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BRANCH BANKING IN MGLAND

Material prepared for the information of the
Federal Heserve System by the
Federal Heserve Committee on
Branch, Group, and Chain Banking

Members of the Committee

I. A. Goldenweiser, Director, Division of Research and Statistics,
Federal Reserve Board, Chairman
Ira Clerk, Deputy Governor, Federal Reserve Bank of San Francisco
M. J. Fleming, Deputy Governor, Federal Reserve Bank of Cleveland
L. E. Rounds, Deputy Governor, Federal Reserve Bank of New York
E. L. Smead, Chief, Division of Bank Operations, Federal Reserve
Board

J. H. Riddle, Executive Secretary and Director of Research

The Committee was appointed February 2o, 1930. by the
Federal Reserve Board




". . .to assemble and digest .information on
"branch banking as practiced in the United States,
group and chain hanking systems as developed in
the United States and elsewhere, the unit banking
system of the country, and the effect of ownership
of bank stocks by investment trusts and holding
corporations."

LETTER 0$ TRANSMITTAL
To the Federal Reserve Board:
The Committee on Branch, Group, and Chain Banking transmits
herewith a study of branch "banking in England, its organization,
safety record, and service to the public.




Respectfully,

E. A. G-oldenweiser
Chairman




CONTENTS
Pag
Organization of the English Banking System
Joint Stock Banks
Types of British Financial Institutions
Banks Financing Primarily Overseas Trade
Savings Banks
Acceptance Houses
Bill Brokers and Discount Companies
Bank of England
Scope of Study
Historical Development of Joint Stock Branch Banking
Structure Prior to Introduction cf Joint Stock
Banking
Origin of Joint Stock Banks
Developments after 1862
Last Stages of the Struggle "between Private and
Joint Stock Banks, IS62-I9OO
The Amalgamation Movement, 19OO-I93O
Present Structure of the Large Banks
Functions of Joint Stock Banks
Safety of Joint Stock Branch Banking
Causes of Failures
Factors Relating to Safety
Size of Banks
Audit ing
Responsibility of Directors
Nature of Assets
Policy Regarding Liquidity
The Availability of, Credit
General Supply of Credit
Credit to Small Borrowers
Cost of Credit
Credit to Industry
Credit to Agriculture
Short-term Credit to Agriculture
Capital Loans for Agriculture
Effective Competition
Banking Offices
Joint Undertakings
Working Agreements and Standardized Rates

1
1
5
5
5
5
6
6
8
11
12
13
17
17
19
2k
27
30
32
33
33
36
37
38

II

' ^7
1+7
5°
53
56
60
63
65
67
70
73
73




CONTESTS (Cont'd)
Pag
Banking Costs and Profits
Costs and the Concentration Movement
Branches
Salaries and Wages
Office Equipment
Operating Advantages
Profits and Dividends

~(6
76
79
8>1
82.
S3
8k

Conclusions
Safety Record
Availability of Credit
Effective Competition
Costs to the Community

90
90
91
92
95

Bibliography

96

CHAPTER I
ORGANIZATION OF THE ENGLISH EANKING SYSTEM

Since 1920 England has suffered even greater economic and financial
difficulties than the United States. Industry as well as agriculture has been
in a state of depression a substantial part of that time. Problems of public
debt and taxation have been far more serious than in this country. Yet there
have been practically no losses to depositors or serious upsets to business in
England as a result of commercial bank failures in recent years.
The commercial banking systems in England and the United States
differ widely in structure and organization*

Compared with about 18,000 indi-

vidual commercial banks in this country with close to $45,000,000,000 of
deposits, the British Isles were served at the end of 1930 by about 40 domestic banks with more than 13,000 branch offices and aggregate deposits of
about $12,000,000,000, exclusive of deposits at the Bank of England.

Joint Stock Banks
There are sixteen commercial joint stock banks in England, but
the five large ones far overshadow the rest of the banking system, having
among them over $8,000,000,000 in deposits and more than 8,000 branch offices.
The total commercial banking strength of the British Isles may be classified
as follows:




- 2 -

(Table 1 - British Commercial Banks, December 31, 1930(1)
Number of
Deposits
(in millions) offices

Number

Type of bank

5
11
10
8
9

Great English joint stock banks
Other English joint stock banks
Private and miscellaneous banks
Scottish banks
Irish banks'^J

$ 8,251
1,359
705
1,262
700

8,500
1,557
507
1,781
1.164

43

Banks of the British Isles

$12,277

13,509

**' Due to complications growing out of England's leaving the
gold standard in 1931, figures as of the end of 1930 are
used,
' 2 ' In Northern Ireland and Irish Free State.

The importance of the "Big Five" is even greater than appears
from the figures in the table alone, as several apparently independent banks
in England, Scotland, and Ireland are owned by the "Big Five." Directly and
indirectly these five large organizations control 75 per cent of the deposits
and 73 per cent of the branches of all the commercial banks in the British
Isles.
This summary tabulation shows the dominant position of the English
joint stock banks in the British Isles as compared with those of Scotland
and Ireland which have only a fraction of the banking strength. In view of
this dominance of the English system and in order to avoid diverting the
readers' attention from the main points by a discussion of differences in the
various systems, this study will be limited to the English system.

The over-

lapping of areas served by the banks of the different countries, as just indicated, is not sufficiently serious to distort the salient facts.
The treatment will be further limited to the joint stock organizations.

Some commercial banking is still in the hands of a few small private




- 3-

banks, but their importance in the field in recent years has "been negligible.

The joint stock banks do the bulk of the general banking business

in England and their function in the aggregate is most nearly comparable
to the function of the more than 18,000 commercial banks in this country.
Table 2 below gives the name and size of banks in the British
Isles according to the London Statist.
Table 2 - Banks in the British Isles^1)
(about December 31, 1930)

Name

C o n t r o l l e d by:

England and Wales
•MIDLAND BANK LTD.
"LLOYDS BANK LTD.
•BARCLAYS BANK LTD.
•WESTMINSTER BANK LTD.
•NATIONAL PROVINCIAL BANK, LTD.
• M a r t i n s Bank L t d .
C o - o p e r a t i v e Wholesale S o c i e t y , L t d .
• D i s t r i c t Bank L t d .
•Glyn, M i l l s & Co.
N a t i o n a l Bank, L t d .
Royal Bank of Scotland
•Williams Deacon's Bank, L t d .
Yorkshire Penny Bank, L t d .
"Big Five" + D i s t r i c t
• C o u t t s and Company
National P r o v i n c i a l
•Union Bank of Manchester, L t d .
Barclays
•Manchester & County Bank, L t d .
• B a r i n g B r o t h e r s & Co., L t d .
B. W. B l y d e n s t e i n and Co.
S. J a p h e t and C o . , L t d .
Thos. Cook & Son ( B a n k e r s ) , L t d .
C. Hoare & Company
G-rindlay and Company, L t d .
National Provincial
•London Merchant Bank, L t d .
• B r i t i s h Mutual Banking Co., L t d .
Grace B r o s , and Company, L t d .
R e l i a n c e Bank, L t d .
Total




Deposits
(in
m i l l i o n s )&

Number
of
offices
(3)

$ 1,945
1,775
1,693
1,419
1,419

2,100
1,900
2,100
1,050
1,350

382
265
255
193
177
156
139
95
87
86
85
49
30
14
13
12
5
4
3
3

570
7
400
3
266
205
153
5
170
191
2
1
1
67
1
8
1
1
2
1

10,304

10,555

- k -

Table 2 - Banks in the British Isles^ 1 ^ Continued)
(about December 31, 1930)

Name

Scotland
Royal Bank of Scotland
Commercial Bank of Scotland, Ltd.
Bank of Scotland
National Bank of Scotland, Ltd.
Clydesdale Bank, Ltd.
Union Bank of Scotland, Ltd.
British Linen Bank
North of Scotland Bank, Ltd.

Controlled by:

Barclays
Midland

Westminster
Midland

Provincial Bank of Ireland, Ltd.
Northern Bank, Ltd.
Hibernian Bank, Ltd.
Eoyal Bank of Ireland, Ltd.
National City Bank, Ltd.
Total

Number
of
offices^3'

Bank of Ireland

247
166
162
157
150
142
137
101

243
343
244
177
199
212
205
158

1,262

Lloyds
Midland

Total
Ireland(4)
Bank of Ireland
Munster and Leinster Bank, Ltd.
Ulster Bank, Ltd.
Belfast Banking Company, Ltd.

Deposits
(in
millions)t2J

1,781

162
121
105
75
71
69
57
32
8

135
205
212
86
140
192
114
79
1

700

1,164

Isle of Man
•Isle of Man Bank, Ltd.

11

G--RMB TOTAL

$12,277

(1)
(2)
(3)
(4)

13,509

Based on Statist. British Banking Section, May 23, 1931, p. 856.
$4.8665 per pound is used as the rate of conversion throughout this study.
In some cases includes sub-branches.
Of these, six operate in both the Irish Free State and Northern Ireland, two in
the Irish Free State only, and one in Northern Ireland only.
These are the 16 banks usually included in lists of English joint stock banks
doing a general banking business. They are the banks reported by the London
Economist under "Joint Stock Banks of England" and compose the group on which
most of the statistics in this study will be built. Glyn, Mills & Co. and
Coutts & Co., though joint stock organizations, both operate as unlimited companies. National Bank, Ltd., although having its head office in London and
being a member of the London Clearing House, is essentially an Irish bank.
Yorkshire Penny Bank, Ltd. is primarily a savings institution. The remainder
of the English banks listed are not regarded by some authorities as doing a
general banking business.




- 5-

Types of British Financial Institutions
In addition to the joint stock hanks which have confined their
activities largely to a general hanking business, accepting deposits subject
to withdrawal by check on demand or relatively short notice and granting the
types of short-term credits characteristic of commercial banking, there are
several other types of financial institutions in England.

Their functions

are briefly described in the paragraphs following;
Banks Financing Primarily Overseas Trade. - In London

there is a

large group of banks whose principal function is that of financing the trade
with or between overseas areas. As the joint stock banks have broadened their
activities in this sphere, especially since the war, this group is to be numbered among the competitors of the joint stock system, though only to a
limited degree in the field of domestic deposits and loans. In this group
are banks having offices in England and operating under dominion, foreign,
as well as English law.
Savings Banks. - As competitors for the savings deposits of the
English people, the joint stock banks have several types of depositories to
take into account, among which are the post office savings banks, arid a
number of trustee savings banks and building societies. The aggregate deposits of all of these run into billions of dollars.

Investment trusts

are a medium through which capital investments are made by large and small
investors.
Acceptance Houses. - In the investment banking field, a group of
houses act as originators, underwriters, and dealers in securities and are
the channels through which individual or institutional investors place some




- 6 -

of the savings of England in capital securities. Operating in this field
are a few special concerns as well as the merchant hankers or acceptance
houses which take their name from their activities in connection with accepting hills of exchange "both foreign and domestic.

The acceptance business

of any particular house is often of a specialized nature, either along geographical or industrial lines.
Bill Brokers and Discount Companies. - Other important elements in
the financial structure are the three discount companies and the many hill
brokers, who deal in high-grade hills of exchange, most of which arise out
of foreign trade. The discount houses generally retain most hills to maturity,
while the hill brokers resell bills coming into their possession to other institutions, including joint stock banks seeking an outlet for funds. The
working funds of both discount houses and bill brokers are made up of their
capital and demand or short-term loans from the commercial banks. This kind
of money market loan is one of the most important avenues through which commercial banks adjust their position from day to day.
The acceptance houses and the discount houses, but not the bill
brokers, receive deposits on which they pay a slightly higher rate of interest than the banks. Thus there are several types of specialists which compete to an extent with the banks but do not carry on a full line of banking
activities.

Bank of England
The central institution, the Bank of England, is the banker for the
Government, and has special privileges.

Except for small issues, especially

for the Isle of Man, it is the only English bank of issue, and through long




- 7 custom the joint stock banks have come to carry a large part of their cash
reserves as "balances with it, although this is not required by law.
As a holder of the ultimate "banking reserves of the country, it
must keep itself in an exceptionally liquid position.

If the "banking de-

mands of the country at the moment require an expansion in credit, it "becomes reflected in the relationships "between the joint stock banks and the
Bank of England.

As the advances and deposits of the former expand, they

will seek to build up their reserve balances at the central bank commensurably.

To accomplish this, the banks usually call in their demand or short

notice loans to the bill brokers and convert the proceeds to balances at the
Bank of England or employ them for other purposes. At times, especially at
the end of June and December, the bill brokers borrow at the Bank of England
to replace the accommodation withdrawn by the joint stock banks. In the same
way, if the joint stock banks are experiencing an increased demand for currency, they draw on the Bank of England for it, restoring their depleted
balances by forcing the bill brokers into the central bank as described above.
The Bank of England may, also, and frequently does, take the initiative in
tightening or easing the market by voluntarily buying or selling securities
or bills of exchange on its own initiative. When higher or lower rates are
established by the Bank of England with respect to its own activities, their
influence is ordinarily reflected in the rate structure of the money market.
In recent years, several of the joint stock banks have grown much
faster than the Bank of England so that the deposits of any one of the "Big
Five" now exceed those of the Bank of England's banking department. Nevertheless, the central bank has retained its position of leadership and the




- 8 -

banks cooperate with i t to carry out i t s p o l i c i e s .
By 1918 a "body of opinion had developed i n England, however, which
believed that the great size of the j o i n t stock hanks was a threat to the
Bank of England and i t s central functions, and i n 1918 the Treasury Committee
on Bank Amalgamations r e p o r t e d : ^ /
"Any approach to a "banking combine or Money Trust
. . . . . . w o u l d undoubtedly cause great apprehension to a l l
classes of the c o m m u n i t y . . . . . . . . . Moreover, the p o s i tion of the Bank of England—which would, i t may be a s sumed, stand outside any such Trust—would be seriously
undermined by so overwhelming a combination, and the
Bank might find i t extremely d i f f i c u l t to carry out i t s
very important duties as supporter and regulator of the
Money Market. Any such r e s u l t would, i n our opinion,
be a grave menace to the public i n t e r e s t . "
Scope of Study
An effort has been made i n t h i s study to determine, in so far as
available data w i l l permit:

( l ) the factors responsible for the development

of the English system of branch banking,
(3) the a v a i l a b i l i t y of c r e d i t ,
tion i s maintained, and

(2) the degree of safety achieved,

(4) the extent to which effective competi-

(5) the costs of banking s e r v i c e s .

In making t h i s

study the Committee has r e l i e d solely upon information available i n t h i s
country and has made no o r i g i n a l i n v e s t i g a t i o n i n England of banking conditions t h e r e .
A handicap has been the limited scope and d e t a i l of available
s t a t i s t i c s with respect to banking i n England.

In that country governmental

agencies publish no material comparable to the extensive information as to
condition and income collected by the supervisors of banks i n the various
j u r i s d i c t i o n s i n t h i s country.

The statements of English banks to t h e i r

( l ) T. E. Gregory, Select S t a t u t e s . Documents and Reports Relating to
B r i t i s h Banking. 1832-1928. Vol. I I , p . 331.




-8 stockholders and the public are meager indeed.

The policy of English "banking

organizations to keep their "business private presents a limitation on the
degree of detail to which the English situation may " e analyzed " y an outside
b
b
student.
In making any comparison of "banking developments and services in
England and the United States there are certain differences "between these
countries which should " e kept in mind.
b

One is the difference in geographi-

cal compactness and density of population.

England and Wales have about 680

inhabitants per square mile as contrasted with about 40 for the United States
as a whole and about 260 for the more densely populated Bastern States (New
York, New Jersey, and Pennsylvania combined).

One should bear in mind the

relatively greater importance of industry as compared with agriculture in
England, and her greater dependence upon overseas trade and upon commerce in
general, as compared with production.
Another difference to be noted is between the public policies of
the two countries with respect to commercial banking. A few outstanding
British statutes with reference to the broad outlines of organization and the
matter of currency emission represent a very small body of law compared to the
voluminous banking codes of the federal and State jurisdictions here. Statutory provisions in the banking codes of this country with respect to the amount
and agency for carrying reserves against deposits, the minimum amount of capital, limitations on loans to one interest, provisions for the supervision and
examination of banks by publicly appointed officials are things wholly unknown
in British law and practice. Moreover, the surveillance by authorities of ap-




-9 stockholders and the public are meager indeed.

The policy of English "banking

organizations to keep their "business private presents a limitation on the
degree of detail to which the English situation may " e analyzed " y an outside
b
b
student.
In making any comparison of "banking developments and services in
England and the United States there are certain differences between these
countries which should " e kept in mind.
b

One is the difference in geographi-

cal compactness and density of population.

England and Wales have about 680

inhabitants per square mile as contrasted with about 40 for the United States
as a whole and about 260 for the more densely populated Eastern States (New
York, New Jersey, and Pennsylvania combined).

One should bear in mind the

relatively greater importance of industry as compared with agriculture in
England, and her greater dependence upon overseas trade and upon commerce in
general, as compared with production.
Another difference to be noted is between the public policies of
the two countries with respect to commercial banking. A few outstanding
British statutes with reference to the broad outlines of organization and the
matter of currency emission represent a very small body of law compared to the
voluminous banking codes of the Federal and State jurisdictions here. Statutory provisions in the banking codes of this country with respect to the amount
and agency for carrying reserves against deposits, the minimum amount of capital, limitations on loans to one interest, provisions for the supervision and
examination of banks by publicly appointed officials are things wholly unknown
in British law and practice. Moreover, the surveillance by authorities of ap-




- 10 -

plications for "bank charters common in this country is unknown in England
where any persons meeting a few pro forma requirements have the right to
set up in the banking "business.




CHAPTER II

HISTORICAL DEVELOPMENT O f JQIM? STOCK BRANCH BANKING
f

The rise of the great joint stock "branch hanking organizations in
England in the modern corporate form with limited liability of shareholders
followed upon a series of statutes passed during the last century, terminating in the law of 1879. The joint stock form of organization was authorized
" y the Act of 1826, hut prior to the acts of I85S and 1862 ownership of
b
shares in these institutions carried unlimited liability under the law for
all obligations incurred by the company.

The Act of 1862, however, definite-

ly permitted joint stock banks to be established with stockholders' liability
limited to the capital subscribed.

Subsequent acts clarified this right.

Even after these acts stockholders of banking corporations remained unlimitedly liable for bank notes, but this fact was not particularly significant
as note liability was becoming less important compared to deposit liability.
Most of the banks in England prior to 1862 had relatively few
owners. At most they had about a hundred partners contrasted with the
tens of thousands of stockholders in each of the large banks today. Where
a person risked his whole fortune in the banking business, the tendency was
to keep organizations small and compact enough to be constantly under the
immediate eyes of the proprietors. With limited liability the shareholders
no longer felt the necessity of following all the details of the banks and
cauld turn over their operation to paid officials. The corporate form was
then capable of expansion in size limited only by the point of diminishing
returns. As a background for the development of the great banking corporations after the third quarter of the nineteenth century, it is useful to have




- 11 -

- 12 -

in mind something of the course of English tanking history in the decades
immediately preceding.

Structure Prior to Introduction of Joint Stock Banking
In 180C commercial "banking in England should " e viewed in two
b
parts:

the situation in London and in the cotuatry outside the metropolis-.

At that time, banking outside of London, commonly referred to as- country
banking, was in the hands of a large number of private firms which conducted
their business as note issuing banks rather than as banks of deposit and
frequently were primarily merchants, tradesmen, or manufacturers rather than
bankers.

These partnerships, in making loans, paid out to borrowers their

own notes which comprised a large portion of the circulating medium of the
day.
In the city of London, the Bank of England dominated the field.
Under the terms of an act of 170S it claimed a monopoly of the right to
operate as a joint stock company, invoking the following provision:

"Daring

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 3um or sume of money on their bills or notes, payable at demand,
or at a less time than six months from the borrowing thereof."
Due to this provision, the Bank of England enjoyed the sole privilege of note issue among banks in the city of London. Moreover, the inter-




- 13 -

pretation grew up in tradition that the Bank of England enjoyed the exclusive right in the whole of England to operate as a hanking "business in
the form of a joint stock company, all other hanks being partnerships with
not more than six members. The Bank of England was operated for the benefit of its shareholders, was the banker for the Government, and operated
in the field of commercial banking in competition with other London banks.
It was not at that time charged with the general responsibility for the
money market as it is today. That responsibility was to be assumed a great
many years later as a result of public opinion and not because of legislative mandate.
Alongside the Bank of England a group of private banks existed
in London at the beginning of the nineteenth century without issuing notes.
These organizations were the precursors of the banking organizations of
today which operate in the field of deposit without the note issue privilege.

Origin of Joint Stock Banks
The number of private banks operating in England during the first
quarter of the nineteenth century has been variously estimated as somewhere
between 500 and 1,000 and no joint stock banking organization existed other
than the Bank of England.

In the year 1826 an act was passed allowing con-

cerns, if not within 65 miles of London, to do a banking business, including
the issue of notes, with an unlimited number of proprietors in contrast to
the legal limit of six prior to that time. These new concerns were known
as joint stock companies, but were in fact simply large copartnerships. In
addition to the possibility of having an unlimited number of proprietors
they had other characteristics of modern corporations, including continuity




-14 -

of existence and transferability of shares. Although this proved to be a
more flexible and attractive form under which to conduct a banking business
than a partnership limited to six members, the important privilege of
limited liability, allowing banks to operate as real corporations, was not
to be granted for more than three decades.
A s soon as they were authorized by law, joint stock banks began
.
to be organized either as new concerns or as conversions from the private
form and were successful in attracting business, due to the unsatisfactory
record of failures suffered by the private banks and to the success of the
joint stock system as established in Scotland.

It is estimated that between

1S1^ and 18l6, 25O private banks failed and that during the panic of 1825•'
*
1826 about SO more closed. ( • In the decades which followed, the banking
situation was characterized by increasing numbers of joint stock companies
and decreasing numbers of private banks .
The new banking companies were at first local copartnerships,
but with the coming of the railway the joint stock banks soon became interested in branch banking. They were encouraged by the successful examples
in Scotland.

The private banks, on the other hand, did not at first evince

any particular interest in this means of expansion. Many of the early
branches among private banks came about through keeping both offices open
when the fortunes of two banking houses were joined by the intermarriage of
the controlling families. The result of this difference in policy was that
by 18UH the joint stock system, though having fewer individual banks, had
more branch offices than the private firms. The following table gives the

" ' Daniel Hardcastle, Banks and Bankers, p. 2U9.




- 15 -

comparative status of "both "banks and "branches, joint stock and private,
at important dates.
Table 3 - Decline of Private Banks and Growth of Joint Stock Banks
Year

1825
1SU4
1870

Private "banks
Number of
Number of
"banks
"branches
55^
335
255

681
428
517

Joint stock hanks (1)
IJumber of
dumber of
hanks
"branches

106
113

Gok
970

(1) Exclusive of the Bank of England.
In the interval between 1S26 and 1862, several dates are important
in connection with the development of joint stock companies. In 1833 impetus was given the movement by granting joint stock hanks the right of
establishing offices in London provided they did not issue notes.

On the

other hand, the movement was retarded by the Peel Act of 18M+, the purpose
of which was ultimately to concentrate all note issues in the Bank of England
through a gradual withdrawal of the privilege from other banks.

This act

provided that no bank subsequently organized should have the note issuing
privilege.

Since currency banking was then more important than deposit

banking, this had the effect of reducing the number of new organizations,
including joint stock banks.

Conversions of private banks to joint stock

were also discouraged by that provision of the act which withdrew the note
issuing privilege from banks changing their form,while mergers with banks
within the 65 mile limit also resulted in the abolition of the issuing
privilege. The Peel Act, though slowing down temporarily the joint stock
movement, made considerable contribution to the rise of m o d e m deposit bank-




- 16 -

ing " y restricting the note issuing privilege.
b

Another act(l) passed that

same year placed a more serious check on the progress of joint stock hanking
by permitting

copartnerships to be formed only on obtaining a Royal Charter

under very strict conditions.

As a result few new joint stock banks "were

established for many years or till that act had been repealed."^) <phis
repeal was passed in 1857» another date of importance in the development of
joint stock banking.
The greater flexibility of the joint stock form of organization
as against the private form has been referred to. The bringing together
of the resources of many partners in one institution gave them greater
strength than could be mustered by the private banking firms which were
restricted to six partners. Moreover, a great number of the many new shareholders naturally transferred their banking business to the companies in
which they were interested, to the advantage of these joint stock banks and
at the expense of the private banks. The reputation of the new type of bank
was enhanced during the depressions that occurred in the period, as they
showed greater stability than private banks, which failed by the score.
Moreover, many private banks were so weakened that they gladly accepted
offers to merge with the joint stock banks, and during the period 1826-1861,
approximately 100 private banks were absorbed by joint stock banks while no

(1) An Act to Regulate Joint Stock Banks in England (September 5, 18V+). in
T. E. Gregory, Select Statutes. Documents and Reports Relating to British
Banking. 1832-1928. o » 229-250.
t.
(2) Walter Bagefcot, Lombard Street, new edition, 1927, p. 239. Bagehot
refers to the Act of 18^5 but he apparently means the Act of 1SU^.




- 17 -

cases of private "banks absorbing joint stock banks are on record. Daniel
Hardcastle, an English writer on banking in those days, stated'that:(1)
" . . . the joint-stock Banks did not rise until the losses
inflicted by the private Bankers had repeatedly shaken the
confidence of the public. . ."
The joint stock banks also attracted public confidence by taking the lead
in lessening the tradition of secrecy with respect to bank operations and
by establishing a policy of making available some information as to their
condition.

Developments after 1862
Last Stages of the Struggle between Private and Joint Stock Banks,
1862-1900• - The preceding paragraphs have outlined the developments over
the first sixty years of the nineteenth contury away from the small private
banking firm toward the present-day corporate form, away from currency banking toward deposit banking.

The modern era may be said to begin with the

Act of 1362 which applied the principle of limited liability to shareholders
of banking concerns, thus paving the way for the emergence of large corporations in the banking field. For several years before that time, there had
been agitation for limited liability for banking companies and acts actually
were passed in 1857 and I858 towards this end.

It was not until 1862, how-

ever, that the legal status was sufficiently clarified by a new act to give
the impetus to this form of organization, although even this law carried
certain limitations which were not removed until I879.
During the forty years subsequent to the introduction of limited
liability among bank shareholders in 1862, more than 125 private banks
disappeared because of merger with joint stock companies with almost no




- 18 -

compensating movement, as the accompanying table shows.
Table 4 - -Amalgamations of English Banks (1)
Period

Unknown dates
1825-18^3
1844-1861
1862-1889
1890-1902
1903-192^
1925-1930
Total

Private Joint stock
absorbs
absorbs
private .ioint stock

23
11
31

37
l
— -

103

Private
Joint stock
absorbs
absorbs
joint stock
private

17

i
10

-

1
1

40
51
60

4
171

-

76
22

67
64
3h
—Z.

~

2

280

(1) Joseph Sykes, The Amalgamation Movement in English Banking,
1825-1924, Appendix I, p. 193. 1925-I93O data from Bankers'
Almanac and Year Book, 1929-I93O.
By the beginning of this century the joint stock banks were in
complete ascendancy as to number of offices, and particularly as to banking
strength measured in deposits. The London Economist reports that 77 joint
stock banks existed in 1900 with approximately 3»800 offices and deposits
of about $3,000,000,000. The private banks are given as 19 with deposits
of about $200,000,000. Although the figures are not available, it is likely
that in addition there were a small number of private banks operating in
country districts, the aggregate banking strength of which was not great.
The total offices of private banking firms could not have been more than a
few hundred.
During the last quarter of the nineteenth century, the reduction in
the number of private banks resulted not only from mergers but also from
voluntary liquidations and failures. The greater facilities and larger
resources of the joint stock banks attracted much of the banking business




- 19 -

to them.

The Baring failure coupled with great losses through foreign

investments during the early nineties was particularly important in undermining public confidence in the private institutions, although this was to
a great extent offset " y the failure of a large joint stock organization,
b
the City of Glasgow Bank.

In an effort to stem the tide running against

them, private bankers took up some of the innovations introduced by the
joint stock banks, including the establishment of branch offices, the publication of balance sheets, and competition for savings, foreign and acceptance
business.

Nevertheless, the private banks found competition more and more

difficult as time went on. The growing use of checks lessened the advantage
of the note issuing private banks, and the expansion of industry was requiring larger banking institutions, which were more easily attainable in
the joint stock form.
During the closing years of the century the merger movement not
only served to diminish the number of private banks but of joint stock
banks as well.

During the seventies about 120 joint stock banks were in

existence, and in the subsequent 20 years this figure was halved.

The low

money rates obtaining through these years induced the London banks to purchase country banks, which were able, as a rule, to maintain good incomes
because of higher rates. The principle reason for many of the mergers,
however, was that progressive country banks were anxious to secure a footing
in London to avoid the expense and inconvenience of agency arrangements,
while progressive London banks were desirous of widening their spheres of
influence by extension in the provinces.
The .Amalgamation Movement, 1900-1950« - Instead of a haphazard
merger pattern, however, a few banks were taking the lead in the merger




- 20 -

movement, and outstanding units were "beginning to emerge. Rivalry "between
them played an important role in the development of the heist decades. With
the turn of the century the movement lost some of its numerical force, since
fewer hanks were left to merge, "but those fusions which occurred were of
great importance "because of their size.

Instead of a successful "bank ab-

sorbing a failing institution, or a London bank seeking provincial outlets,
the strong banks merged with each other, thus concentrating rapidly the
resources of the nation into the hands of a small group of banks.
The outbreak of the war accelerated this tendency and between
1916 and 1922 thirty-two banks were taken over by other institutions. The
climax in the concentration of banking resources was reached in 1917 a n i
-<
1918 when as a result of consolidations among large banks the "Big Five"
emerged to dominate English banking.

The Barclays Bank of today represents

the bringing together over the years of lUg different banks. Lloyds absorbed over 170 banks; Midland, about SO banks; National Provincial, about
120 banks; and Westminster, about 100 banks as direct or indirect composites
of their present structure.'1'

It is a curious fact that of the five banks

which dominate English banking today, four had their roots in the provinces,
and only the Westminster originated as a city bank.

This reflects the

effects of the longer duration of the prohibition against joint stock banking in London than in the provinces.
Public opinion had for some time been considerably alarmed, fearing that banking competition would be eliminated.

This led to the appoint-

ment of a Treasury Committee in 1918 to study the English banking situation.

(1) Luther A. Harr, Branch Banking in England, pp.




l^kar-l^ki.

- 21 -

This committee felt that unregulated concentration had gone far enough and
suggested that a law be passed making it compulsory to get the permission of
the Treasury and the Board of Trade for further amalgamations. Although
this "bill was dropped, the sentiment of the public was so apparent that the
hanks, without legal compulsion, subsequently abided by Treasury decisions.
Indeed in recent years the banks, realizing the strength of public opinion,
have made few proposals for further amalgamations, and structural development has taken the form mainly of establishing affiliations with existing
institutions in other parts of the kingdom through purchase of stock.
By the end of the nineteenth century, limited liability was the
usual thing among English joint stock banks, having come about as Sir
Felix Schuster, governor of the Union of London & Smith's Bank, Limited,
described it before the National Monetary Commission. (1)
" . . . There had been a great outcry after the failure of
the City of Glasgow Bank, which was an unlimited concern,
and there was a great feeling in the country against the
unlimited liability.(2) The result was that many responsible holders of shares, however good the concern might be,
showed a desire to sell out, and there was a fear that only
those people would remain shareholders whose liability would
not count. The feeling all over the country was so strong
that an act was passed in 1880 enabling those unlimited companies to register themselves as limited companies with a
very large uncalled liability, and we and all the other London clearing banks registered as limited companies at that
time, and no joint stock banks in the country were unlimited."

(1) Vol. I, p. 34.
(2) Hote: In the failure of the City of Glasgow Bank holders of stock
amounting to £750,OCO out of a total of £840,000 in the hands of the
public were completely ruined by the losses they were forced to meet.
For years it had been urged that limited liability be applied to bank
shareholders, partly because of the desire to encourage desirable
stockholders, partly to discourage rediscounting on the strength of
the unlimited liability of bank owners.




- 22 -

The statistical history of joint stock branch hanking in England
since the "beginning of this century traces the record of the concentration
movement which, of course, fed on the possibilities offered "by the fact that
neither British statute nor public opinion opposed the branch office system,
by that time more than 50 years old.^1'

Contemporary discussion during the

nineteenth century had focused on the power of the Bank of England, the
struggle between joint stock and private banking, the question of concentration or dispersion of note issues, and later, to some extent, on the
superiority of limited over unlimited liability of shareholders. The public paid practically no attention to the growth of branch banking. An
English author writing in 1930 points out :^2'
"The branch system in England sprang up as a matter of
course, and no one has ever seriously suggested any other system to take its place. The disappearance of the private banker
may in some ways be regretted, but it was recognized as inevitable."
The passage of a century had greatly altered the banking structure
of England.

In 1825 commercial banking, exclusive of the Bank of England,

was wholly in the hands of private partnerships, with no joint stock companies in existence. A hundred years later less than 2 per cent of commercial banking deposits were in the hands of private companies. Instead
of the six partners or proprietors,'-" to which the private banks were
limited, each of the "Big Five" was a national institution in which a large
segment of the public was interested, and each had at the end of 1930 at
least ^0,000 shareholders.
or

Cf. James William Gilbart, A Practical Treatise on Banking,
Vol. I, p. I65.
(2) L . Le Marchant Minty, English Banking Methods, p. 92.
(3) Has since been increased to ten partners.




- 23 -

Table 5 - Shareholders of the "Big Five" in 1930(l)
Humber of
shareholders

Bank
Barclays Bank
Lloyds Bank
Midland Bank
National Provincial Bank
Westminster Bank

Average
holding;

56,1+26
65,000
76,055
to, 000

$1,368
1,18U
912
1,153
530

25,569

Total

323,050

$ 975

(1) New York Times. July 18. 1931. p. 22. column 5,
from American Banker.

The following table brings out the decrease in the number of
joint stock banks and the increase in their average number of offices and
deposits since 1900.

Table 6 - Growth in Size of Joint Stock Banks
1900-1930(2)

Year

1900
1905
1910
1915
1920
1925
1930

Number of
joint stock
banks

77
45
37
20
IS
16

Average number of
banking offices
per bank
(approximate)

Average deposits
per bank
(in millions of i's0

1+95

8
11
16
27
98
100

630

12l+

50
75
115
160
380

(-) Based on Economist (London), Banking Number, May 9, 1931,
pp. 18, 19.

In thirty years the number of banks had decreased mainly through amalgamation from 77 to 16, and the average size of each had increased about 15
times, both in deposits and the number of offices.




-24-

The increase in branch offices which has accompanied the concentration of hanks in England has "been more than proportionate to the growth
in population.

In the course of the past thirty years hanking offices have

more than doubled while the number of persons in England and Wales has
grown hut 22 per cent, inhabitants per hanking office having decreased as
follows:
Tahle 7 - Inhabitants per Banking Office(l)

Year

1901
1911
1921
1930

Number of
banking
offices

Inhabitants
per
banking office

Moo
6,300
7.S00
10,100(2>

6,S00
5,700
5,000
3,900(3)

(1) Joseph Sykes, Amalgamation Movement
in English Banking, p. 113. The figures
are approximate.
(2) Economist (London), Banking lumber, May 9»
1931.
(3) 1930 population, estimated.

Present Structure of the Large Banks
With the development of these large branch systems combining as
many as 2,000 offices into one organization have come serious managerial
problems.

The banks have paid close attention to the development of in-

ternal organizations to cope with a business of such size and dispersion.
Bank costs and profits depend upon the solution of the organization problem,
which touches the interests of banking clientele because the quantity and
quality of service as well as the safety of banking rests upon it.
The smallest form of banking office is a sub-branch which may be
open for a limited number of days a week.




Such offices are usually manned

- 25 -

by officials from a nearby branch.

A full fledged branch has a staff,

headed by a manager, with one or many subordinates, depending upon its size.
A group of branches is responsible to a district superintendent, who in
turn reports to one of the leading officials at the head office. The chief
executive officers are the joint general managers, each one having charge
of a section of the bank's activities, and responsible to the board of
directors.
The board, varying in size among the "Big Five" from about twentyfive to about fifty members, is elected by the stockholders of the bank and
for the large banks the custom is to have it meet, as a committee of the
whole, about once a week.

It is also divided into permanent or rotating

committees which deal with various phases of the bank's business, and these
meet more frequently.

For example, the finance committee passes on loans,

investments, and other fiscal matters. The premises committee has to do
with the buildings and real estate of the bank and the location of branches,
and other groups have their special interests.
Barclays Bank has effected the largest degree of decentralized
control.

Instead of the one head office to which all branches must turn,

Barclays has forty local head offices whose directors have wide powers of
discretion. This form of organization was inaugurated with the formation
of the bank in I896 and has been successfully maintained ever since.
In the hierarchy of officials each has specific duties and powers,
increasing in scope as the scale is mounted. 'Both titles and forms of organizations vary from bank to bank but there is some similarity between the institutions and they may be described in a general way.




For example in the

- 26 -

matter of the granting of loans, there is usually a pyramiding of responsibility.

Each "branch manager is limited as to the maximum loan he may make

without referring the matter to his superintendent, who also has limits which
he may not exceed.

Officials at the head office including the general mana-

gers have their limits, loans of the largest size having to " e approved " y
b
b
the board of directors, as a rule. The exact size of loan which each grade
of official may approve is not published by the banks, but it is known that
the maximum figure on loans which may be approved by the local manager varies
from bank to bank and from branch to branch within the bank, depending upon
the size of the branch and the business characteristics of the area served.
Generally, major officials of a bank are responsible for the open
market loans and investments, determine funds to be held in cash or with
the Bank of England, and keep the various classes of assets in proper proportion to each other. The lending activities of branch managers are restricted in general to loans and advances to their own customers. Some
•branches obviously have more deposits than acceptable applications for loans
while other branches may have local loans exceeding deposits. The position
of the branches in this respect may vary from season to season, but the
widespread branch systems serving a variety of localities and businesses
are an effective instrument for affording fluidity to banking funds. Unfortunately no statistics exist as to the deposit-loan position at different
seasons of the year of branches with a variety of interests.

In calculating

the profits results of branches, those which supply a surplus of funds which
are utilized elsewhere receive an interest credit at the head office while
those lending in excess of their deposits are charged at a stipulated rate
by the head office. The details with respect to these accounting arrange-




- 27 -

merits have not "been found in published sources.
Despite the size of the companies, officials at the head office
are kept in constant touch with the detailed workings of the entire organization through an elaborate system of bookkeeping and reporting, including
the general credit standing of borrowers.

In most cases, the condition of

the branches is reported daily, and it is subject to periodical audit from
the head office. The law requires joint stock banks to make public twite
a year a statement of condition, but these statements are of a much more
condensed nature than those familiar in .American practice.
The usual form is for the accounting system and procedure to be
under the control of a chief accountant, an important official of the head
office.

An officer is responsible for the auditing procedures and upon the

adequacy of his periodical check up of the branches rests in large measure
the soundness and safety of the whole organization.

Functions of Joint Stock Banks
The services of the joint stock branch banking system to the
English public fall chiefly in the sphere of commercial banking, as these
banks are much less the department store of finance known in other countries.
Their detachment from the long time capital market and from the business of
dealing in securities is noteworthy and will be elaborated in the section
dealing with the availability of credit.
The banks receive subscriptions for stock issues, but do not
"regard themselves except in very rare cases as fathering the issue or in
any way responsible for it beyond seeing that the prospectus complies
generally with law and that the issue is on the face of it responsible. "(1)

(1) Great Britain, Committee on Finance and Industry
H. P. Macmillan, K. C., chairman, p. Ib7-




(1931), Rt. Hon.

- 28 -

Securities affiliates of commercial banks, such as are prevalent in this
country, do not exist in England.
It has been shown in a previous section that the rise of the
branch system has increased the number of offices compared to the total
population, suggesting that accessibility of banking services to the banking public has been increased with the progress of concentration.

As is

true in other countries, competition has caused banks in England to engage in a variety of miscellaneous services in behalf of depositors, including investment advice, purchase of investments, making of foreign exchange, custody of securities, clipping and collecting of coupons, advice
in connection with income tax returns and in connection with the drawing
of wills, paying monthly bills, and a variety of like matters.
During the present century

the joint stock banks have extended

their interests in foreign fields, becoming more active competitors of the
group of banks with London offices interested primarily in the financing
of the trade of overseas areas.

Since the war this expansion was intended

to replace other accommodations in this field which became less important
during the war. On the other hand, it was a reflection of the urge to expand in other fields when the growth in domestic fields through amalgamations was curtailed.

Some of the banks have increased their facilities by

opening branches abroad, but all of them have extended their foreign business.

In some instances special corporations have been organized by one or

more of the joint stock banks to operate in foreign fields. A list of these
new concerns is to be found on page




of the appendix.

- 29 -

The Midland Bank in contrast with some of the other hanks has
refrained from placing branches abroad and emphasizes the facilities
which it offers through its correspondents in foreign countries, hat it
has today a large "business in accepting sterling hills arising out of
foreign trade.




CHAPTER III
SAFETY OF JOIMT STOCK BRANCH BANKING

Failures among English joint stock "banks have been comparatively
few, and losses to depositors only a fraction of those suffered by depositors
in the United States. No official data on bank failures are compiled and
even the current English periodicals which have banking statistics give very
limited material of this kind. It appears from the best evidence available,
however, that only 8 joint stock banks in England have failed since 1900, and
6 of these were very small institutions.
Table 8 - Failures of Joint Stock Banks in England since 190o(!)
Year of
f ai lure
1901
1903
1905
1910

19lU
1920
1925

Number of
branches

Name of bank
Cheque Bank, L t d .
C a r l t o n Bank, L t d .
John Brown & Co.
Economic Bank, L t d .
London T r a d i n g Bank, L t d .
C i v i l S e r v i c e Bank, L t d .
F a r r o w ' s Bank, L t d .
Western Bank, L t d . W

1
0
0
0
0
0

7^
3

Paid-up
capital

Deposits(2)

£ 58.000
17,000 1

(3)

50,000
42,000

(3)

361,000
200,000

(3)

{ 5,000

v

86,000
73.000

(3)

4,137,000
81,000

(1) Based on Hearings before a Subcommittee of the Committee on
Banking and Currency, United States Senate, 69th Congress on
S. 1782 and E.R. 2, pp. 119, 120. Brought up to date with the
Bankers' Almanac and Year Book. 1929-1930. All banks other
than English commercial joint stock companies have been eliminated from the list. The statistics given are usually for
dates prior to failure, sometimes several months or a year
prior to failure.
(2) Due to the violent fluctuations in exchange rates in post-war
years, pounds are not converted to dollars in this study when
a series covering a period of years is used.
(3) Not available.
(4) May not have been a commercial joint stock bank.




- 30 -

-31-

Only two failures, as noted in the above table, occurred from 1915
to 1931 inclusive, in spite of all the war and post-war financial disturbances.

These were Farrow's Bank and the Western Bank.

The deposit liabil-

ities of the latter were very small and there is some doubt as to the nature
of its business. Assuming, however, that it should be included among the
commercial banks, the total deposits of failed banks have aggregated only a
little over 1^,200,000 during the past seventeen years. During this period
average annual deposits in the active joint stock banks amounted to about
41,7^0,000,000, so that the ratio of deposits of failed banks to the average
deposits of active banks in the seventeen years was less than one-fourth of
one per cent, which contrasts with about 13 per cent for national and State
banks in the United States. On the other hand, it is probable that some
banks on the verge of suspension have been saved either through merger or
through financial assistance. Unfortunately, it is not known how many of
the seventy joint stock banks absorbed by others since 1900 were in difficulties.
The emergence of larger and larger banks and the extension of networks of branches have been accompanied through the decades by a decrease in
the number of bank failures. A century ago failures were very comnon. From
1793 ^

1818 about 1,000 failures of all types of banks in the British Isles

were recorded,(1)

or an average of about U5 a year.

It will be recalled

that in the early part of the nineteenth century banking was carried on by a
large number of small concerns, but by 1872 the number of banks was less and
the average size larger.

It is estimated that 2k failures occurred in the

(1) H. T. Easton, History and Principles of Banks and Banking, p. $k.




- 32 -

following thirteen years,'1) an average of only 2 failures a year. In the
thirty years of this century there have been no more than 18 bank failures
in all of the British Isles, or less on an average than a tank a year* The
table of hank failures given earlier in the chapter includes only those 8
which can be considered English joint stock banks, the remaining 10 being
either Scotch, private, or non-commercial institutions.

Causes of Failures
Daring the formative period of modern English banking, the nineteenth century, important causes of bank failures have been cited, such as
limitation of capital investment through restriction of number of partners,
unsound methods of banking, particularly the combination of trading and banking, the temptation to overissue, and the practice of rediscounting, B.ecent
failures have usually been associated with internal irregularities, the importance of dishonesty or mismanagement being indicated by the following
short description of the causes for several of the more recent failures.
The Cheque Bank, a small English joint stock concern which closed
in 1901, had specialized in the issuance of small checks for remittance purposes.

It suffered from the competition of the extended facilities of the

post office and as its checks were easily imitated, continental forgers
victimized the bank. The Economic Bank, Ltd., failed in 1905 as a result
of the manipulation of its capital stock by its management, which had devised a scheme to buy up its own shares. The London Trading Bank, though
conducted on a sound basis, was drained of its resources by the failure in
1910 of the Charing Cross Bank, a private bank run on highly speculative
lines.
U ) Ibid., P. llU.




-33-

Farrow's Bank, Ltd,» which suspended payment in 1920, was the
largest English joint stock bank to fail during this century. At the time,
opinion was expressed that the collapse was due to commitments in highly
speculative ventures. The Statist said that "The charge of bad management
and losses in trading, extending over a number of years, made officially,
sufficiently account for the fact that the Bank was not helped over the
crisis."C1)
Subsequent to the joint stock bank failures of recent years, the
press has agitated for some form of governmental supervision for banking
houses, depending more or less on the size of the institution involved. As
the failures have been few and for the most part inconsequential in size,
the demands have not been maintained either long or forcibly and banks are
still subject to practically no public regulation beyond the matter of further
amalgamat ions.

Factors Belating to Safety
Size of Banks. - The high degree of safety attained has been attributed to the strength inherent in the large size of most banks, both in assets
and number of branches, A chairman of one of the large English banks said:
(2)
"It would have been impossible for England to have weathered
the financial storms of 191*+ without branch banking. It was only
the concentration of resources made possible by branch banking
that enabled England to go through this critical period without
a financial collapse. "

U ) December 25, 1920, p. 1237.

(2)
Luther A. Harr, Branch Banking in England,
June-July, 1928.




Corn Exchange B u l l e t i n ,

-3U-

In an editorial in the Bankers1 Insurance Managers.' and Agents'
Magazine in 1901/ ' the following arguments were set forth:
"The great reduction in the number of banks has doubtless
in many ways been attended with very considerable advantages to
the districts in which it has occurred. The substitution of a
strong bank for a weak one is in itself no unimportant change.
The branch of a strong bank has all the vigour of the strong
bank at its back, and it is probable also that there will be
less likelihood of dangerous advances being made, or of weak
businesses, which should long ago have been wound up, being
supported at an undue risk. The individual banker in a small
town may find it difficult to refuse to make advances which
his better judgment would lead him to decline. The branch
manager, on the other hand, must put the case before his 'board,1
which will go into the matter dispassionately and from the point
of view of business suitability alone. Hence, bad local business is less likely to be undertaken by a large bank with a good
system of management than by a separate individual concern. When
large joint stock banks have failed in this country of late years,
the catastrophe has almost always arisen from some very powerful
customer having gained a mastery over the governing body, or from
absolute fraud.
"We need not bring forward instances. The exercise of due
care, a good system of supervision honestly worked, and a proper
attention to the consideration of the security proposed for each
advance, will be great safeguards against perils of this sort.
And the bringing together the banking business generally into
a few powerful institutions ought to assist in the safety of
the whole number. Such questions as the maintenance of an adequate specie reserve are more likely to be decided on correct
principles by a few men fully aware of the great risks involved,
when the reserve is not adequate, than by a largernumber to some
of whom the responsibility of their position has not appealed
as serious as it really is. In all these points there should be
great advantages from the change."
The principal advantage of the large bank is that it enables the
scattering and balancing of risks. The large organization, comprehending
city and country banking and serving a variety of industries, can hope to
have misfortunes encountered at one point balanced by better results at
others.

It is also assumed that the large bank is able to provide a higher

(1) July, 1901, pp. 1-5.




-35-

grade of management than the small "bank. Most of the officers of each "bank
have spent their entire careers in the service of the "bank and have thoroughly
absorbed its special traditions and methods.
The large "branch organizations have protected depositors from
losses in still another respect. Under a unit hanking system an -unsuccessful
"bank is in many cases forced to close its doors, usually with losses to both
depositors and stockholders, but with the branch banking form of organization,
an office unable to support itself can be discontinued with no loss to depositors and without demoralizing the economic roiamunity. Any losses which
may have been incurred can be absorbed by the bank because of its size and
the diversification of its assets, and the losses due to forced liquidation
are eliminated.

Some indication that banking losses in England have been

mitigated in this fashion is brought out by the large number of offices
closed as contrasted with the small number of actual bank failures, cited
above. The Bankers1 Almanac and Year Book indicates that 3>993 offices were
closed in England between 1876 and 191^» as compared with 8,9^2 which were
opened during the same period. The number closed was almost half as large
as the number opened.

In 1915» 15^- new branches appeared, while 53 were

closed/ 1 ) but during 1916, when the war made the banking situation very difficult, more offices were closed than were opened. (2) This indicates that
adjustments to changing economic conditions and expansions into new fields
have been made in England as in other countries, but the results have not
been disastrous to

depositors* due to the balancing of profit and loss

within the systems and the avoidance of forced liquidation.
With banking institutions reduced to a few of very large size,
public policy no doubt feels the necessity of taking a more active interest
(!) 1917. PP. 26, 27.
(2) 191s, p . 25-




-

3

6-

in the safety and solvency of any particular one when the occasion arises.
A hint of this possibility is to he found in a discussion concerning the
Farrow's Bank failure in 1920. (1)
" . . . Immediately upon the announcement of the suspension, the
Board of Trade issued a "brief announcement stating that 'Prom
information available to the Board, it is clear that the closing
of the hank is due to losses in trading and errors of management
extending over a series of years, and is not due to any causes
of a general nature arising out of the circumstances of the present time,1 The same evening the Chancellor of the Exchequer repeated this statement in the House of Commons, and added that
while the probability of suspension had been known to the Government for some little time, he had satisfied himself that the
Government could not usefully or prudently j^ake any steps to
support the bank."
A point of view often expressed by British observers of their banking system
holds that the lax-ge banks are practically national institutions and that the
Government could not allow one to fail without first exercising every resource
of Government credit and of the rest of the banking system to save it.
Auditing. - The rigorous systems of audit used among the joint
stock banks also contribute to their safety and solvency.

There is in the

first place the internal auditing and inspection by especially organized departments whose representatives periodically check up on all branches and
activities. Part of the inspection system includes the making of a variety
of reports at stated intervals by the branches to the head office.
Corporation procedure in England for a long period of time has
placed much reliance in audits on behalf of shareholders by accounting firms.
As a result there has developed a group of reputable and experienced accountants, whose audit and certification of the state of the companies' affairs
carries a high degree of moral responsibility as well as the reputation for
a conservative presentation of the facts. The customary employment of these

(1) Bankers' Magazine, January, 1921, p. 38. Italics added.




- 37 large accounting firms by the shareholders of hanks is an assurance to the
depositor. Joint stock companies must under the law he audited once a year
in this fashion and a former chairman of one of the "Big Five1' has said: (1)
"No self-respecting bank could possibly face anything less
than an absolutely clean certificate from its auditors; they have
to lay down the conditions under which they are prepared to give
it. In short, the names of the auditors are the ultimate guarantee to the public that a bank is being conducted on sound
line s."
Besponsibility of Directors. - In the banking tradition and standards which have developed in England, the responsibility of directors has been
emphasized and the interest which those accepting bank directorships have
taken in their institutions has no doubt had its influence upon the solvency
record of English banks. The Companies Act of 1908 held that the directors
are liable for loss due to wilful neglect or default or actual dishonesty:(2)
". . .if they (tne directors) appear to the court not to have
acted as men with any ordinary degree of prudence would have
acted on their own behalf, they have been guilty of such negligence and misconduct as to make them liable to the company."
In 1929 this was made still stronger. (3)
"Subject as hereinafter provided,W any provision, whether
contained in the articles of a company or in any contract with
a company or otherwise, for exempting any director, manager or
officer of the company, or any person (whether an officer of the
company or not) employed by the company as auditor from, or indemnifying him against, any liability which by virtue of any
rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he
may be guilty in relation to the company shall be void."
In 1903 a court said :(5)

(1) Walter Leaf, Banking, pp. 233, Z}k.
(2) First Earl of Halsbury, Laws of England, Vol. 5, P- 232.
(3) The Companies Act of 1929, Sir R. M. I. Chitty, The Complete Statutes of
England, Classified and Annotated in Continuation of Halsbury's Laws of
England . . ., Vol. 2, pp. 873, s 7 ^
(U) In certain cases, not pertinent here, relief may be applied for—author.
(5) Economist (London) November 21, 1903, p. 197U.




-38-

". » . Since the trial of the action, the 'Eight Hon.' Lord de
Morleyi as he is described in the literature of the 'bank',
has written stating that, although managing director of the
advisory hoard, 'I do not give instructions, nor am I responsible for the hank's management, that duty being placed entirely
in the hands of the general manager, who is appointed or dismissed by the shareholders only, and to them responsible.'
The managing director of this concern cannot, however, divest
himself of his responsibility so easily. He has lent his name
to the institution with the full knowledge of what that entails,
and it is useless for a person placed in his position to try to
evade the consequences of his action."
Nature of Assets. - The safety of banks rests in the last analysis
on the soundness of their assets and the suitability of these assets from the
viewpoint of the banks' liabilities. Eor this roason, some analysis of the
balance sheets of the joint stock banks at various dates seems desirable.
The liabilities of the banks consist chiefly of deposits, mostly payable on
demand or notice of a few days only. The commercial banking philosophy of
England holds that in order to meet such liabilities, bank assets must possess a high degree of liquidity, and should not be subject to broad fluctuations in value. Short-term paper is favored to achieve this end.
Under the law, the joint stock banks mast publish statements of
condition twice a year, but not much detail is required. As a matter of
practice these reports are usually made as of about the end and the middle
of the year. The Economist (London) has for years been publisaing consolidations of these balance sheets and as of the end of 1930 gives the figures
for the l6 joint stock banks as follows:




- 39 -

Table 9 - Assets and l i a b i l i t i e s of English J o i n t Stock Banks
December 3 1 , 1930U)
( i n millions)
Assets
Cash in ioand and at the Bank of England
Cash at call and short notice
British Government securities (where
separately stated)
Bonds, stocks, and other investments
Bills discounted (where separately stated)
Advances and loans
Buildings and sundries including cover for
acceptances
Total

$ 1,585
7l4
1,3^1
261
i,54o
4,694
842
'.10,977

Liabilities
Capital paid up
Reserve funds
Undivided p r o f i t s
Notes in c i r c u l a t i o n
Acceptances and endorsements
Deposit and current accounts
Other l i a b i l i t i e s
Total

389
313
30
1
623
9,620
l
$10,977

' Economist (London) Banking Number, May 9, 1931*
The English j o i n t stock banks have no l e g a l reserve requirements,
but at the end of 1930 they had about $2,300,000,000 or 21 per cent of t h e i r
funds e a s i l y a v a i l a b l e .

In the neighborhood of one-half t h i s sum was in

cash and in deposits with the Bank of England and other banks, while the r e maining was in money at c a l l and short n o t i c e .

There was some $1,600,000,000

or 15 per cent in investments, said to be mainly short term; $1,500,000,000
or l4 per cent in Treasury and commercial "bills discounted; and the remaining
$5,600,000,000 or 50 per cent was composed largely of advances and loans to
customers.

Although the bulk of the l a t t e r were granted o r i g i n a l l y as short-

term c r e d i t s , quite a number of non-liquid items are believed to be included




- 10+

in them at the present time owing to the difficult position of British industry.
The balance sheet figures given above are as of a certain lay, but
it has been the general belief for a long time that most of the English banks
have indulged in "window-dressing" on balance sheet days.(l) The Macmillan
Committee on Finance and Industry referred to this as follows: (2)
". . . It is evident, therefore, that the clearing banks do not
maintain from day to day so high a proportion of cash as is
shown by the monthly statements, and although we have not available all the data required to make an exach calculation, it
seems probable that the balance maintained by those banks (excluding the half yearly periods) is appreciably below i60 millions or less than 3 - Pei* cent, of deposits. It is probable
g
therefore that the total cash reserve kept (apart from balances
l
with other banks and items in transit), is over all about 9 l
per cent., against the published figure of nearly 11 per cent."
Against this tendency of published balance sheets to overestimate
highly liquid items is a known disposition to hide completely a large body
of assets. Some of these undisclosed assets relate to bank premises which
have been written down on published balance sheets below their true worth
although some English bankers have stated that their total commitments in
office real estate were higher than desirable. Conservatism causes the banks
to write off loans or investments which, though partially in doubt, may be
recovered in whole or in part.
On the liability side of the balance sheet the joint stock banks
have $13 of deposits for every $1 of book invested capital. Eighty-seven
per cent of liabilities represents deposits, while about 6 per cent consists
of contingent liabilities arising; out of acceptances and endorsements.
Although the small proportion of less than 7 per cent shown for

(1) The Committee on Finance and Industry recommended that this practice
be given up at once and it is believed that since then many banks have
acted on this recommendation.
(2) Op.. cit.,Beport, p. 36.




- 41 p r o p r i e t o r s ' l i a b i l i t y includes c a p i t a l paid up, "book reserves, and undivided
p r o f i t s , i t does not account for hidden reserves spoken of above nor indicate
the extent of the subscribed, but not paid-up, c a p i t a l for which the shareholders are responsible.

The unpaid stock l i a b i l i t y bears some analogy to the

"double l i a b i l i t y " provision familiar in American banking s t a t u t e s .

Among the

j o i n t stock banks two-thirds of the subscribed c a p i t a l i s at present unpaid
and p a r t i s subject to c a l l at any time and the remainder callable in case of
l i q u i d a t i o n . (1)
Policy Regarding Liquidity. - The d i s t r i b u t i o n of both a s s e t s and
l i a b i l i t i e s has shown l i t t l e change over a long period of years, as indicated
in Table 10.
Table 10 - Distribution of Assets and L i a b i l i t i e s ' 2 )
of English Joint Stock Banks
1900-1930
1900

1905

1910

1915

1920

1925

1930

In millions of £'s

Total a s s e t s

699

759

862

1,147

2,200 2,074 2,256

In per cent of total assets
Assets
Cash in hand and money at
call and short notice
Investments
Discounts and advances
Buildings and sundries
Total

54.3
6.7

22.9
27.0
^3.9
6.2

20.4
16.7
57.^
5.5

21.3
15.3
56.3
7.1

20.9
l4.b
56.8

100.0

100.0

100.0

100.0

100.0

100.0

3.0
lei

10.8
82.6
5.*2
L.U

9.4
S3.6
6.0
1.0

7.1
86.4
5.5
1.0

5.8

s4.o

1:?
0.5

6.5
87.1
6.0
0.4

6.4
87.6
5.7
0.3

100.0

100.0

100,0

100.0

100.0

100.0

100.0

77

59

20.7
12,3
56.6
4.4

23.6
17.3
52.9
6,2

23.0

100.0

11.3

lb.O

7.7

Liabilities
Capital and reserves
Deposits

Acceptances
A l l other l i a b i l i t i e s
Total
Number of banks

*5

37

20

18

16

(2) Economist (London), Banking Number, May 9» 1931*

(1) Barclays Bank Ltd. is the only one of the "Big Five" having no uncalled
capital.




- U2 Por some years in the early part of this century an increasing proportion of
resources was represented " y money at call and short notice, but by 19171 the
b
peak of this tendency was reached and the present status is about tlw same
as thirty years ago. The increase and decrease in the cash and money at call
were compensated by opposite changes in discounts and advances. The increasing ratio of cash cut into the discounts and advances until 1917 when the release of funds from the cash account found its way into advances and discounts.
Investments which were of much greater relative importance during the war than
before or since, represent today a lower propor^on of resources than thirty
years ago, while in the same time buildings and sandries have come to occupy
almost twice as important a position on the balance sheet.
For several decades

capital funds did not keep pace with the grow-

ing resources of the banks, and by 1920 capital and reserves were only half
as important as they had been in 1900, having shrunk from 11.3 per cent to 5.8
per cent of total liabilities. This failure of capital to keep pace with the
growth of resources resulted in part at least from a conscious policy, many
companies having reduced book capitalization in order to show a higher rate
of earnings. A feeling of dissatisfaction with these developments was entertained in some quarters and the Treasury Committee expressed itself in 1918
quite frankly as follows: (1)
"The proportion of capital to deposits is now so small in
the case of English joint stock banks, even excluding the temporary war increase in the amount of deposits, that any further
shrinkage of bank capital is clearly undesirable, in the interest
of depositors, if it can be avoided. Attention has been drawn
to the fact that amalgamation schemes usually mean a reduction
in the total paid-up capital and uncalled liability of the two
pre-amalgamation units. This has frequently been the case in the
past, and it has also been a feature of recent amalgamations and
proposed amalgamations. The amalgamation of the National Prot 1 ) Heport of the Treasury Committee on Bank Amalgamations, 1918, in T. E.
Gregory's Select Statutes, Documents and Reports Relating . o British
t
Banking, 1832-1928, Vol. II, p. 329.




- U3-

vincial Bank of England, Ltd., with the Union of London and
Smith's Bank, Ltd., resulted in a reduction of over £1,000,000,
or 16 per cent,, in the total paid-up capital, and of over
49*000,000, or over US per cent., in the uncalled liability
of the Union shareholders. The amalgamation of Parr's Bank,
Ltd., with the London County and Westminster Bank, Ltd.,
while it resulted in an addition of 42^3,000, to the total
paid-up capital, "brought about a reduction of nearly
£1,770,000, or 17 per cent., in the uncalled liability of Parr's
shareholders. The proposed amalgamation of the London City and
Midland Bank, Ltd., with the London Joint Stock Bank, Ltd.,
would effect a reduction of nearly 41,000,000 in the total paidup capital, and of over £9.000,000, or over 50 per cent., in the
uncalled liability of the Joint Stock Bank shareholders. In each
of these three cases, therefore, substantial benefits to shareholders are purchased at the expense of soma of the security of
the depositors. But the reduction of capital (as opposed to the
reduction of uncalled liability) resulting in two of the cases
appears to be only nominal, the sum written off, or some sum
approximating to it, being added to the inner reserves, at any
rate at present."
The prevalence of opinions of this sort has no doubt had its effect
for the ratio of capital and reserves to total resources increased somewhat after this report and in the last few years has held constant around or
just under 6| per cent.
During the past decade a larger proportion of all deposits has become subject to periods of notice before withdrawal rather than being demand
deposits. A classification of deposits along this line for the ten London
clearing banks since 1919 is given in the report of the Committee on Pinance
and Industry. (I) In December of that year 66.9 per cent of the deposits were
repayable on demand and since then the proportion has fallen rapidly, being
58.7 per cent in December, 1925, and 53*9 per cent by the end of 1930*

The

Midland Bank states that:^2'
"The significance of these figures becomes apparent when we
remember that demand deposits are essentially money in active use
in business of all kinds, while time deposits have more of the

(1) pjo. c i t . , pp. 28k, 287, and 289.
^ 2 ) Speech of the Eight Hon. E. McKenna, chairman, Ordinary General Meeting,
Midland Bank Limited, January 22, 1§29, P. 6.




- ii4-

character of money awaiting investment and money for which no
no trading use can he found at the moment..."
A large part of time deposits are withdrawahle under the terms of the contract upon such short notice as 7 to lk days, hut hanking practice permits
the withdrawal of time deposits generally without the required notification
on forfeiture of part of the interest..
The London clearing hanks publish monthly statements in more detail
than those published

semiannually by all of the joint stock hanks, which

have been the basis of the discussion in the preceding paragraphs. Moreover,
the Committee on Finance and Industry procured from these clearing banks still
more detailed information with respect to the assets held by them over a
period of years as well as a split up of deposits between demand and time referred to in the preceding paragraph.,. These figures form a better basis for
gauging the degree to which deposit liabilities are covered by the more
liquid styles of assets. The London clearing house has 10 members,^) 9
of which are numbered among the joint stock banks doing a general domestic
business, and these 9 have 95 per cent of the business of all the l6 joint
stock banks of England and Wales. What is typical of the clearing banks,
therefore, is typical of joint stock banks in general. The following tabulation gives monthly averages for the years 1926 through 193O of certain
assets expressed as dollars per $100 of total deposits.

t 1 ) Barclays; Coutts & Co.; G-lyn, Mills & Co.; Lloyds; Martins; Midland;
National; National Provincial; Westminster; Williams Deacon's.




- 1+5-

Table 11 - Distribution of Assets of London Clearing Banks
per $100 of Deposits,U) 1926-1930
1926
1.
2.
3.
4.
5.
6.
7.
S.

Cash in hand
Balance at Bank of England
Money at c a l l
Money a t short notice to
money market
Money a t short notice to
stock exchange
Treasury h i l l s discounted
Commercial h i l l s d i s counted
Investments
Total

1927

1928

1929

19>SL

$ 6 . 4 l $ 6.33 $ 6.11 $ 6.00 $ 5,95
4.89
4.85
5.14
4.77
5.35
1.52
1.66
1.66
1.90
1.55
3.92

4.55

4.55

H.37

4.60

2.00
6.27

2.38
6.79

2.81
6.30

2.50
5.66

1.64
7.39

6.70
17.68

5.93
16.44

6.92
16.11

7.07
15.82

7.30
16.17

$49.88

$49.08

$49.35

$47.85

$49.80

(1) Based on Report, Committee on Finance and Industry, pp. 2S7-289*
Important asset items which do not appear in the above tabulation
include balances with other banks in the United Kingdom, checks in course of
collection, bank buildings

and real estate, and the very important item of

advances or customers' loans. The items given in the tabulation, however,
are the assets usually regarded by the banks as most easily convertible for
the purpose of meeting deposit demands on the part of the public. The aggregates show that during the past few years the clearing banks have averaged
per $100 of deposits $50 in assets which do not rely on the customer relationship. All of these assets with the exception of investments are of the shortterm variety and it is said that a large part of the investment account is
also of this class. In addition to the cash and call items, the money market
loans, the discounted bills and the investments are highly regarded by any
one bank as a support to its liquid position on the theory that these assets
can be shifted in the open market in contrast to customer loans and advances
which are not so shiftable. Jxom 1926 to 1930 there has been a tendency for




- US -

the proportion of cash in hand and balance at the Bank of England to decline
from year to year. They were about $11.75 per $100 of deposits in 1926 as
against $10.80 five years later. Advances to customers in the five /ears
have ranged from $53 to $55 per $100 of depositse
It is said that English bankers aim to keep their various types
of assets in certain proportionate relationships, one to the other, in accordance with their views of liquidity developed and maintained over a long
period of years. The relative stability of the averages of various items
over five years, as given in the foregoing tablo- is consistent with that
principle.




CHAPTER IV

THE AVAILABILITY OP CREDIT

It is not easy to measure statistically the effectiveness with
which commercial "banks perform their function of financing goods and services on the way to the consumer or to the point at which they "become a part
of fixed capital. Whether such banks extend too little credit or too much
is largely a matter of opinion, colored " y the personal interests of him who
b
ventures it.

General Supply of Credit
Most of the discussions with respect to the adequacy of the joint
stock "branch "banking system of England have centered around the question of
the availability of credit, and arise from two charges sometimes made; first,
that the large "branch systems have concentrated their loans in the large centers at the expense of the small urban and rural communities; and second, that
the banks have been unduly niggardly in the extension of credit to industry
and have maintained the position of short-term creditors rather than participants in industry, as in Germany.

The merits of the opposing contentions are

especially hard to determine because of England's difficult economic situation.
When so many factors are involved, as in the case of a stagnant industrial
situation, it is difficult to say how much of the condition, if any, is due to
the method and degree of credit extension by the banks. An analysis is further
hampered by the fact that little or no evidence can be adduced other than personal impressions.




- l*g -

The weight of opinion appears to hold that the joint stock "banks
of England supply an adequate volume of short-term credit and that " y and
b
large all classes of "borrowers entailing no more than a reasonable risk are
accommodated.

Concentration of hanking resources in the hands of a few con-

cerns makes for the fluidity of hanking funds, and this does not appear to
have prejudiced the position of outlying communities nor of the small "borrower who is a legitimate credit risk.

The "banks have held that their func-

tion is that of furnishing short-term credit; that they cannot afford to
lock up their depositors' money in the financing of fixed capital. Responsible authority appears to think the position of the banks in this respect is
well taken, and leans to the view that more harm has been done on the side
of leniency of credit extension, by way of keeping weak concerns in existence,
than would have been the case had they been forced to liquidate promptly. Although the weight of opinion with respect to these matters may lean one way,
the contrary view has its exponents as many of the citations to follow will
show.
The findings of the Committee on Industry and Trade with respect
to this question are of outstanding importance.

This was a committee of busi-

ness men under the chairmanship of Sir Arthur Balfour, provided for by Parliament to make an extensive study and report. After holding hearings for over
three years the committee published its findings in 1929. In connection with
the sufficiency of the supply of bank credit in general the report said:^'
"The weight of the evidence of representative
traders and trade associations was to the effect that

HnaL Heport. pp. 47, 48.




- 49-

there is no lack of loan capital available for the use
of British industry, at moderate rates of interest, provided that reasonable security is forthcoming. Generally
speaking, and with certain exceptions noted below, the
testimony of the traders was that the facilities provided
by the batiks to industry are satisfactory, and many witnesses expressed the view that industry is better served
by the great amalgamated banks than was the case before
the amalgamations took place.

"We find, therefore, that on the whole, and subject
to certain exceptions noted below, the existing machinery
for supplying British industry with financial facilities
to meet its legitimate needs is adequate and suitable."
Another governmental commission of investigation, the Macmillan
Committee on Finance and Industry, reporting in 1931 corroborated the position of the Balfour Committee on the general credit supply by saying:(1)
"Every industrial and commercial company has a
double financial problem, namely, to provide itself
with adequate permanent capital and to obtain, as occasion warrants, temporary or seasonal credits, either
of a self-liquidating character or to be repaid ultimately out of the issue of more permanent capital. It
may also have—and perhaps in increasing measure—a
third problem, namely, to provide itself with what are
known as intermediate credits. Short-dated credits are
endless in the variety of their conditions, and to provide them is the principal function of the banks. As
such advances form the most lucrative part of their assets the banks indeed are very willing to do so, so
long as their total lies within their customary percentages and within the limits set by general credit policy.
In this direction British industry certainly suffers under no handicap in comparison with its competitors. The
great English banks, undoubtedly among the strongest financial institutions in the world, use and have used
their resources freely, sometimes too freely, in the provision of advances to industry. In general we are satisfied that, subject to the conditions imposed by the necessity of accommodating ourselves to the outside world, our
banking system is adequate and satisfactory in the provision of the normal short credits to industry and their
distribution."

^ ' Heport. p. 169.




- 50 -

Credit to Small Borrowers
The Balfour Committee also dealt particularly with the question
of the service of the large banks to the small "borrower, a problem generally associated with the process of the concentration of banking resources
in the hands of a few organizations:'^'
"....the opinion was expressed by some witnesses that bank
amalgamation has led to the standardising of the rules governing bank advances and has been unfavourable to local elasticity.

"The last of the specific complaints made to us as to the
results of bank amalgamations is that the rules governing the
making of advances have been standardised, that the local bank
manager has no longer the same discretion as in the past to lend
upon personal knowledge of character and local conditions, and
that the decision of questions of advances is more and more
centralised in London.
"It should be said at once that this complaint was by no
means generally made by the trade witnesses who appeared before
us. On the contrary, the general trend of the evidence was that
on the whole industry is better served by the banks than before
the amalgamations, provided of course that reasonable security
is available. No doubt the real trouble is that the greater
part of the period which has elapsed since the amalgamations has
been marked by a prolonged depression of trade, and a consequent
heavy fall in the average rate of profit on industrial undertakings, which circumstances have greatly impaired the power of
certain industries either to obtain more capital from the public
or to offer attractive security for bank advances. That a distressed industry to-day cannot obtain as good financial facilities as the same industry in the former days of its prosperity
is no reflection on the effects of bank amalgamations. On the
contrary, the evidence before us gives a good deal of support to
the view that, without amalgamation, the power of the banks to
give support to industry would have been considerably less than
at present, especially in view of the increased size of the
average business unit.

Final Report, p. 47.




- 51 -

"It would be a natural effect of enlarging the unit
of banking "business that the general principles on which
advances are made should "become more carefully co-ordinated
and more uniformly applied. Such a change is " y no means
b
generally to the disadvantage of sound "business, for the
attractive phrase 'local elasticity' sometimes in the past
covered undesirable preferences and personal discriminations.
According to our information, however, it is not the case that
local managers have "been deprived of discretion to act (of
course within limits) on their own knowledge of local conditions and personal character."
The Balfour Committee thus under the term "local elasticity"
deals with the problem of the contact of the small "borrower with the large
"banks and does not "believe that the process of concentration has "brought
about a net loss in this respect. Sometimes it is stated that the large network of "branches absorbs deposits throughout the country, but makes loans
primarily from the head office to the city borrower, who may be a large one.
Unfortunately, current data showing the distribution of loans either by
branches or size of loans are not available.

The great banks have had occa-

sion to take note of the contentions with respect to discriminations against
the small man as is shown by the following statement in the Statist in 1927
which includes a pertinent quotation from the head of Lloyds Bank:^ '
"As regards the question of the 'small man' there may
be some justification for complaints raised in respect of
the larger branches, but investigation is obviously very
difficult. It may be mentioned, however, that in 1923 the
late Chairman of the Westminster Bank gave figures relating
to the loans of the bark to the farming community which showed
that 28 per cent, of the loans were wholly unsecured, and 13
per cent, only partially secured. This is, of course, an example of lending to 'small men' on the security of personal
character. Again, in the current year, Lloyds' Chairman
offered an analysis of the overdrafts of the bank, showing
that 84 per cent, of the borrowers fell within the categories
of Personal and Professional, agriculture and retail, and

t1) May 14, 1927, p. 857.




- 52 -

had "between them an average overdraft of only £614.
He added 'Although we have been described as huge
capitalistic institutions, it is "the small man" with
whom we are chiefly concerned, and it is "the small
man" who figures most prominently in all aspects of
our business.'
"In general, there is no evidence to show that the
very large hanks, equally with the small hanks, do not
endeavour to extend up to the safety limit in the direction of profitable loans, advances, and discounts, and,
as the figures furnished by Lloyds' Chairman show, to
ignore 'the small man' would be to reject something like
57 per cent, of the total of sound business going in the
form of overdrafts,,"
In the case cf Lloyds Bank, the Stat: s t sai d i d )
"....An analysis of loans and advances given by the chairman at the annual meeting showed that 'professional and
personal loans,' broadly classified, still lead both in number of accounts and in the aggregate amount involved. These
loans showed an increase last year of oyer £2,250,000, whereas loans to 'agriculture,' the next largest category, fell
slightly in consequence of the continued stagnation in that
industry. The same factor accounted for a reduction of about
£1,000,000 under each of the headings, 'engineering,' 'shipping
and shipbuilding,' and 'coal' and for a decline of no less than
£1,750,000 under the heading of 'cotton.' It is indicative of
the attention given by the company to the 'small man,' that in
nearly 85 per ceait. of the total number of overdrafts granted
the average overdraft is only about £600."
The Midland Bank gave the distribution of its advances on June
30, 1928, and indicated that 6- per cent were "professional and private."(2)
|
t 8J0
*Loans and advances were extended" by the Midland Bark " o 1 0 D O borrowers, the
average amount outstanding "being £1,200."(3'

In the following year, Lloyds

Bank found its average overdraft was £1,151.

The chairman of the bank said:

'

Statist, Banking Supplement, May 11, 1929, p. 890.

^ ' Speech of the Eight Hon, E. McKenna, chairman, Ordinary General Meeting,
Midland Bank Limited, January 22, 1929, p. 23.
^

UM-,




P. 26.

- 53 -

"The average overdraft in agriculture amongst all our accounts is £840
only, and in the largest item there, the 'Personal and Professional5 item,
it is only £561."(i) Another joint stock hank, Martins, said that 85 per
cent of its 31,000 loan accounts outstanding were for amounts of less than
$5,000.(2)
The Economist (London), commenting in 1929, said:
(3)
"There is much truth in the complaint that the small
man,living in the provinces, is neglected. A customer who
hanks at Head Office in London has direct access to one of
the joint general managers of the hank, whose powers are
very much wider than those of the manager of the small country tranches, and he is therefore ahle " o conduct his net
gotiations directly with one of the men with whom final
decisions rest. A provincial customer has to submit his application to his own "branch manager, who can do no more than
forward it 'through the usual channels.' Even so, if the
would-be borrower and the branch manager take the trouble to
put the ajjplication into the form required by Head Office,
they will usually find that the bank is just as ready to earn
its living by making small advances to the province as by big
operations in the City of London. It must be borne in mind
that competition between the 'Big Five' banks is a potent
factor safeguarding the small man from undue neglect. Further,
the scrutiny in London of provincial applications for loans
has this advantage, that it makes for more uniform banking
policy and precludes the abuse of local influence in support
of applications for loans not justified on their merits."

Cost of Oredit
The cost of credit to the borrower is, of course, no small element
in the general problem of the availability of credit, for as the Macmillan
Committee expressed it, high interest rates diminish possibilities for profitmaking, which in turn discourages borrowing. Because of the lack of detailed

(1) Minutes of Evidence. Cornmittee on Finance and Industry, p. 128, par. 2157.
(2) Statist. Banking Supplement, May 11, 1929, p. 895.
Economist (London), October 19, 1929, p. 701.




- 54-

earnings statements of the joint stock "banks over a period of years, which
would show the average rate of return on advances, a statistical analysis
of the effect of the rise of large "branch "banking organizations on ohe costs
of commercial credit is lacking.

The Macmillan Committee reports that the

clearing banks charge on loans and overdrafts from \ per cent to 1 per cent
above the Bank of England rate, with an agreed minimum of 4 to 5 per cent,
as a rule, which they maintain to meet expenses. (1) The Balfour Committee
concluded that:
(2)
"....the evidence available shows that the rates of charge
for these facilities compare favourably with those obtaining for similar services in any competing country
"
A more critical point of view in connection with the interest
charges of banks is expressed by Francis W. Hirst, former editor of the
Economist (London), who, writing in 1930 in the Hew York Tribune, avers; (3)
"Banks, by the way, are not philanthropic institutions, and that is a reason why the public, their customers, are, or ought to be, averse to anything like a
banking monopoly. Up to a point, the elimination of
small banks in England and their amalgamation into larger
units was defensible and desirable from the standpoint of
security. A century ago in England, as now in the United
States, a commercial or stock exchange crisis would bring
about a panic, during which numbers of small banks would
close their doors.
"The danger now is that with five great banks and
only a few smaller ones, there may be a gentleman's agreement not to give the public the full benefit of cheap
money. For example, during this year the bank rate has
fallen rapidly and is now only 3 per cent. At the same
time the open market rate for short loans has been until
quite lately only about 2 per cent, and the discount rate
for three months' bills about the same. But the banks

Report, p. 32.
^ ' Final Report. p. 48.
(3) August 12, 1930.
2




- 55 are still charging most of their customers 5 per cent,
for overdrafts, although their charge is supposed to he
only 1 per cent, above hank rate. Big customers, we are
told, can get lower rates; hut why should not ordinary
people, on depositing sufficient security, he ahle to
get accommodation at rates more nearly in accordance with
the official minimum of the Bank of England? If there
were real competition "between the hanks the small trader
and the small customer might have better treatment."
The overdraft system of borrowing in England results in the
nominal rates charged reflecting more nearly the actual cost of accommodation than is the case in this country. Banks of the United States, especially in the large centers, require a borrov/er to leave a portion of his
borrowings on deposit which serves to raise the effective rate charged for
the loan.

In England, a customer enjoying a line of credit often borrows

by overdrawing his account, paying interest only on the amount used.

It is

said that of recent years in London there has been a tendency away from the
overdraft system and in the direction of a loan and compensating balance
system, but this tendency is not so apparent in other parts of the country.
To quote still another Government investigation upon the subject
of the adequacy of the credit supply as well as the level of interest charges,
the Departmental Committee on Jlnancial Facilities for Trade as long ago as
1916 said^ 1 )
"A careful study of the evidence . . . and our own
knowledge of banking arrangements and facilities, lead
us to the conclusion that there exists to a considerable
extent at the present time in this country the machinery
and facilities for the finance alike of home trade and of
large overseas contracts, and for carrying through much of
the business which has been done by foreign banks. The
British banks afford, we believe, liberal accommodation to
the home producer, British bankers are not shy in making
advances on the strength of their customers' known ability
and integrity, and the charges for accommodation are we
August 31, 1916.




-56-

believe often lower than the corresponding charges in
foreign countries. Similarly, the Colonial Banks and
British Foreign Banks and Banking Houses render immense
assistance to British trade abroad, and certainly in the
Far East and in many parts of South America British banking facilities do not fall short of those of any other nation."

Credit to Industry
Much dissatisfaction with the facilities of joint stock banks has
been voiced in recent years by those who would have them grant greater facilities to industry in the form of long-term loans for fixed capital financing.
Those wishing to see banking policy take this course have cited the example
of German banks whose managerial and long-term commitments in industry are
heavy.

Ihe joint stock banks have resisted these suggestions on the grounds

that they are banks of deposit, whose liabilities are payable on demand or
short notice and whose assets should conform to the short-term commitments
generally associated with commercial banking, and the weight of responsible
opinion appears to support the banks in their position.

Tae analysis of the

asset items of the banks given in an earlier chapter brought out the small
proportion of portfolio represented by investment securities and gave some
indication of the ideals of English joint stock banking with respect to shortterm liquid paper.

It is true, nevertheless, that some of the assets of banks

accounted for under the head of "advances" have become frozen because of the
condition of industry and really represent long time commitments.
A current financial column recently expressed the issue with regard
to the relation of banks to industry as follows: (1)
"The chairmen of the 'Big P-ive1 have made their annual
speeches and, with the exception of kr. McKenna, whose position as a member of the present Banking Committee imposed

Banks and Industry in England and Germany_,
March 1, 1930, p. 449.




Economist (London)

- 57 -

silence in this respect, all touched on the "burning question
of the relation of hanks to industry. Their views were remarkably unanimous. They repudiated the suggestion that the
banks had not granted sufficient facilities to industry, and
rightly pointed out that it was not the function of the banks
to find the permanent funds required for capital expenditure.
Mr. Goodenough restated the view so often expressed by bankers
in England that it lies with industry to reorganise itself,
this question being outside the province of the banks, and Mr.
Beaumont Pease also refused to entertain the idea that banks
should dictate the steps to be taken towards reorganisation.
While it is difficult to quarrel with any of these views per se,
the cumulative effect was rather that of a general repudiation
of responsibility, and suggested a disinclination on the part
of bankers even to reconsider their position in this issue,
notwithstanding the widespread feeling that there is a gap in
the British financial system which in some way or other ought
to be bridged."
The Balfour Committee dealt with the problem of long-term advances
and supported the position taken by the banks: (1)
"....Certain complaints were also made of the . . . inadequacy
of the facilities available for financing long-term business,
. . . The last-mentioned complaint is not a reflection on the
joint stock banks, which do not, and in our opinion ought not to,
lock up their depositors' money for long periods of time. It
rather points to a gap in the machinery available for the financing of industry.

"To avoid all possibility of misunderstanding, we desire
to make it perfectly clear that the statement made above to the
effect that the machinery for supplying the financial needs of
industry is on the whole adequate and suitable must not be understood to imply that an adequate supply of new capital is actually
being absorbed by British industry for essential purposes such as
the reconditioning and modernisation of industrial plant, buildings and equipment. On the contrary, it was shown clearly in one
of our volumes
(2)
that there is a great deficiency, probably in
the neighbourhood of £L50 millions, in the annual amount of the
national savings as compared with the period just before the war,
after allowing for the change of price level. In the same volume
it was indicated that (after making the same allowance) the aggregate amount of trading profits has largely declined, and that there
VA/

Final Report, pp. 47 and 50-53.
Factors in Industrial and Commercial Efficiency, p. 55.




-58-

has "been a great increase in the -uncertainty of the results
of "business as shown " y the much wider 'dispersion' of the
b
recorded rates of profit and loss (1). She prospect of profit
is the most important security an industry can offer, "both to
the public as investors in its shares and debentures and to
the hanks. It is clear, therefore, that, particularly in the
case of the great "basic industries of cotton, steel, and coal,
failure in dividend-earning power has made it impossible for
them to get additional capital from the general investing
public, while their capacity to furnish security for advances
which a "bank would consider adequate has "been seriously impaired.
At the same time, the source from which alone new capital can " e
b
created is by no means yielding so plentiful a flow as before
the war. The situation (the causes of which are discussed in
other sections of this Report(2)) can only be expected to improve as and when the general position and prospects of British
industry become more stable and satisfactory. All that can be
said here is that, given existing conditions and prospects, the
current financial requirements of industry from the existing
banking system are for the most part adequately met.
"Nor would any measure of bank nationalisation by itself
alter in any material respect the fundamental conditions which
determine the scope, limits and cost of the financial assistance
that can be given to industry by banks and similar institutions
if, as is usually and rightly stipulated "by-its advocates, such a
measure were administered on a self-supporting basis without imposing a burden on the taxpayer.
"At this point in pur analysis it becomes evident that
the problem of the insufficient capital equipment of industry
merges in the wider problem of industrial recuperation, which
forms the main subject of our reference.
"The attitude of the joint stock banks towards the financing
of industry has been also criticised from a point of view diametrically opposite to that discussed above. It has been suggested that in many cases their support has been not too niggardly
but too lavish, and that injury has been done to the permanent
interests of British industry and trade by the nursing of weak
undertakings by the banks in the vain hope of an early recovery.
These critics urge that it would have been much better to let the
weaker concerns go into liquidation, and to concentrate production
in the hands of the stronger, or at least the more efficiently
equipped and managed, undertakings; and they contend that the
action of the banks, however well intended, has only served to
prolong the agony, and to delay the inevitable day of reckoning,

W Ibid.. pp. 52-54.
(2) See particularly pp. 182-184.




- 59 -

which will " e all the more serious in its economic effects for
b
the postponement.
"It cannot l e doubted that injudicious assistance may
i
do harm by "bolstering up undertakings which had much "better
come to an end. On the other hand, it must never " e forb
gotten that a widespread industrial collapse always has very
disastrous effects on employment, and that great efforts to
avoid it may therefore " e justified if there is any reasonb
able chance of success. It is easy to " e wise after the event,
b
and if it " e the case that the "banks have from time to time
b
especially in the early post-war period, taken too optimistic
a view of the prospects of trade recovery, they have certainly
erred in good company. In judging of the policy or impolicy of
according financial assistance in any given circumstances it is
impossible to lay down rules of general application. It is in
fact the essence of a banker's "business to form sound judgments,
with a full sense of responsibility, but oftan on very imperfect
data, of the relative merits of alternative financial policies,
in their application to particular cases. All that can be said
is that those who criticise the banks for not taking a stronger
line must be prepared to face the inevitable suffering that
would follow, at least for a time, the adoption of a more stringent policy. On the other hand, those who consider that the
banks should be yet more generous in supporting industry must
accept the consequence that the survival of the unfit necessarily
tends to industrial deterioration and the weakening of competitive power. Certainly if in the early post-war period there had
been a general restriction of bank credit instead of a general
willingness to help, such an attitude on the part of the banks
would have been very strongly resented by industry and trade.
"No doubt, as in so many cases, the path of wisdom is somewhere between these two extremes. Probably on balance the more
dangerous temptation to the banks in present circumstances is to
do too much rather than too little to keep weak concerns in being.
Possibly the scales have sometimes been weighted by the fear of offending valuable customers by withdrawing facilities from concerns
in the preservation of which they are interested. In some degree
this particular danger has been accentuated by the increase in the
unit of banking business, which has greatly enlarged the circle of
customers whose views a bank has to study. On the other hand, the
added financial strength due to amalgamation should -pro tanto make
for independence of judgment."
Many short-term advances of the banks to weak organizations have
developed into long-term or frozen commitments.

Short-term advances to

prospering companies have, due to the subsequent years of industrial
depression, become indefinitely tied up in profitless activities.




- So These developments, together with capital shortage owing to the
decline in national savings, have drawn the hanks closer to the problem, of
reorganization and modernization of industry.

The Bank of England, acting

on the "belief that the machinery of investment "banking needed supplementing
so as to aid the rationalization of large industries, has formed two subsidiaries, the Securities Management Trust, Ltd. (1929) and the Bankers'
Industrial Development Company, Ltd. (1930).

The latter has the leading

financial organizations including the "Big Five" as stockholders. These
organizations do not originate or distribute capital securities, but they
do investigate and sponsor projects with respeob to reorganization or new
flotations and turn the final long-term financing over to other agencies.
In some cases provision for temporary short-term financing is made through
the banks.
A third institution, the Agricultural Mortgage Corporation, was
established with the aid of the banks, but, unlike the other two* grants
credit directly on farm lands and other agricultural assets. Although the
banks have been unwilling themselves to enter directly the field of longterm financing, they have been ready to cooperate in making the existing
machinery more serviceable in helping industry toreestablish itself.

Credit to Agriculture
The relationship of banks to agriculture has been a subject of investigation by Government commissions and experts. In supplying the shortterm credit requirements of farmers who own their land and are good risks
the banks are reported to afford an adequate service with competition keener
than before the concentration movement.

Tenant farmers, who have no security

to offer other than growing crops and cattle, are not so attractive as credit
risks to the banks. Following out their policy of not locking up their depositors' money in long-term commitments, the bankers do not care to purchase




- Si -

long-term mortgages, but many examples exist of overdrafts the proceeds of
which were used to purchase farm lands. Although the maturities of these
were fixed in the original agreements at from six to twelve months, in many
cases circumstances have required that they " e renewed a number of times.
b
Nevertheless, considerable criticism has been levied against the
joint stock banks to the effect that they have been indifferent to the current needs of agriculture, receiving deposits from rural communities yet
emphasizing urban loans.

The Committee on Agricultural Credit of 1923 re-

cited these objections and then said: (1)
"It is important to realise that these charges of unsympathetic policy, unfamiliar managers and discrimination in
favour of commercial investments are not of recent origin, but
have been preferred, in a general way, against the Joint Stock
banking system. They are not, therefore, special features of
the crisis through which agriculture is now passing.
"On behalf of the Banks, it has been pointed out that
relatively more agricultural loans are, in fact, outstanding
to-day than in the days of the small private Banks. The fact
that all applications for overdrafts are referred to the Head
Office for approval no doubt accounts for some of the criticism
to which the Banks have been subjected, though, in actual practice, the older and more experienced managers are allowed considerable latitude. Moreover, where applications are refused,
it is possible that the local managers seek refuge from the unpopularity of adverse decisions by throwing the onus on to the
Head Office. The Banks have always regarded the farmer as a
good customer and they are anxious to maintain and, where possible, to develop their agricultural connection, there being
very keen competition between them for that purpose. They
claim to appreciate fully the farmer's difficulties at the
present time, and their policy is to be as helpful as possible,
consistent with their responsibility to their depositors. With
the great majority of farmers an overdraft is a routine arrangement for a part of the year. The farmer who is enterprising,
keeps books, and knows his way about the world, has little difficulty in obtaining credit, and even the less enterprising
type of farmer is more afraid of the Bank than the Bank is shy

Heport of the Committee on Agricultural Credit (1923), pp. 12,. 13.




- 62 -

of him. In some cases of complaint, it transpires that
the farmer is carrying on some other "business, doing
"badly at it, and trying to play off one Bank against
another. To any ordinary farmer, of whom the Banks have
personal knowledge, they would, if necessary, give credit
on his crops alone, although they can take no legal charge.
In the fruit-growing districts of Evesham and Pershore, for
instance, growers obtain credit from the Banks on what the
manager can see for himself on the trees. The Banks realise
that the liquidation of agricultural loans is a longer process, as a rule, than the repayment of purely commercial advances, "but there is a constant eVo and flow of money from
and into the farmer's account which means good "business,
although the loan account may not " e cleared rapidly. In
b
the country districts, an overdraft, unspecified as regards
purpose, is more common than definite loans for particular
requirements. The overdraft is reduced or extended according to the daily or weekly alternations of receipts and
expenditure of the farmer concerned. It is an essentially
elastic arrangement, affording "both secrecy and simplicity,
and one pre-eminently suited to rural conditions
With regard to managers, there is admittedly a tendency for
more changes to he made in the managerships of the country
"branches than in the days "before amalgamation, as these appointments are now open to a wider field. A large number of
the old managers are, however, still in office. As far as
promotion difficulties will permit, the Banks endeavour to
retain the staff in the districts to which they "belong, and
even in those cases where a townsman is appointed to a
county "branch, he is first attached in a supernumerary
capacity to study the local characteristics of the "business
"before he is allowed to take over. Admittedly, the old
country "banker has disappeared, "but some of the Banks have
local directors who live in the district and know a good
deal about the farmers' "business. Finally, from the point
of view of the agricultural community, it is important to
realise that, notwithstanding the absorption of the small
country Banks, there is, in fact, far keener competition
for rural "business than ever "before; while, in the matter
of security to depositors, the amalgamation of the Banks
has also "been of very great advantage. The old private
Banks were always heavily involved in the fortunes of a
restricted area and this was a source of weakness at times
of local crisis. The Joint Stock Banks spread their risks
over a wider area and a greater range of industries, and
can "better carry periods of depression."




- 63-

Nor did the committee feel that credit to agriculture was restricted through unduly high charges:'1;
"Moreover, it is the cheapest way of obtaining money; the
normal rate of interest is 1 per cent, above Bank rate, though
it is understood that a minimum of 5 per cent, is almost invariably fixed; interest is only charged on the net amount outstanding from day to day and there are no legal or procuration
charges such as are usually associated with the advance of money
from other sources. If the account is remunerative, no charge
for keeping it is made. If it "bears an overdraft, the charge,
apart from interest, is only the hare cost of keeping it, The
complaints that incidental Bank charges are excessive are
generally without foundation."
Short-term Credit to Agriculture. - in 1926 Mr. E. R. Infield
of the Ministry of Agriculture and Fisheries made a report on agricultural
credit based in part on the responses received to a circular letter sent to
all parts of the country.

This report corroborated the general findings of

the Committee on Agricultural Credit with respect to the services of the
joint stock banks in the matter of short-term credit to agriculture,'2'
"The position is, therefore, that the banks frequently
lend on their personal knowledge of farmers without a definite
charge upon their property, but the extent to which this is
done is limited. The farmer who has title deeds, share certificates or a life insurance policy to deposit with his bank as
collateral has no difficulty in securing substantial advances
against these securities. The small tenant farmer, however,
whose main assets are his growing crops and other stock, has
difficulty in obtaining adequate bank accommodation.
"It should not be overlooked that since the private
country banks began to be absorbed by the joint stock banks,
other changes have been taking place. It has been affirmed
that there has been a very considerable growth in recent years
of the practice of farmers borrowing from tradespeople—
merchants, auctioneers and dealers—indeed more than one witness have asserted that farmers whose banks have been unable
to make advances to them upon their stocks and crops have been
compelled to resort to merchants, who are prepared to do so on

(1)

Ibid., p. 21.
(2) Heport on Agricultural Credit. Economic Series No. 8, pp. 30, 31.




-64-

the "basis of undertakings " y the farmers to sell the produce
b
to them. Some have even expressed the opinion that the gross
indebtedness to the latter class exceeds the indebtedness of
farmers to the banks. Whatever may " e the truth of this it
b
is obvious that substantial development in this direction must
have a bearing on the operations of the banks particularly as
it is not always an easy matter for the banks to know what
their farmer customers owe to others. Moreover, it is hardly
open to doubt that there are farmers who while complaining of
the attitude of the banks are themselves often to blame for
the difficulties they complain of. They keep inadequate books
or no books at all, and in the absence of books it must be
more difficult for the banks to form a correct idea of the
amount of their debts to tradespeople. In such circumstances
can it be wondered at if banks require 'good' security for their
loans, or appear to be unsympathetic?
"Again, it has to be remembered that parsons who compare
the services to agriculture of the old private banks with those
of the joint stock banks, are sometimes comparing a time when
agriculture was more prosperous with the present time, when it
is still suffering from the effects of depression. There seems
to be no evidence that the present attitude of the banks does
more than reflect the want of confidence in the industry to which
farmers themselves give frequent expression.
"To sum up, there is nothing in the evidence which has been
available to suggest that the banks, within the limits of the
present credit system, are unduly rigid or unsympathetic with
the needs of agriculturists, nor is there anything to suggest
that hasty marketing by the farmer is due to pressure being
exerted upon him by the-banks at harvest-time. On the contrary,
there are many reasons to think that consistent with reasonable
business prudence, the banks administer the present system as
generously as the system permits."
In order to make loans to farmers on the security of livestock and
crops more attractive to the commercial banks, the Agricultural Credit Acts
of 1928 provided for the official registration of liens against crops and livestock.

This type of lien is known as an "agricultural charge." It is said

that since 1928 farmers have been able to receive added accommodation from the
commercial banks on this type of security.




-65-

Capital Loans for Agriculture. - The Committee on Agricultural
Credit, also, specifically recognized that the joint stock banks could not
" e expected to make permanent capital loans to agriculture, saying;'--1-'
b
"At the same time, it has to " e borne in mind that the
b
Banks are not in a position to lend money on long-term mortgages. Having regard *o their obligations to their depositors,
they are "bound to keep their money within reasonably short call.
They realise, however, that agriculture is in a bad way, and
that its revival will be later than that of other industries.
Moreover, to call in their loans too drastically would probably
involve the Banks in heavy losses. Their present policy is,
therefore, to nurse farmers by reducing interest whenever possible and generally to keep them going, even though, in some
cases, the Banks are receiving no interest and no repayment
of principal. They would, however, naturally prefer to see the
outstanding loans paid off as soon as possible, and, if a farmer
is doing well, they will probably suggest, after a time, that he
should effect a permanent mortgage elsewhere for the amount of
his loan outstanding."
Owing to the fact that it had been believed for some time that
the facilities for furnishing long-term capital to farmers on mortgage security were deficient in England, the Agricultural Credit Acts of 1928, referred
to above, established the Agricultural Mortgage Corporation, Ltd. Four of
the "Big Five" (Barclays, Lloyds, National Provincial, and Westminster),
Martins, Williams Deacon's, Glyn, Mills and Co., and the District Banks
cooperated with the Bank of England in subscribing to the capital, and the
Government loaned, interest free, a sum equal to the whole of the capital.
The corporation makes mortgage loans to farmers, and raises funds through
the sale of debentures.

The joint stock banks interested in the corporation

receive applications from prospective borrowers.
"....it is looked upon by the British public as a step
toward the solution of an acute agricultural problem which
exists in the United Kingdom as well as in other parts of
the world. The scheme when first launched was attacked by
the opposition party in the House of Commons on the ground
Report of the Committee on Agricultural Credit (1923), p. 12.




- 66 -

that it constituted a heavy government subsidy to agriculture, and that the real benefit would not come to the
farmer "but to the landlord through increased rents, Leading economists and "bankers of the country, however, are of
the opinion that the plan is working successfully and that
it provides a sound system of agricultural credits with a
considerable degree of relief to British farmers. "(1)

Frederic Edward Lee, Britain's Farm Credit Plan, .American Bankers
Association Journal, November, 1930, p. 467.




CHAPTER V
EFFECTIVE COMPETITION

Apprehension exists in certain quarters that the degree of concentration which has "been reached in the English banking system tends to
"break down effective competition.

It is argued that when the units of

enterprise "become so large and so few as in the English "banking system,
gentlemen's agreements may effect unity of action. However, the concensus
of responsible opinion appears to be that effective competition for deposits
and commercial loans has not been lessened as a result of the concentration
movement, though the latent possibility for such a tendency exists.
As indicated in previous chapters, the Treasury Committee of
1918 was concerned directly with this problem and subsequent to its report
merger activities have been slight. This committee said:(l)
". . .we have received representations from certain municipal
corporations to the effect that banks vary very much in their
willingness to allow reasonable overdraft facilities to corporations, and that sufficient money, and cheap enough money,
has only been obtained hitherto by resorting to different banks,
the number of which is now falling steadily. On this ground a
number of resolutions have been fonvarded to us by corporations
protesting against further amalgamations, and suggesting that
it is not in the national interest that large funds belonging
to the public should be in the hands of a few companies.
"Strong representations have, on similar grounds, been
made to us on behalf of the Stock Exchange and the Money Market. It is claimed that the world-wide fame of the London
Market before the war was due to the freedom with which London
bills could be negotiated, owing to the ease with which Discount Houses obtained ample funds from a wide number of banks,

(1) Report of the Treasury Committee on Bank Amalgamations, 1918, in
T. E. Gregory, Select Statutes, Documents and Reports Rolating to
British Banking. 1832-1928, Vol. II, pp. 330-332.




- 67-

- 6s -

and that the fewer the lending constituents in the Discount
Market, the less flexible is the market and the less fine the
rates. It is added that the number of members in the Clearing House is already becoming very small, and that any further decrease in the number of its constituent members, or
any greatly preponderant power on the part of particular members, might impair confidence in its smooth working and raise
apprehensions in the market. Moreover, it is pointed out
that a reduction in the number of important Banks must mean,
and has already meant, a reduction in the number of firstclass acceptors of bills, and that if this reduction proceeded
very far, it would become a question whether the Bank of
England would not have to place a limit on the amount of
acceptances which they would take from any particular bank
doing a large accepting business, and whether Continental
buyers would not limit the number of bills taken by them. :'

"While we believe that there is at present no idea of a
Money Trust, it appears to us not altogether impossible that
circumstances might produce something approaching to it at a
comparatively early date. Experience shows that, in order to
preserve an approximate equality of resources and of competitive power, the larger English banks consider it necessary to
meet each important amalgamation, sooner or later, by another.
If, therefore, the argument from size, referred to . . . above,
is to prevail, it can only lead, and fairly rapidly, to the
creation of a very few preponderant combinations; and if those
combinations amalgamated, or entered into a joint agreement as
to rates and policy, &c., the Money Trust would immediately
spring to birth.
"Such are the main arguments laid before us against further amalgamations. Undoubtedly some of the dangers feared
are somewhat problematical and remote, and we should very much
have preferred to avoid the necessity for any interference by
Government with the administration of banking. But on a careful review of all the above considerations, we are forced to
the conclusion that the possible dangers resulting from further large amalgamations are material enough to outweigh the
arguments against Government interference, and that, in view
of the exceptional extent to which the interests of the whole
community depend on banking arrangements, some measure of
Government control is essential. Our conclusions on this
point were confirmed by the resolution passed at the recent
annual meeting of the Association of Chambers of Commerce, in
which it was proposed that steps should bo taken to guard




-69-

against amalgamations, & c , shown to " e injtirious to comb
mercial interests.
"We therefore recommend that legislation " e passed reb
quiring that the prior approval of the Government must he
obtained before any amalgamations are announced or carried
into effect. And, in order that such legislation may not
merely have the effect of producing hidden amalgamations
instead, we recommend that all proposals for interlocking
directorates, or for agreements which in effect would alter
the status of a "bank as regards its separate entity and control, or for purchase by one bank of the shares of another
bank, be also submitted for the prior approval of the Government before they are carried out."
Although nu legislation resulted from this recommendation, the Government
has been an advisor in connection with all subsequent moves toward concentration, which has been minimized of recent years.
The Balfour Committee reporting in 1929 felt that "up to the
present there has been little or no attempt on the part of the amalgamated
banks to exercise any monopoly powers, or to suppress competition by
'districting' or other working agreements," but expressed themselves as
adverse to further amalgamation or to the "subtler process of agreements
to avoid competition."t1' According to Lavington, "Competition among
the banks has increased in a marked manner during recent years."(2)
Sykes^3) came to the conclusion that competition is more acute as a result
of the concentration movement, and the Statist has said that "it is a

(!) Final Report, pp. 52, 53.
' 2 ' F. Lavington, The English Capital Market, p. 1U5.
(3) Joseph Sykes, The Amalgamation Movement in English Banking.




- 70 -

coramonplace that competition is teener in "banking today than ever
before.''^1)
Banking Offices
The close watch which each hank apparently keeps on the activities of the others is manifested hy the rapidity with which any move on
the part of one, particularly in the establishment of new offices, is
matched by other banks. An often cited example of this occurred when in
April, 191^, the new Midland Bank, upon learning that Lloyds Bank had extended its activities into a new section of the country through a merger,
arranged within twenty-four hours to open new branches in the same area. (2)
The large banks have branches and sub-branches spread over
practically all England and Wales in competition with each other. Usually
a town which needs banking facilities has two or more . "diking offices
(branches or sub-branches) representing two or more of the joint stock
banks.

Twenty towns were selected at random in various shires, and the

number of banking offices in each town was taken from, the Bankers' Almanac
and Year Book.

The results are shown in Table 12.

It will be noted that

in practically every case where the number of offices is five or less,
each office represents a different bank.

Each town on the list, with

one exception, is served by two or more banks.

(1) Statist, May lU, I927, p. 567' 2 ' E. T. Powell, Evolution of the Money Market. (H85-191^, p. U53.




- 71 -

Table 12 - Banking Offices in Towns of Various Sizes
(exclusive of the Bank of England)

Town

ENGLAND
Devonshire
Exmouth
Torrington
Kent
Chatham
Lancashire
Kirkham
Liverpool
Wardie
Wigan
Lincolnshire
Alford
Skegness
Norfolk
Ay1sham
Cromer
Northumberland
Blyth
Not t inghamshire
Southwell
Shropshire
Dawley
Shrewsbury
Warwickshire
Birmingham
Yorkshire
Bradford
Est on
Leeds
WALES
Caernarvonshire
Bangor

PopulationU)
(nearest
100)

Joint stock
commercial hanks
Humher
Number of
banks repreof
sent e
offices(2)

Persons
per
office
'nearest
100)

All other
banking
offices(2)(3)

14,400
8,300

6
4

5
4

2,400
2,100

U3,500

6

5

7,300

2
11
1

2,100
5,500

7

700

-

4,200
369,500
4,600
6,500

2
157
1-Thurs.
10

-

-

-

15

2,200
7,300

3
4

3
4

700
1,800

-

16,4oo
4,300

2
2

2
2

8,200
2,200

-

31,500

5

5

6,300

28,300

2

2

14,200

7,Uoo

2

32,600

5

2
5

3,700
6,500

-

157

5

6,200

6

56

7
2

5,200

12

968,500
289,200
32,500

( Thurs.
(Mon.&Fri.

-

478,500

59

6

8,100

25

10,900

4

4

2,700

-

(1) Estimated, 1929- The Registrar-General's Statistical Review of England and
Wales for the Year 1929, Part II.
(2)
Bankers' Almanac and Year Book, 1931-1932*
(3) Offices of banks not included in the list of joint stock banks by the London
Economist. Some are offices of foreign banks operating in England.




-7 1 *-

" . . . The monthly figures published " y the clearing banks
b
are not true daily averages but are averages of one selected
day in each week of the month. It seems that, in order to
present a better appearance, most of the banks concerned are
at pains to manipulate their balances with the Bank of England
on the selected day of the week so that they stand at a
higher figure than usual. Moreover, each of the four biggest
institutions pursuing these practices selects a differenct
day of the week for the purpose, calling in loans from the
market on its own selected day, but returning them next morning in time for the next big bank to call them for its makingu > day."(l)
j
With respect to general conditions, Sir Josiah C. Stamp has
said:(2)
". . Although there is the appearance of very free competition, all the same there is a current understanding beneath
which business will not be done."
Iviention has been made in previous paragraphs of how the rate for
general customer advances has been standardized among the banks by giving
it a definite relationship to the Bank of England rate although highly
valued customers do got preferred treatment.

In the s^ne manner the rate

of interest on deposits allowed by the joint stock banks has been standardized to a degree. This fixing of rates is analogous to the agreements
among clearing house banks in this country, except that in England, of
course, agreements are not limited to a localized area.
Deposits in joint stock banks may be classified as current
accounts, which are withdrawable on demand, and those withdrawable upon
notice, commonly seven days in London.

Current accounts represent roughly

one-half of all deposits and upon these no interest is customarily allowed
in London and some provincial areas, while an interest rate is paid in other
provincial areas.

On deposits withdrawable on notice, the rate allowed

in London is usually 2 per cent under the Bank of England rate quoted for
(l) Report. Committee on Finance and Industry, p. 156.
(2)
Minutes of Evidence. Committee on Finance and Industry, Vol. I, p. 272,
par. I+I39.



- 72 -

The increase in the "banking offices in England has been much more
rapid than the increase in population.

In Table 7, page 23, of this report

it was shown that the population per hanking office declined from a.bmt
6,800 in 1901 to about 5,000 in 1921 and to about 3,900 in 1930. The population per banking office in the United States in 1930 was about U,S00.
Thus England has more banking offices in proportion to the population than
the United States, although the density of the population is much greater
there than in this country, as indicated in Chapter I.
."jngland has approximately one banking office for each six square
miles, while in this country there is on the average one national or State
banking office for about every one hundred and twenty square miles. Considering only the more densely populated States in the East (New York,
New Jersey, and Pennsylvania), there is on the average a national or State
banking office for close to every twenty-five square miles. The average
deposits per banking office in England are roughly $955»000, compared with
about $1,900,000 for State and national banks in the United States.
Some evidence that steps are being taken by the banks to protect
themselves against excessive competition among branches is found in a
recent address to the shareholders of Lloyds Bank by the chairman, Mr. J.
Beaumont Pease, who said:^1'
"Banks have sometimes been criticized for opening new
offices in places where banking facilities were redundant.
The multiplicity of branches has been to the advantage of the
public, but, undoubtedly, there are places where the business
is not sufficient to ensure satisfactory results to all the
banks represented there, and, with this in mind, and by mutual
arrangement with other banks, we have closed down a good many
sub-offices, with a consequent saving in expense."

(1) Annual Meeting of Shareholders, Lloyds Bank Limited, February 5» 1932>
p. 5*




- 73 -

Farther evidence of competition is supplied " y the extensive
b
advertising and other forms of publicity undertaken by the hanks, :. well
-s
as by innovation in the way of services such as the night safes a i . anall
:u
home savings hanks.

Joint Undertakings
In spite of the competition which exists among the English commercial banks they are engaged in certain joint undertakings. When they
increased uheir interest in overseas financings numerous organizations were
establishes to specialize in this activity, and many of these are owned by
several of the English banks jointly. For example, a French bank, which
was taken over, is owned equally by Lloyds Banks and the National Provincial
Bank, and the British Overseas Bank was established by several banks and
is now controlled by Williams Deacon's Bank, Union Bank of Scotland, and
Prudential Assurance Company.

Lloyds, Westminster, an^' Credito Italiano

were the primary movers in the organization of the British Italian Banking
Corporation, Ltd., but twenty-one other banks are interested.

Within

England itself an example of combined ownership is to be found in the
Yorkshire Penny Bank which has as its stockholders the "Big Five" plus the
District Bank and Williams Deacon's Bank.

The joint interests of the banks

in the new investment banking projects have been cited earlier.

Working Agreements and Standardized Rates
Among the "Big Five" there are working agreements or tentative
understandings with respect to the making of loans to bill brokers on shortterm paper, and the days which the various banks enter and leave the market are fixed by mutual consent.




- 75 -

discount of prime bills, although in England, as in this country, large
accounts get special rates. Prior to 1921, this rate of interest, known
as the bank deposit rate, was l r per cent under the Bank rate, ani the
*
lower level of recent years has been attributed by some to necessity growing out of the fact that other costs of doing a banking business have risen
parallel with the amalgamation movement.

Others see the widening of the

spread between the Bank of England rate and the rate paid on time deposits
by the joint stock banks as an indication of lessened competition and of
gentlemen's agreements which are easy to effect when competing units are so
few.
According to much of the current literature these cooperative
undertakings, working agreements, standardized interest rates, and the
like, merely indicate attempts to eliminate unhealthy cutthroat competition.

Whether they may develop beyond this point remains to be seen.

Even under the unit banking system of the United States numerous agreements exist regarding call loans, interest rates, and the like, and in
various sections of the country there is a strong tendency towards standardized rates, even where there are no formal agreements.




CHAPTER VI

BANKING COSTS AND PROFITS

The earnings and expenses of banks are of interest not only to
shareholders tut to borrowers and depositors as well. A banking system
which can do business at low unit cost can presumably sell its accommodation at lower rates to the borrower, pay the depositor more for his deposits,
and leave the shareholder in possession of a good return on his investment.
Low rates to borrowers, though regarded in some quarters as a stimulant to
business activity, may

have an adverse effect on the profits of banks.

In the same way high interest returns to depositors, though desirable from
the depositors' viewpoint, may, through the forces of competition, cause
bankers to take too great risks in an effort to provide sufficient earnings
to pay such interest. Since banks are run by private individuals for profit,
a fair return to shareholders on their invested capital as well as for the
risk involved is essential to the continuance of the system. It is generally
assumed that a movement in business enterprise, such as the spectacular concentration of banking resources in England, has as one of its motivating
forces the desire to protect profits in the face of competition.

Costs and the Concentration Movement
It is an unfortunate fact that the publication of earnings and
expense figures among English banks is and has been so meager as to make
difficult any adequate test of the effects on banking costs of concentration
of head offices and the accompanying increase in branch offices. There are




- 76-

- 77 those who believe reductions have occurred, but considerable evidence points
in the contrary direction.
In his book dealing with the amalgamation movement Sykes came to
the conclusion that:^'
"Expenses have . , . increased.
(2)
Very definitely amalgamation is largely responsible for this. In the case of expenses
it is apparent that the expected economies so often stressed in
chairmen's speeches have not materialized, and consequently what
was a strong argument in favour is actually a strong argument
against the policy. Most bankers still seem to consider that
more economies than diseconomies have resulted, and consequently
do not seem to be alive to the results of their actions."
Another author has said: (3)
"The returns reflect the fact that, for all their efficiency,
the 'Big five* have not reduced their working costs by amalgamation or by the development of branch banking, but have actually
increased them. This is well recognized by the banks themselves
n
...

An example of this is found in the statement of the chairman of
Lloyds Bank, quoted earlier, where he quite frankly referred to "places where
banking facilities were redundant. " W

The cries of "Hear, hear," greeting

every sentence at this point indicate that the chairman was expressing the
sentiments of the shareholders as well as the officers of the bank.
In the years prior to 1916 it was the practice among some of the
joint stock banks to make public an important part of their annual expenses.
These statements did not include write-offs or losses or interest on deposits
but did include salaries and wages and other miscellaneous expenses. These
expenses expressedThe Amalgamation Movement in English Banking, 1825-192U,
(1) Joseph Sykes, as a ratio of total working resources for the years 191kP. 158.
\2) In a footnote Mr. Sykes says: "The results of the large railway regroupings has been similarly productive of increased expenditure."
(3) Patrick Fitzgerald, Industrial Combinations in England, p. 18k,
Beaumont Pease, Annual Meeting of Shareholders, Lloyds Bank Limited,
February 5. 1932, p. 5.




-78-

1915 were published by Sykes as follows: (1)

Table 13 - Expenses of Joint Stock Banks per $100
of Working Eesources, 1911-1915

Year

Number
of "banks

Expenses
(per $100 of t o t a l
working r e s o u r c e s ' 2 ) )

1911
1912
1913
1914
1915

20
9
7
S
5

$1.08
1.03
1.06
1.02
1.0U

(2) Working resources include paid-up
capital, reserves, deposits, and
acceptances.

Subsequent to 1915 Barclays Bank alone published an annual expense
figure through 1928 discontinuing it with that year.

In the case of Barclays,

annual expenses per $100 of resources were for 1924, $1.62; 1925, $1»55»
1926, $1.61; 1927, $1.64j and for 1928, $1.57.
Contrasting the figures for a group of banks on one hand and
Barclays Bank on the other, expenses per $100 of business appear to have
risen substantially in the course of twenty years, but conclusions can be
drawn only with caution since one series of figures represents several banks
and the other only one. On the other hand, it is commonly believed that the
banking costs of all the "Big Five" are roughly comparable, and the contrast
corroborates the commonly held view that parallel with the development of
branch banking and concentration costs have increased.

Sykes took note of

this as indicated above and the Balfour Report recognized the tendency, but
at the same time pointed out that rising costs have been common to various

(1) Joseph Sykes, The imalgamation Movement in English Banking. 1825-1924,
p. 130.




- 79 -

business activities over the past few decades and not unique in "banking.
And again in banking itself the causal factor with respect to rising costs
may be less the result of cumbersomeness growing out of concentration than
the result of an increase in the breadth of banking services to the community, Tor example, in the United States under a wholly different banking
structure expenses have been increasing. Among national banks the cost of
handling a unit of business has about doubled from the first to the third
decade of this century.

Statistics are not available which would segregate

over a long period the higher costs attributable to interest on deposits,
but it is quite probable that other components, such as salaries and wages
and costs of premises, have been rising in the United States, as it is believed they have risen in England.
Branches. - Among the factors of cost of English joint stock banks,
the race for branch representation has been accorded considerable importance
by authorities. England today, it will be recalled, has over 10,000 branches
and each of the "Big Five" has under its direct control between 1,000 and
2,100 offices. Many of these branches were established and are maintained,
not because the business available for the time being justified their existence, but because the parent bank wished to preempt a field which some day
might be profitable or because the bank deemed it necessary to be represented
at the spot since one or more of its rivals were there. The example of the
Midland Bank making arrangements to open 17 new outlets within twenty-four
hours after hearing of expansion plans on the part of Lloyds Bank is typical
of what has happened in many other instances. Today hundreds of villages
and towns which could not support one independent local bank, are served by
one, two, and three branches of the large London banks. The inevitable




- 80 -

result of this type of competition is numbers of offices which do not pay
their way. Although such branches are the means of affording banking facilities to many communities which otherwise would " e without them, they
b
no doubt have contributed to the general rising costs of hank operations.
It would appear that it will he a long time before a number of the existing
offices can he placed on a profitable basis.
This situation in general was summed up by the late, chairman of
the Westminster Bank:'*)
"In the days of private banking there was a sort of
courteous convention, by which each local bank, except in the
larger towns, was allowed its own district within which the
irruption of a rival was regarded as something like poaching.
These times have passed away, and the village must indeed be
a small one in which there are not at least 3 offices of the
large banks in direct competition. I do not complain of this:
it is very much to the benefit of the commercial community.
The only persons who have any right to complain are the shareholders, whose profits are devoted in some measure at least
to the opening of fresh brandies which take a long time before they can pay their way, and in some cases, one may fear,
are not likely ever to pay at all. Before the war, a new
branch, if established in a growing region, should pay its
way after some three or five years of existence. Now, owing
to the rise in overhead expenses on the one hand and the
severe cutting of profits on the other, that period is about
doubled."
Despite these facts, the number of banking offices of the joint
stock banks has continued to grow, the annual average increase for the past
five years being about two hundred and forty. However, this is a smaller
increase than the annual average from 1918 through 1922, which was almost
four hundred and forty-five. It cannot be doubted that many of the branches
contribute their full quota of profits to the organization and unsuccessful
ones have their value from an advertising point of view.

(!) Statist, May 10, 19 2H, quoted by Patrick Fitzgerald, op_. cit., p. 181.




- 81 -

Salaries and Wages. - The wastes which are related to the operations of organizations so large and so widely dispersed emphasize the
problem of costs among the joint stock banks. Smaller and less cumbersome organizations might arrive at the necessary decisions without the
consumption of so much time, including that involved in the elaborate
reports and correspondence between branch and head office.

It has been

estimated that over 70 per cent of the annual expenses, not including
interest on deposits or provision for losses, of a great English bank
is consumed in salaries and wages. (1) Although the national banking system in the United States may not average much higher than 50 per cent
in recent years in this connection, this does not necessarily put the
English bank in an unfavorable light. As banking is a business which
must depend largely upon personal services, English development may have
been in the direction of reducing the proportion of non-salary overhead
which is associated with an irreducible personal service element. A
better test of labor efficiency in banking rests upon the comparative
economy with which different banking structures handle a unit of business. (2)
Facts for testing the British system along these lines are extremely limited, but some material has been found which will be presented
in a subsequent paragraph.
It is sometimes pointed out that the effectiveness of personnel
is stultified by regimentation incidental to organizations as large as
the great English banks, no encouragement being given to the expression
of initiative and energy. Management takes some steps to offset this
(1) Joseph Sykes, The Present Position of English Joint Stock Banking.
P. 128.
(2) I.e., costs per $100 of loans and investments.




- 62 -

tendency by providing personnel departments which concern themselves among
other things with discovering and encouraging individuals of promise.
Much of the promotion among employees in the great hanks is worked out
on the basis of the success of hank clerks in examinations in various
fields of study given by a professional banking society.

Several of the

banks attempt to stimulate interest among employees through affording them
the opportunity to purchase stock in the bank.
Office Equipment. - The backwardness of the great English banks
in adopting modern business methods has been pointed out by some students
as a factor resulting in high costs. Such American commonplaces of labor
saving as loose-leaf ledgers, machines for calculating and stamping, and
the like have been reluctantly accepted by the banks. Mechanical equipment has been adopted slowly due to the possibility of disturbing customers
in their banking relations and also due to the personnel problem involved.
It is a tradition of English banking that once an employee has passed his
probationary period, his position is assured for the rest of his life, although promotion will depend on ability. Bank managers are faced with the
problem of surplus employees resulting from the introduction of labor saving
machinery.

Moreover, the unwritten law guaranteeing a place to a proven

employee develops a feeling of loyalty among the employees, who rarely
seek other connections. Thus on the staff of each bank there are many clerks
who have been doing the same sort of computation for years and the speed
which results challenges the timesaving of novices with machines. Within
the past year or so a considerable change has taken place in the direction
of installing some of the modern office
operating costs.




devices in an effort to reduce

-83-

Adopting new accounting methods and forms presents serious
problems in a great branch "banking system composed of large and small
"branches. Any change in a standard form, for example, must be made in
all the offices, from the largest to the smallest, in order to insure
the maintenance of complete coordination of reports. Therefore, the
banks have to consider whether the saving throughout the system will be
sufficient to warrant changes, and in many cases they have found that
more efficient methods for large offices would be unremunerative in the
small. Perhaps more local experimentation would have taken place earlier,
were it not for the rigid allocation of responsibility which has developed
in the branch systems. The manager of each branch, realizing that the
head office would hold him responsible for the success or failure of any
undertaking, has been unwilling in many instances to take the risk. For
the same reason branch managers have at times been reluctant to accept
suggestions on bookkeeping and other banking technique from technical experts at head office.
Operating Advantages. - There are, however, many characteristics
of the concentrated system which tend toward economical operation. In this
class are a variety of matters usually associated with large scale operation, such as high-grade management at the top and specialization among individuals, making for expertness. The review of important credit commitments by several persons results in a composite judgment, often lacking
in smaller institutions. The important officials of large organizations
who specialize in handling the open market loans and investments are in
a position to avoid mistakes which might develop if their energies were
dissipated over a variety of matters.




-gU-

Concentration "brings effectiveness in the pooling of cash reserves and keeps them at the lowest level consistent with safety. Interbank "balances are simpler matters "between the offices of the samp bank
than between independent banks. In the same way, clearing and collection
of checks and other instruments &?e facilitated when a much larger proportion of transactions represent relationships of one branch with another
within one banking organization*

Profits! and dividends
The only complete income and expense statement of a recent year
for any one of the English joint stock banks which has been found is not
official but represents a series of shrewd guesses by the English student
of banking, Joseph Sykes, who reconstructed items for Barclays Bank for the
year 1926 as followst^1'
Table Ik - Shdome and Expense Account of Barclays Bank fbfr 1926

Income on advances
Income on bills discounted
Income on money market and stock exchange loans
Income on investments
Income on service charges on accounts
Miscellaneous

(in millions)
$4l»32
S.32
5»l6
13.*+3
9«73
2.U"5

Total
I n t e r e s t on deposits
S a l a r i e s and other expenses
Bad and doubtful items
Total expenses and losses
Net a v a i l a b l e for dividends
Dividends

$80.39
$32.02
27.30
9.25
$68.57
$11.83
$ 8.03

(1) Present P o s i t i o n of English J o i n t Stock Banking, Ch, I I I .




-85-

In the case of this one joint stock bank for the one year, interest and discount make up the major portion of gross income, as they
do among banks in this country. It is of interest, however, that nearly
one-eighth of gross income was furnished by service charges received from
depositors to compensate for carrying their accounts. Interest paid out on
deposits was almost as large as all other expenses and losses combined and
nearly three times as large as the net amount available for dividends.
Although no broad conclusions can be drawn from limited comparisons, the following tabulation, showing income and expense items for the
year 1926 expressed as dollars per $100 of loans and investments in the
case of Barclays Bank and comparable figures typical of a group of small
national banks and a group of large national banks, suggests the extent
to which a great English bank represents the averaging out of high cost
small offices and low cost large offices.
Table 15 - Income and Expenses per $100 of Loans and Investments
of Barclays Bank and National Banks in the United States, 1926
Barclays
Bank

Small
national
banks(1)

Large
national
banks(!)

$5.09
.91

$6.64
.70

$4.95

$6.00

7.3^

5.93

I n t e r e s t on deposits
Salaries and other expenses
Losses

2.39
2.0U
.69

2.03
3.61
if09

1.97
2.05

Total expenses and losses

5.12

6.73

.44
4.47

Net available for dividends

$ .88

$ .61

$1.46

I n t e r e s t and discount
Other income
Total groos

(1) Small banks, those with loans and investments
$250,000-$500,000; large banks, $50,000,000 and
over.




- 86 -

The indication is that the gross return of small national "banks
in this country on their loans and investments is much higher than that of
a great English hank, and thus represents higher charges to "borrowers " y
b
the small hank.

It is generally "believed that the large "bank in England,

providing through "branch offices services to small communities which in
this country would " e accommodated " y a small "bank, makes a more even charge
b
b
for accommodation than does the unit "banking system of the United States.
Outlying "borrowers stand therefore to gain in this respect from the concentrated English system.

Daring 1926 Barclays Bank received $6.00 per $100

of loan and investment accommodation "but returned $2,39 in interest on
deposits.

The difference, which may " e regarded as the measure of the cost
b

of hanking services to the community, amounted to $3.61 for every $100 of
loans and investments, which compares with $5.31 for small national hanks
and $3.96 for large national hanks in the United States. Barclays Bank had
a final margin of profit available to shareholders of $0,88 per $100 of loans
and investments; small national hanks, $0.61; large national hanks, $1.46.
Conclusions "based on the experience of one hank in one year are of
limited value, as previously stated, and the average experience over a period
of years would he a "better basis for tests of this sort. In this connection
it is worthy of note that the only cost item available over a period of
years in the case of Barclays Bank—salaries and other expenses—averaged
$2.00 for the three years 1926-1928. This indicates that the figure of $2.04
for the year 1926 is probably typical of average experience.

The average

figure for the three years for small national banks was $3.57; for large
national banks $2.14.




In a direct comparison such as this betv?een the operating costs

- 87 -

of the banking systems of two countries cognizance should " e taken of
b
the difference in types of services rendered.

In earlier chapters men-

tion was made of the fact that English hanks have confined

themselves

much more to the "business of deposit and lending and do not supply some
of the services given by American hanks. English hanks do not control
the fiduciary "business of that country to the extent that hanks of deposit
do here, nor do English banks engage in the business of merchandising
securities for their own account. For these reasons the actual value of
the services rendered by the banks to the two communities cannot be compared.
The following tabulation gives the annual profits and dividends
for a large group of English joint stock banks for a five year period before the war and for the past five years.

The ratios presented in the

second part of the tabulation, which show the margin of profit per $100 of
resources and the rate of profit per $100 of invested capital, are particularly interesting.

Table 16 - Profits and Dividends of English Joint Stock Banks^)




Year

1908
1909
1910
1911
1912

Annual
Annual
net
dividends
profits
(in thousands)
L 7,743
7,454
8,241
8,214
9.124

Dividends
as per cent
of profits

i 6,904
6,722
6,761
6,818
6.884

84

Five year average
1926
1927
1928
1929
1930

13,843
13,349
13,784
13,978
11.941

89
90
82
83
75

10,099
9,854
10,274
10,461
9.913

Five year average
(1) Economist (London), Banking Numbers.

73
74
75
75
83

76

- sg -

Table 17 - Net Additions to Profits per $100 of Resources and
of Invested Capital

Year

Annual p r o f i t s
per $100 of
resources'*)

1908
1909
1910
1911
1912

$ .96
.91
.96
.93
.99

$8.98
8.75
9.71
9.80
10.68

$10.69
10.44
9.84
9.47
9.23

Five year average $ .95

$9.58

$9.93

$ .66
.61
.59
.62
.53

$9.51
9.15
9.30
9.43
7.93

$6.92
6.70
6.34
6.62
6.67

Five year average $ .60

$9.06

$6.65

1926
1927
1928
1929
1930

Invested c a p i t a l
Annual p r o f i t s
per $100 of
per $100 of
invested c a p i t a l ( l )
resources

Resources and invested capital are as of the end of the year.
Annual profits are for a large group of joint stock banks which
make reports; resources and invested capital are for all joint
stock banks. The discrepancy due to the omission of several
banks is not great.

The average margin of profit per $100 of resources for the five
years

1908-1912 was 95 cents; for the past five years, 60 cents. The

lowering of the margin of profit is in part a reflection of the higher costs
per unit of business which have been spoken of in earlier paragraphs. Despite the lowering of the margin of profit per unit of business, the rate
of earnings on book invested capital has not decreased materially, the
average for the earlier period being 9.6 per cent and for the later period
9.1 per cent. As the third column shows, the reason for the contrast in
the decline in the rate of net earnings on resources and on invested capital grows out of the fact that there has been a large reduction in the
ratio of book invested capital to total resources.




- 89 -

In connection with the apparent rate of earnings on invested capital, it should he "borne in mind that because of hidden assets or secret
reserves the actual invested capital of English hanks is no doubt much
higher than the books indicate.

To whatever extent it is greater, the rate

of earnings on invested capital is commensurably lower.
The tabulation brings out that on the average for the past five
years English banks have paid out 76 per cent of profits in dividends; in
the period 1908-1912, 84 per cent was so paid out. Eor some years, the
rates of dividends declared by the "Big Five" remained unchanged and a
feeling had developed that changes were very unlikely.

The uncertain busi-

ness conditions, however, coupled with heavy losses suggested the wisdom
of conserving reserves at the expense of dividends, and during 1930 and
1931 most of the banks reduced their dividends.




CHAPTER VII

CONCLUSIONS

Safety Record. - Losses to depositors "because of "bank failures
have "been negligible in England since the tise

of the great "branch "banking

organizations in recent decades. There were less than ten failures among
commercial joint stock "banks from 1900 to 1925» and since that date there
have! been none.

Since 19l4 the ratio of deposits of suspended hanks in

England to the average yearly deposits of active "banks has "been less than
one-fiftieth of the same ratib for the State and national "banks of the
United States.
1

The existing "banking structure in England, where about 80 per
cent of "both commercial "banking deposits and offices are concentrated in
five large branch systems, is the outcome of a long period of competition
"between small local "banks and joint stock "branch hanking companies. A century ago there were scores of local "banks operating as small partnerships,
many of which failed during the course of the nineteenth century. After
the law of 1826 gave joint stock companies the right to operate in the commercial "banking field, they "began to develop "branch office systems and
their growth was rapid, especially after the Act of 1862 definitely permitted hanks to operate as modern corporations with limited liability.
These large "branch systems of England, in contrast to small local
hanks of earlier periods, serve a wide geographical area and are in contact
with a variety of business interests. Therefore, they have a wide diversification in their portfolios. Management in England has endeavored to




- 90 -

- 91 -

operate along traditional commercial "banking lines, keeping funds liquid
in the form of short-term loans and investments. Careful attention to the
problems of internal audit and supervision of large and small hanking offices
alike has "been essential to tho stability of these large organizations.
Many of the branch banking offices in England that have proved
unsuccessful have been liquidated but this liquidation has not caused losses
to depositors. Assets of the discontinued offices have been transferred to
other offices and losses sustained by the operation of these offices have
been absorbed by the banks. About U,000 offices were closed in England
between I876 and 191^» as compared with about 9»0(X) that were opened during
the same period.^' The number closed was almost half as large as the number opened.

In 1915» 15*+ Hew branches were opened and 53 were closed,'2/

but during 19l6, when the war made the banking situation very difficult,
more offices were closed than opened.^3/ This indicates that adjustments
to changing economic conditions and expansions into new fields have been
made in England as in other countries, but these adjustments have not
caused losses to depositors because forced liquidation of assets was avoided
and operating losses have been absorbed by the banks.
Availability of Credit. - Government commissions in England charged
with investigating the problem have concluded that all classes of borrowers
at the commercial banks, including farmers, are well served by existing
facilities there.

It is recognized, however, that the large banking insti-

tutions extend their accommodations on a less personal basis than small
local concerns. Since this has served to bring fewer undesirable assets
(IT Bankers' Almanac and Year Book.
(2) Ibid., 1917, pp. 26, 27.
(3) Ibid.. 191S, p. 25.




- 92 -

into the "banks, it has "been generally regarded as more of a gain than a
loss to the community.
Available figures indicate that a substantial proportion of the
loans of the great branch banking organizations are in small units, and
the small man in England who represents a reasonable commercial banking
risk receives adequate consideration and accommodation. Although the widely
diffused branch banking systems are channels for the mobilization and distribution of funds, the investigating commissions have concluded that this
does not result in draining deposits from the outlying communities to the
industrial and financial centers.

Comparisons which have been made between

the rates of interest charged for short-term accommodation in England and
elsewhere, indicate that English borrowers are in a favorable position.
On the other hand, a body of opinion for years has been critical
of the attitude of the banks, holding that they should make longer term
commitments to industry and agriculture. Bank management has resisted these
suggestions on the ground that it is not sound banking to lock up for long
periods deposits payable on demand or short notice. Responsible investigating commissions have concurred in this view.

They report, however, that

England needs more adequate investment banking machinery to handle capital
financing.
Effective Competition. - After the emergence of the "Big Five"
more than a decade ago public policy set its face against further uncontrolled concentration of banking resources. It was felt at that time that
continued reduction in the number of banking units might lead to joint
agreements among the remaining banks resulting in a "money trust." The




- 93 -

Government has "been an advisor and adjudicator in connection with all subsequent moves toward concentration.
Government commissions have concluded, however, that "up to the
present there has "been little or no attempt on the part of the amalgamated
hanks to exercise any monopoly powers, or to suppress competition " y disb
tricting or other working agreements. " ^ '

Indeed, many believe that con-

centration so far has "been accompanied by increased competition, which has
found expression among other ways in the spread of banking facilities
through new offices.
The large banks have branches and sub-branches spread over practically all of England and Wales in competition with each other. Usually a
town which needs banking facilities has two or more banking offices
(branches or sub-branches) representing two or more of the joint stock
banks.

It has often happened that a bank has opened a new office in a

locality because a competitor was operating there and not because enough
business existed to justify the outlet.

In some cases these redundant

offices have been put on a paying basis after a period of several years.
On the other hand, such overbanked situations have affected earnings substantially and have frequently led to the closing of unprofitable banking
offices.

Nevertheless, the number of banking offices has increased during

nineteen out of the last twenty years.
The increase in the banking offices in England has been much-more
rapid than the increase in population.

The population per banking office

declined from about 6,800 in 1901 to about 5,000 in 1921 and to about 3,900

(1) Committee on Industry and Trade, Final Report, 1929, pp. 52, 53.




-3k-

in 1930, compared with 4,800 in the United States. Liverpool had a commercial "banking office for every 5»500 persons; Birmingham had one for
every 6,200 persons. As of a comparable date New York City had a conmercial
hanking office for every 10,500 persons and San Francisco, one for 5»800
persons.
There was one banking office in England for each six square miles,
while in this country there was one national or State banking office for
about one hundred and twenty square miles.

In the densely populated States

of New York, New Jersey, and Pennsylvania, there was a banking office for
each twenty-five square miles.
These figures illustrate the relative accessibility of banking
offices in England.

The responsible heads of English banks have on occa-

sion commented on the problem of excess offices.

In 1924 one of them spoke

of "fresh branches which take a long time before they can pay their way,
and in some cases, one may fear, are not likely ever to pay at all. " • •
'*'
Some evidence that steps are being taken by the banks to protect themselves
against excessive competition among branches is found in an address to the
shareholders of Lloyds Bank early in 1932 by the chairman, Mr. J. Beaumont
Pease, who said:(2'
"Banks have sometimes been criticized for opening new
offices in places where banking facilities were redundant.
The multiplicity of branches has been to the advantage of
the public, but, undoubtedly, there are places where the
business is not sufficient to ensure satisfactory results
to all the banks represented there, and, with this in mind,
and by mutual arrangement with other banks, we have closed
down a good many sub-offices, with a consequent saving in
expense."

(1) Chairman of the Westminster Bank, Statist, May 10, 1924, quoted by
Patrick Fitzgerald, Industrial Combination in England, p. 181.
(2)
Address to shareholders quoted in American Banker, February 24, 1932,

p. 4.




- 95 -

Costs to the Community. - Data available with respect to the earnings and expenses of the joint stock "branch hanks of England are so meager
that it is difficult to draw conclusions in respect to the relative jost of
hanking services to the public. Although the English banks make smaller
charges for their services than do small unit hanks in this country, their
advantage over large hanks here is not clear.

It is clear, however, that

the costs of the great British branch systems are the result of averaging
low cost large offices with high cost small ones.

The competition for new

branch outlets has been reflected in the costs and profits of English banks.
Although there has been a reduction in the margin of profit per
unit of business among English banks during the past two decades, a commensurate reduction in the rate of profit on book invested capital has not
occurred, owing to a large increase in operations per unit of capital. If
hidden reserves are taken into consideration in computing invested capital,
however, the real rate of profit is considerably smaller than the apparent
rate which averaged about 9 per cent during the five years I926-I93O.




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