.)

Total Lodgments with London and Westminster Bank; also Amount of Cash in Hand, Moneys with Bill-Brokers at Call, and Government Securities held by the Bank.
DATE Deposits Cash in Hand Money at Call Government Securities TOTAL
£ £ £ £ £
31 December 1845 3,590,014 563,072 628,500 1,039,745 2,231,317
31 December 1846 3,280,864 634,575 423,060 938,717 1,996,352
31 December 1847 2,733,753 721,325 350,108 791,899 1,863,332
30 June 1848 3,170,118 588,871 159,724 1,295,047 2,043,642
31 December 1848 3,089,659 645,468 176,824 1,189,213 2,011,505
30 June 1849 3,392,857 552,642 246,494 964,800 1,763,936
31 December 1849 3,680,623 686,761 264,577 973,691 1,224,029
30 June 1850 3,821,022 654,649 258,177 972,055 1,884,881
31 December 1850 3,969,648 566,039 334,982 1,089,794 1,990,815
30 June 1851 4,414,179 691,719 424,195 1,054,018 2,169,932
31 December 1851 4,677,298 653,946 378,337 1,054,018 2,080,301
30 June 1852 5,245,135 861,778 206,687 1,054,018 2,122,483
31 December 1852 5,581,706 855,057 397,087 1,119,477 2,371,621
30 June 1853 6,219,817 904,252 499,467 1,218,852 2,622,571
31 December 1853 6,259,540 791,699 677,392 1,468,902 2,937,993
30 June 1854 6,892,470 827,397 917,557 1,457,415 3,202,369
31 December 1854 7,177,244 694,309 486,400 1,451,074 2,631,783
30 June 1855 8,166,553 722,243 483,890 1,754,074 2,960,207
31 December 1855 8,744,095 847,856 451,575 1,949,074 3,248,505
30 June 1856 11,170,010 906,876 601,800 1,980,489 3,489,165
31 December 1856 11,438,461 1,119,591 432,000 2,922,625 4,474,216
30 June 1857 13,913,058 967,078 687,730 3,353,179 5,007,987
31 December 1857 113,889,021 2,226,441 1,115,883 3,582,797 6,923,121

AppI.46

1190. Do you consider that when your deposits are materially on the increase it is necessary to keep a larger amount of money in reserve than you would keep at other times?—I may say that, as a general rule, our reserve would always bear some proportion to our deposits.

AppI.47

1191. Do you employ your money in the discounting of bills for other persons than your own customers?—Discount brokers.

AppI.48

1192. Only to discount brokers?—Yes.

AppI.49

1193. Not to strangers who are in the habit of bringing you in bills; commercial houses?—I should say generally not. We have one or two houses for whom we discount who have not accounts with us as bankers, but generally we do not discount except for our customers or for bill-brokers.

AppI.50

1194. Do you consider that any advantage can arise to the public by the Bank of England advancing to a greater extent than can be considered strictly prudent on the soundest principle of banking, under the idea of their affording aid to the commercial world?—As I said before, as long as there are good bills in circulation, that is, bills about which there would be no doubt of their being paid at maturity, there should be some means by which those bills could be discounted.

AppI.51

1195. And do you think that it is part of the functions of the Bank of England to discount a bill for anybody, merely because the party holding the bill wishes to convert it into cash?—As I said before, the Bank of England will have great difficulty in getting rid of that inconvenient idea which there is in the mind of the public, that the Bank of England is something more than an ordinary joint stock bank. I think it must depend very much upon circumstances whether you can or cannot refuse the discount of good bills which are offered to you.


Note C.
Statement of Circulation and Deposits of the Bank of Dundee at Intervals of Ten Years between 1764 and 1864.

AppI.52

Year Circulation Deposits*42
£ £
1764 30,395
1774 27,670
1784 56,342
1794 50,254 48,809
1804 54,096 157,821
1814 46,627 445,066
1824 29,675 343,948
1834 26,467 563,202
1844 27,504 535,253
1854 40,774 705,222
1864 41,118 684,898


AppI.53

Note D.
Meeting of the Proprietors of the Bank of England.
September 13, 1866.
(From 'Economist,' September 22, 1866.)

AppI.54

A General Court of the Bank of England was held at the Bank at twelve o'clock on the 3th instant, for the purpose of declaring a dividend for the past half-year.

AppI.55

Mr. Launcelot Holland, the Governor of the Bank, who presided upon the occasion, addressed the proprietors as follows: This is one of the quarterly general courts appointed by our charter, and it is also one of our half-yearly general courts, held under our bye-laws, for the purpose of declaring a dividend. From a statement which I hold in my hand it appears that the net profits of the Bank for the half-year ending on the 31st of August last amounted to 970,014l. 17s. 10d., making the amount of the rest on that day, 3,981,783l. 18s. 11d.; and after providing for a dividend at the rate of 6l. 10s. per cent., the rest will stand at 3,035,838l.. 18s. 11d. The court of directors, therefore, propose that a half-yearly dividend of interest and profits, to the amount of 6l. 10s. per cent., without deduction on account of income tax, shall be made on the 10th of October next. That is the proposal I have now to lay before the general court; but as important events have occurred since we last met, I think it right I should briefly advert to them upon this occasion. A great strain has within the last few months been put upon the resources of this house, and of the whole banking community of London; and I think I am entitled to say that not only this house but the entire banking body acquitted themselves most honourably and creditably throughout that very trying period. Banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year. But the manner in which the banking establishments generally of London met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. This house exerted itself to the utmost—and exerted itself most successfully—to meet the crisis. We did not flinch from our post. When the storm came upon us, on the morning on which it became known that the house of Overend and Co. had failed, we were in as sound and healthy a position as any banking establishment could hold; and on that day and throughout the succeeding week, we made advances which would hardly be credited. I do not believe that any one would have thought of predicting, even at the shortest period beforehand, the greatness of those advances. It was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the Bank should have gone to the Chancellor of the Exchequer and requested the Government to empower us to issue notes beyond the statutory amount, if we should think that such a measure was desirable. But we had to act before we could receive any such power, and before the Chancellor of the Exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret. But we could not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and I am not aware that any legitimate application for assistance made to this house was refused. Every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house. I have perhaps gone a little more into details than is customary upon these occasions, but the times have been unusually interesting, and I thought it desirable to say this much in justification of the course adopted by this house of running its balances down to a point which some gentlemen may consider dangerous. Looking back, however, upon recent events, I cannot take any blame to this court for not having been prepared for such a tornado as that which burst upon us on the 11th of May; and I hope the court of proprietors will feel that their directors acted properly upon that occasion, and that they did their best to meet a very extraordinary state of circumstances. I have now only to move that a dividend be declared at the rate of 6l. 10s. per cent. for the past half-year.

AppI.56

Mr. Hyam said that before the question was put he wished to offer a few observations to the court. He believed that the statement of accounts which had just been laid before them was perfectly satisfactory. He also thought that the directors had done their best to assist the commercial classes throughout the late monetary crisis; but it appeared to him at the same time that they were in fault in not having applied at an earlier period to the Chancellor of the Exchequer for a suspension of the Bank Act. It was well known that the demand on the Bank was materially lessened in the earlier part of the day, in consequence of a rumour which had been extensively circulated that permission to overstep the limits laid down in the Act had been granted. That concession, however, had only been made after the most urgent representations had been addressed to the Chancellor of the Exchequer at a late hour in the night, and if it had then been refused he felt persuaded that the state of affairs would have been much worse on the Saturday than it had been on the Friday. The fact was that the Act of 1844 was totally unsuited to the present requirements of the country, which since that period had tripled or quadrupled its commerce; and he was sorry to know that the measure seemed to meet with the approval of many of their directors. Any one who read the speeches made in the course of the discussion on Mr. Watkins' motion must see that the subject called for further inquiry; and he trusted that the demand for that inquiry would yet be conceded.

AppI.57

Mr. Jones said he entirely dissented from the views with respect to the Bank Act entertained by the hon. proprietor who had just addressed the court. In his opinion the main cause of the recent monetary crisis was that, while we had bought 275,000,000l. worth of foreign produce in the year 1865, the value of our exports had only been 165,000,000l., so that we had a balance against us to the amount of 110,000,000l. He believed that the Bank acted wisely in resisting every attempt to increase the paper currency, and he felt convinced that the working classes would be the people least likely to benefit by the rise in prices which would take place under such a change.

AppI.58

Mr. Moxon said he should be glad to know what was the amount of bad debts made by the Bank during the past half-year. It was stated very confidently out of doors that during that period the directors had between 3,000,000l. and 4,000,000l. of bills returned to them.

AppI.59

The Governor of the Bank.—May I ask what is your authority for that statement? We are rather amused at hearing it, and we have never been able to trace any rumour of the kind to an authentic source.

AppI.60

Mr. Moxon continued—Whether the bad debts were large or small, he thought it was desirable that they should all know what was their actual amount. They had been told at their last meeting that the Bank held a great many railway debentures; and he should like to know whether any of those debentures came from railway companies that had since been unable to meet their obligations. He understood that a portion of their property was locked up in advances made on account of the Thames Embankment, and in other ways which did not leave the money available for general banking and commercial purposes; and if that were so, he should express his disapproval of such a policy. There was another important point to which he wished to advert. He was anxious to know what was the aggregate balance of the joint stock banks in the Bank of England. He feared that some time or other the joint stock banks would be in a position to command perhaps the stoppage of the Bank of England. If that were not so, the sooner the public were fully informed upon the point the better. But if ten or twelve joint stock banks had large balances in the Bank of England, and if the Bank balances were to run very low, people would naturally begin to suspect that the joint stock banks had more power over the Bank of England than they ought to have. He wished further to ask whether the directors had of late taken into consideration the expediency of paying interest on deposits. He believed that under their present mode of carrying on their business they were foregoing large profits which they might receive with advantage to themselves and to the public; and he would recommend that they should undertake the custody of securities after the system adopted by the Bank of France. In conclusion, he proposed to move three resolutions, for the purpose of providing, first, that a list of all the proprietors of Bank stock should be printed, with a separate entry of the names of all those persons not entitled to vote from the smallness of their stock, or from the shortness of time during which they held it; secondly, that a copy of the charter of the Bank, with the rules, orders, and bye-laws passed for the good government of their corporation, should be printed for the use of the shareholders; and thirdly, that auditors should be appointed to make detailed audits of their accounts.

AppI.61

Mr. Gerstenberg recommended that the directors should take some step for the purpose of preventing the spread of such erroneous notions as that which lately prevailed on the Continent, that the Bank was about to suspend specie payments.

AppI.62

Mr. W. Botly said he wished to see the directors taking into their consideration the expediency of allowing interest on deposits.

AppI.63

Mr. Alderman Salomons said he wished to take that opportunity of stating that he believed nothing could be more satisfactory to the managers and shareholders of joint stock banks than the testimony which the Governor of the Bank of England had that day borne to the sound and honourable manner in which their business was conducted. It was mainfestly desirable that the joint stock banks and the banking interest generally should work in harmony with the Bank of England; and he sincerely thanked the Governor of the Bank for the kindly manner in which he had alluded to the mode in which the joint stock banks had met the late monetary crisis.

AppI.64

The Governor of the Bank said—Before putting the question for the declaration of a dividend, I wish to refer to one or two points that have been raised by the gentlemen who have addressed the court on this occasion. The most prominent topic brought under our notice is the expediency of allowing interest on deposits; and upon that point I must say that I believe a more dangerous innovation could not be made in the practice of the Bank of England. The downfall of Overend and Gurney, and of many other houses, must be traced to the policy which they adopted of paying interest on deposits at call, while they were themselves tempted to invest the money so received in speculations in Ireland or in America, or at the bottom of the sea, where it was not available when a moment of pressure arrived.

AppI.65

Mr. Botly said he did not mean deposits on call.

AppI.66

The Governor of the Bank of England continued—That is only a matter of detail; the main question is whether we ought to pay interest on deposits, and of such policy I must express my entire disapproval. Mr. Moxon has referred to the amount of our debts, but, as I stated when I took the liberty of interrupting him, we could never trace the origin of any rumour which prevailed upon that subject. As far as it can be said to have ever existed it had its origin most probably in the vast amount advanced by the Bank. It must, however, be remembered that we did not make our advances without ample security, and the best proof of that is the marvelously small amount of bad debts which we contracted. It has never been a feature of the Bank to state what was the precise amount of those debts; but I believe that if I were to mention it upon the present occasion, it would be found to be so inconsiderable that I should hardly obtain credence for the announcement I should have to make. I am convinced that our present dividend has been as honestly and as hardly earned as any that we have ever realised; but it has been obtained by means of great vigilance and great anxiety on the part of each and all of your directors; and I will add that I believe you would only diminish their sense of responsibility, and introduce confusion into the management of your business, if you were to transfer to auditors the making up of your accounts. If your directors deserve your confidence they are surely capable of performing that duty, and if they do not deserve it you ought not to continue them in their present office. With regard to the supposed lock-up of our capital, I must observe that, with 14,000,000l. on our hands, we must necessarily invest it in a variety of securities; but there is no ground for imagining that our money is locked up and is not available for the purpose of making commercial advances. We advanced in the space of three months the sum of 45,000,000l.; and what more than that do you want? It has been recommended that we should take charge of securities; but we have found it necessary to refuse all securities except those of our customers; and I believe the custody of securities is becoming a growing evil. With regard to railway debentures, I do not believe we have one of a doubtful character. We have no debentures except those of first-class railway companies and companies which we know are acting within their Parliamentary limits. Having alluded to those subjects, I will now put the motion for the declaration of the dividend.

AppI.67

The motion was accordingly put and unanimously adopted.

AppI.68

The chairman then announced that that resolution should be confirmed by ballot on Tuesday next, inasmuch as the Bank could not, under the provisions of its Act of Parliament, declare otherwise than in that form a dividend higher than that which it had distributed during the preceding half-year.

AppI.69

The three resolutions proposed by Mr. Moxon were then read; but they were not put to the meeting, inasmuch as they found no seconders.

AppI.70

Mr. Alderman Salomons said that their Governor had observed that he thought the payment of interests on deposits was objectionable; and everyone must see that such a practice ought not to be adopted by the Bank of England. But he took it for granted that the Governor did not mean that his statement should apply to joint stock banks which he had himself told them had conducted their business so creditably and so successfully.

AppI.71

The Governor of the Bank said that what he stated was that such a system would be dangerous for the Bank of England, and dangerous if carried into effect in the way contemplated by Mr. Moxon.

AppI.72

Mr. P. N. Laurie said he understood the Governor of the Bank to say that it would be dangerous to take deposits on call, and in that opinion he concurred.

AppI.73

Mr. Alderman Salomons said that he, too, was of the same opinion.

AppI.74

On the motion of Mr. Alderman Salomons, seconded by Mr. Botly, a vote of thanks was passed to the Governor and the directors for their able and successful management of the Bank during the past half-year, and the proceedings then terminated.


Notes for this chapter


42.
The Bank did not begin to receive deposits until 1792, in which year they amounted to 35,944l.

End of Notes


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Appendix II
By E. Johnstone

Note I

AppII.1

This pre-eminent position in regard to the relative magnitude of its resources the London Market has not fully maintained. The deposits of the metropolitan banks have indeed enormously increased. They amounted at the end of December, 1905, to £504,000,000; but in this total was comprised (as closely as can be estimated, since, owing to amalgamations, an exact comparison is impossible) about £230,000,000 held by banks which were not included in the statement for December 31, 1872, most of them banks with country branches, and which hold, therefore, a great deal of provincial as well as London money. Allowing for this, a greater relative increase is shown by the New York associated banks, whose deposits at the end of 1905 (including Government deposits) amounted to a little over £195,000,000 as compared with the £40,000,000 held by then in 1873. But, as in the case of the London banks, the deposits of the New York banks include a large amount consisting of the balances of other banks throughout the country. In Germany also there has been a great development of deposit banking, Unfortunately the German statistics are drawn up in a form which renders any comparison with those of the British banks exceedingly difficult, if not impossible. The German banks place under "deposits" only such amounts as are left with them upon call or for specific terms, usually three or six months. There is, however, another heading, "Creditors," under which is included amounts due to account holders on account current business, and apparently some other forms of liability. According to the Frankfurter Zeitung, the "deposits" of the eight largest Berlin banks (exclusive of the Reichsbank) amounted at the end of 1905 to £52,100,000, and their "creditors" to £93,463,000. And, in addition, the Reichsbank at that date owed its current account holders £24,105,000. The Frankfurter Zeitung also gives statistics of the forty leading banks of the Empire—that is, banks having a capital of not less than £500,000 (but not including the Reichsbank). At the end of 1905 these held in "deposits" £73,736,000, and in "creditors" £144,223,000. Nor is it only that the resources of the German banks have greatly increased; these banks now play a much more important part in cosmopolitan finance. Berlin is now an important market for foreign loans, and through the instrumentality of the banks large amounts of German capital have been embarked in foreign industrial enterprises. The growth of these and other markets, however, has not operated to the relief of "Lombard Street." On the contrary, it has added to the delicacy of its position. It has increased the magnitude of the demands for gold that may be made upon us in times of pressure, and thus renders it more necessary than ever that the Bank of England should maintain an adequate reserve.


NOTE II

AppII.2

On December 31, 1891, the deposits of these four banks amounted to £70,000,000, but owing to amalgamations which have altered the identity of two out of the four, the further growth of the deposits since Mr. Bagehot wrote cannot be accurately traced. Some indication of it, however, may be gathered from the fact that the purely Metropolitan banks (including one of comparatively small magnitude) held on December 31, 1905, deposits to the amount of £78,000,000, and at the same date ten London banks with country branches held between there deposits aggregating over £374,000,000. The private deposits of the Bank of England on December 27, 1905, amounted to £44,000,000.

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