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6 1 S T C O N G R E S S "I

2d Session

)

SENATE

/ DOCUMENT

N o . 492

NATIONAL M O N E T A R Y COMMISSION

The

English Banking
System
By

HARTLEY WITHERS
Sir R. H. INGLIS PALGRAVE
AND OTHER WRITERS

Washington : Government Printing Office : 1910

NATIONAL MONETARY COMMISSION.

NELSON W. ALDRICH, Rhode Island, Chairman.
EDWARD B . VREELAND, New York, Vice-Chairman.
J U L I U S C. BURROWS, Michigan.
E U G E N E H A L E , Maine.
PHILANEER C. K N O X , Pennsylvania.
THEODORE E . BURTON, Ohio.
H E N R Y M. T E L L E R , Colorado.
HERNANDO D. MONEY, Mississippi.
JOSEPH W . BAILEY, Texas.

J O H N W . W E E K S , Massachusetts.
R O B E R T W . BONYNGE, Colorado.
SYLVESTER C. SMITH, California.
LEMUEL P . PADGETT, Tennessee.
G E O R G E F . BURGESS, Texas.
A R S E N E P . P U J O , Louisiana.
ARTHUR B . SHELTON, Secretary.

A. PIATT ANDREW, Special Assistant to Commission.

TABLE OF CONTENTS.

THE ENGLISH BANKING SYSTEM.

B Y HARTLEY W I T H E R S .

CHAPTER I * — T H E E N G L I S H SYSTEM:

(A)
(B)
(C)
(D)
(E)
(F)
(G)

Page.

The Bank of England
The joint-stock banks
The Scotch banks
The private banks
The merchant bankers and accepting houses.
The postal and trustee savings banks
The discount houses.

I I . — L A W AND CUSTOM I N T H E ENGLISH SYSTEM

(A)
(B)
(C)
(D)

The Bank of England
The English joint-stock banks
The private banks
The Scotch banks

I I I . — T H E BANKING

3
23
41
50
53
58
61
66
78
93
95

BUSINESS I N ENGLAND AND SCOT-

LAND:

(A)
(B)
(C)
(D)

English arrangements
Scotch arrangements
English banking associations
Conclusion

99
105
106
109

I V . — T H E LONDON STOCK EXCHANGE:

(A)
(B)
(C)
(D)
(E)

The institution of the jobber
Constitution and membership
The government of the exchange
The settlement and other details
The official list

111
120
127
128
132

THE HISTORY OF THE SEPARATION OF THE DEPARTMENTS OF THE BANK OF ENGLAND. B Y S I R R. H. INGLIS
PALGRAVE, F . R. S

149

CHAPTER I . — H I S T O R Y OF T H E SEPARATION

149

I I . — S E P A R A T I O N OF T H E T W O DEPARTMENTS AND T H E
R A T E OF DISCOUNT

182

III.—CORRESPONDENCE BETWEEN T H E GOVERNMENT AND
THE BANK O F ENGLAND DURING T H E C R I S E S OF

1847, 1857, AND 1866

202

IV.—EXTRACTS FROM EVIDENCE AND R E P O R T S OF COMMITTEES
HOUSE

OF T H E H O U S E

OF LORDS

AND T H E

OF COMMONS ON THE DIVISION

OF T H E

DEPARTMENTS

221

V . — R E M A R K S ON T H E BANK A C T OF 1844 BY T H E LATE

D R . N. G. PIERSON, SOMETIME P R E S I D E N T O F T H E
B A N K O F T H E NETHERLANDS
1

243

National

Monetary

ENGLISH BANKING ORGANIZATIONS.

Commission
B Y ERNEST SYKES__

THE LONDON BANKERS CLEARING HOUSE. BY ROBERT
MARTIN HOLLAND
TABLE I.—Bills, checks, etc., paid a t the bankers clearing house
in London, 1899-1908
II.—The average daily clearings, 1868-1908
I I I . —Statistics of the bankers clearing house from 1868-1908 _ _

Page.
262
267
292
293
294

THE ENGLISH BANKING SYSTEM.
By HARTLEY WITHERS.

CHAPTER

I."

THE ENGLISH SYSTEM.
(A) BANK OF ENGLAND.

The distinctive functions of the Bank of England consist
in its acting as—
i. Banker to the British Government.
2. Banker to the joint stock and private banks.
3. (a) Sole possessor of the right to issue notes which
are legal tender in England; (b) sole possessor, among
joint stock banks with an office in London, of the right to
issue notes at all.
4. Provider of emergency currency.
5. Keeper of the gold reserve for British banking.
6. Keeper of the gold reserve which is most readily
available for the purposes of international banking.
These various functions fit into and supplement one
another, and though their diversity is sometimes pointed
to as throwing too much responsibility onto one institution, it in fact enables the Bank to carry out its duties
with extraordinary ease, and with the least possible disturbance to the financial community. By the fact that
it keeps the balances of the other banks, the Bank of
England is enabled to conduct the payment of the interest
on the British debt largely by transfers in its books. By
the fact that it keeps the balances of the Government and
has the monopoly of the legal-tender note issue, the Bank
has a great prestige in the eyes of the general public,
which it communicates to the other banks which bank

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with it. There is an impression that the Government is
always behind the Bank, and that the Bank is always
behind the other banks, and this feeling has certainly
done much to foster the confidence of the British public
in its banking system.
A credit in the books of the Bank of England has come
to be regarded as just as good as so much gold; and the
other banks, with one exception, habitually state their
"cash in hand and at the Bank of England" as one item
in their balance sheets, as if there were no difference
between an actual holding of gold or legal tender and a
balance at the Bank of England. It thus follows at
times when an increase of currency is desirable, it can
be expanded by an increase in the balances of the other
banks at the Bank of England, since they thus become
possessed of more cash to be used as the basis of credit.
For currency in England chiefly consists of checks, and
customers who apply to the banks for accommodation,
by way of discount or advance, use it by drawing a check
which is passed on and so creates a deposit; and expansion of currency thus consists chiefly in expansion of
banking deposits. This expansion is only limited by
the proportion between deposits and cash which the
banks think fit to keep, and as long as they can increase
their cash by increasing their credit in the Bank of England's books the creation of currency can proceed without let or hindrance. Their balances can be increased
by borrowing from the Bank of England, which is generally carried out not by the banks themselves but by
their customers from whom they have called in loans,
and the Bank of England is thus enabled to provide

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emergency currency with great ease, by means of loans
and discounts which are used to swell the balances of
the other banks, which thus show an increase of the cash
at the Bank of England which they use as a basis for
credit operations. The elasticity of the system is thus
remarkable, and the merchants and bill brokers of
London can by taking approved security to the Bank of
England, increase the basis of English credit in a few
minutes by borrowing.
i. Examining these functions of the Bank of England
in closer detail we find that its first and most obvious one,
which originally brought it into being, of financing the
British Government and acting as its banker, is now perhaps its least difficult and important duty. Apart from
the prestige which it thus acquires and its close touch
with the Government and the officials of the Treasury, the
Bank's position as government banker is of little direct
material advantage. Its duties as such, besides the normal relation between a bank and a customer, consist
chiefly in making advances to the treasury in the shape
of "deficiency advances" when the government balances
are too low to admit of the payment of the quarterly
interest on the British debt without replenishment, or
against "ways and means" advances at times when the
revenue is coming in more slowly than government expenditure is proceeding. It also, when the Government
has to borrow to a greater extent, manages its issues of
treasury bills, or any loan operation that the Government
may have to undertake, such as the creation of fresh debt
in time of war, or the periodical borrowing recently necessitated by the requirements of the Irish land-purchase

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scheme. The variations in the amount of the Government's balance at the Bank of England are a question
of great importance to the outside money market, because
when this balance is big the result is that a large amount
of money is in the control of the Bank of England, and
the resources of the outer market are thus curtailed.
It has already been shown that the balances of
the other banks at the Bank of England are treated
by them as cash and used as the basis of credit.
Consequently when the payment of revenue on a large
scale transfers large amounts from the other banks to the
government account in the Bank of England's books, the
outer market's basis of credit is thus reduced and money
tends to become scarce and dear. This is especially noticeable in the last quarter of the financial year, January to
March, when the payment of the direct taxes (income tax,
and house duty) transfers many millions from the tax-paying public, through its bankers, to the national exchequer's
credit at the Bank. Between December 28, 1907, and
March 27,1908, public deposits, or government balances, at
the Bank of England rose from £5,625,000 to £19,843,000
by the operation of this process. This transfer makes a
gap in the basis of credit which has to be filled up by borrowing, and it is usual to find that, according to the phrase
current in Lombard street, " the market is in the Bank "—
that is, the merchants and brokers are borrowing from the
Bank of England throughout the greater part of this quarter of the year. When the market is borrowing from the
Bank it does so either by discounting bills with it at Bank
rate, which is the official minimum rate of discount, or by
taking advances on securities, for which advances it usu-

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ally pays one-half of i per cent above Bank rate; and since
Bank rate is, except on quite rare occasions, above the
rates for loans and discount current in the outside market,
it will be seen that this transfer of revenue funds to the
Government's balance normally raises the current value
of money during the period in which it is proceeding.
Dealers in credit, who are pinched in pocket by this
habitual decrease in the supply of money at this season,
cry out against the system, and maintain that the revenue
ought to be distributed among the other banks until it is
required for government disbursements at the end of the
quarter, in the same manner as the United States Treasury
deposits, when placed with the American banks, are
divided among many. Such a change, however, would
obviously strike at the very basis of the English system,
which has grown up with all its anomalies into a very
practical and trustworthy instrument. If the Bank of
England were deprived of its privilege of holding the
revenue as paid in, it would have to be remunerated more
highly, not only for the other work that it does for the
Government, but also for performing other functions for
the community, which, as will be seen later, throw onto
it responsibilities which hamper its earning power as a
banker. If any alteration is necessary of an arrangement
which causes chronic inconvenience to dealers in credit
during the greater part of a quarter of the year, it would
more naturally be found in a reorganization of the system
under which most of the direct taxes are paid in one
quarter. It has already been shown that the position
of the Bank of England as government bank gives it a
prestige in the eyes of the public, which it passes on to the

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other banks which are its customers; and a banking
system is so largely a psychological matter that the most
radical reformer would hesitate before making any alteration which would tend to shake the basis of this prestige.
2. The second of the Bank of England's distinctive
functions—its acting as banker to the rest of the English
banking community—is the one which throws upon it its
most serious responsibilities and gives it most of its actual
power and ease in working. The Government gives it
prestige in the eyes of the multitude, which considers that
governments are omnipotent; the other banks give it the
power of providing emergency currency by making entries
in its books, and so acting as the easily efficient center of
a banking system in which elasticity and the economy
of gold are carried to a perfection which is almost excessive. Nevertheless, it pays heavily for its apparently
privileged position as bankers' bank. At first sight
it would appear that these customers, keeping a regular
balance of twenty-odd millions, which varies little and
on which the Bank of England pays no interest, were a
source of comfortable income and no anxiety to it. But
in the first place it is obvious that a liability which is
regarded as cash by the rest of the banking community
requires special treatment by its custodian, and in practice it is so specially treated that the Bank of England
maintains a proportion of cash to liabilities which is fully
twice as high as that of the strictest of the other banks.
This proportion rarely is allowed to fall below 33 per cent
and generally ranges between 40 and 50 per cent, and it
need not be said that this high level of cash holding tells
heavily on the earning power of the Bank of England.

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Moreover, it is its position as bankers' bank that exposes
the Bank of England to the responsibility of maintaining
the gold reserve for English banking and being prepared
to meet, in gold, any draft on London that anyone abroad
who has acquired or borrowed the right to draw wishes
to turn into metal to be shipped to a foreign country.
The amount of the bankers' balances is not separately
stated, but is wrapped up in the total of the other deposits in the Bank of England's weekly return. It is believed
to average about 22 millions in these days, and it is
often contended that valuable light would be thrown
on the monetary position if this item were separated
from the balances of the other customers of the Bank.
Many of the outer bankers are in favor of this change,
but there is a serious practical objection to it, in that a
dangerous impression might be created in the public
mind if at any time it were seen that the Bank's cash
reserve was below its liability to its banking customers;
and the separate publication of the bankers' balances
might thus check the readiness with which the Bank of
England creates emergency credit. Another suggestion
that is sometimes made by the many critics of the existing order of things in English banking is that the banks
should keep their cash reserves themselves; but this
very revolutionary change would deprive the system
of its two great advantages, a centralized organization
with a center which specializes on the duties involved
by acting as center, and the extreme elasticity with
which the present arrangements work. At the same
time it must be admitted that the system by which the
other banks treat their balances at the Bank of England

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as cash leads to the existence of a vast amount of " cash "
in England which on being looked into is found to consist of paper securities or promises to pay. If we assume
that the proportion of cash held by the Bank of England
is 50 per cent of its liabilities—it does not always stand
so high—the other 50 per cent being represented by
securities, this at once shows that only half the bankers'
balances are backed by cash. And we shall see when
we look into its weekly return that its cash in its banking department, of which the bankers' balances are a
liability, consists largely of its own notes; and its own
notes are backed, to the extent of about one-third, by
securities. So that the actual gold held against these
bankers' balances consists roughly of about two-thirds
of a half of them, or one-third of their total. And when
it is considered that these bankers' balances are treated
by the bankers as equal to cash in hand and are made
the basis of credit, on which they build liabilities ranging from five to ten or even in extreme cases to fifty
times their extent, it becomes evident that the critics
who maintain that the multiplication of credit and the
economy of gold are carried too far in England have a
solid foundation for their contention.
3. The Bank of England's monopoly of note issue, which
once gave it the monopoly of joint-stock banking in London, is now a matter of comparatively minor importance,
owing to the change in English banking habits by which
the check has ousted the bank note for the purpose of
daily commercial payments, and the regulations which
were imposed on the note issue by the bank act of 1844.
Its monopoly lay in the provision, which was one of its

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early privileges, that " i t shall not be lawful for any body
politic or corporate whatsoever, or for any other persons
whatsoever, united or to be united, in covenants or partnerships exceeding the number of six persons, in that
part of Great Britain called England, to borrow, owe, or
take up any sum or sums of money on their bills or notes
payable at demand/' This monopoly was conferred on
the Bank in 1706 and was maintained until 1826, when
the implied monopoly in joint-stock banking was restricted to a 65-mile radius around London. In 1833
joint-stock banks were established in London itself, since
it had been discovered that the Bank of England's alleged
monopoly only reserved to it the privilege of note issue,
and the private bankers in London had already found
that it was more convenient to banker and customer to
work by the system of deposit and check. By this system
a customer who took a loan from his banker did not carry
it away with him in the form of notes, but was given a
deposit or credit in the bank's books and the power of
drawing checks against it. The development of this system has made money in England mean, as a rule, a credit
in the books of a bank which enables its holder to draw
checks, and has made checks the chief currency of the
country.
The development of this system was quickened by the
provisions of Peel's Act of 1844, which, under the influence
of banking disasters that had arisen out of reckless note
issuing by private banking firms in the counties, laid down
an iron rule for the regulation of note issues in England.
None of the other note issuers were allowed to increase
their issues under any circumstances, and the Bank of

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England, for every additional note issued beyond £14,000,000, was to hold metal in its vaults. Under the terms
of Peel's Act one-fifth of this metal might be silver, and
in the early returns issued by the Bank under the act a
certain amount of silver is found among the assets of the
issue department. In the first return issued, for example,
which was dated September 7, 1844, the total note issue
was £28,351,000, which was backed by £14,000,000 in
securities, £12,657,000 in gold coin and bullion and
£1,694,000 in silver. But since 1853, no silver has been
held in the issue department of the Bank, and in 1897,
when the influence of the bimetallists on the existing
Government led to a proposal that the proportion of silver allowed by law should be held by the Bank as backing for its note issue, public opinion expressed itself so
vigorously that the suggestion was promptly buried.
The Bank's fiduciary note issue, thus fixed at £14,000,000,
was only allowed to increase by the lapse of the issues of
the existing issuers, the Bank being empowered to
increase it by two-thirds of the amount lapsed. The
lapsing process has proceeded steadily by the amalgamation of country banks with banks which have London
offices and so are prohibited by the Bank's monopoly.
And the Bank's fiduciary issue has thus been raised
from the original £14,000,000 to £18,450,000. Above
this line it can not go except by means of the suspension of the bank act, which has been found necessary occasionally in times of panic, the last of such
occasions having occurred in 1866. The English currency
system is thus, as far as the law can rule it, entirely inelastic, but it has already been shown that even when the

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law of 1844 was passed, the check currency, over which the
law exercises no restriction, was already driving out the
note, and banks without any right of note issue had been 11
years established in London. The Bank of England's note
issue is now chiefly used by other banks as "till money,"
or part of the store of legal-tender cash they keep to meet
demands on them. It has thus become part of the basis
of credit in England, since the other banks roughly base
their operations on their holding of cash in hand and at
the Bank of England. Their cash at the Bank of England has already been discussed above; their cash in
hand consists of coin and notes, and since the latter have
thus become part of the foundation on which the deposit
liabilities of the other banks are based, there is reasonable
ground for the contention often put forward by practical
expert critics of the English system, that the fiduciary
note issue should be reduced by the repayment by the
Government of the whole or part of a Government debt
of £11,000,000 to the Bank, which backs the greater part
of it, and its replacement by gold. It is evident that the
amount of metallic backing for a note issue which is
intended to circulate as currency is a different matter
from that required in the case of a note issue which is held
by bankers as a reserve and used by them as a foundation for a pyramid of credit operations.
4. By the ease with which the Bank of England provides emergency currency it gives the English banking
system the great advantage of extreme elasticity and
adaptability; and it is enabled to do this by the fact that
it acts as banker to the other banks, and that every credit
which they have in its books is regarded by them and by

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the rest of the community as "cash" to be taken as practically equal to so much gold. This cash at the Bank of
England in the hands of the rest of the bankers can be
multiplied as rapidly as the Bank of England is prepared
to make advances, and as the mercantile and financial
community can bring it bills for discount or securities to
be borrowed on. There is no legal restriction of any sort
or kind, and the close relations between the Bank and its
borrowing customers enable the necessary operations to
be carried through with a celerity which is unrivaled, at
any rate in the Eastern Hemisphere. The process works
as follows: In every English bank balance sheet there will
be found an item among the assets "cash at call or short
notice," though in a few cases the slovenly habit is adopted
of including this entry along with the cash in hand. This
" cash," as it is called, really consists chiefly of loans made
by the banks to the discount houses, and regarded by the
banks as the most liquid of their resources. As such, it
is at once made use of when for any reason, such as the
many payments which have to be made on quarter days,
or the end of the half year when the preparation of balance
sheets by firms and companies requires an abnormal
amount of cash for more or less ornamental purposes, the
banks are subjected to extra pressure by their customers,
who both withdraw actual currency from them for smaller
payments, and require advances in order to show cash
with bankers in their balance sheets.
The banks in order to meet this pressure, and at the
same time to preserve an adequate amount of cash in
their own statements, call in their loans from the discount
houses; the discount houses, at a point, can only repay

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them by borrowing from the Bank of England and transferring the credit raised with it to the bankers, whose cash
at the Bank of England is thus increased. This book
entry takes the place in their balance sheets of the legaltender cash that their customers have withdrawn, and is
used as the basis for the increased deposits that have been
created by the loans of the bankers to their customers for
ornamental purposes. Similarly at the time of year when
the transfer of the taxes to the Government's balance
reduces the cash at the Bank of England held by the other
banks the gap is filled by the loans made by the Bank of
England to the customers of the other banks. In short,
by discounting and making advances the Bank of England can at any time create book credits, which are regarded
as cash by the English banking community, and on which
the latter can base the credits which give the right to
draw checks, which are the most important part of the
English currency. The extent to which the Bank of
England can create this credit is a matter for its own
discretion, but any creation of it diminishes the proportion that it shows in its own weekly returns between its
reserve and liabilities. Consequently when it is applied
to for amounts which bring that proportion too low the
Bank of England has to take steps to reinforce its cash
reserve.
5. It has been shown that the Bank of England keeps
the balances of the other banks, and from this it follows
that the latter look to it for gold or notes at times when
the local commercial community requires an extra supply.
At the end of every month, especially at the ends of the
quarters or at times of national holidays, the Bank's note
76651—10

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circulation expands and coin is taken from it. The duty
is thus thrown upon it of keeping an adequate supply of
casji for home purposes, and, as has been already stated,
its normal proportion of cash to liabilities is very much
higher than that of the other banks. But these movements are tidal and regular, and hough times of active
trade increase slightly the demand for coin and note currency in England, the extensive and ever-growing use of
the check reduces the importance of this part of the
Bank's duties.
6. Much more important is the Bank of England's duty
as custodian of the gold store for international banking.
London is the only European center which is always prepared to honor its drafts in gold immediately and to any
extent. The Bank of France has the right to make payments in silver, and uses it by often charging a premium
on gold, sufficient to check any demand for it; and in
other centers measures are taken which make apparently
free convertibility of credit instruments optional at the
choice of the central bank. Consequently the Bank of
England has to be prepared to meet demands on it at any
time from abroad, based on credits given to foreigners
by the English banking community, and it has thus to
observe the signs of financial weather in all parts of the
world and to regulate the price of money in London so
that the exchanges may not be allowed to become or
remain adverse to a dangerous point. The difficulties of
this task are increased by the extent to which the English
banking community works independently of it, by accepting and discounting finance paper, and giving foreigners credits at rates which encourage their further

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creation. For t h e low and wholly unregulated proportion
of cash t o liabilities on which English banking works,
enables t h e other banks to multiply credits ultimately
based on t h e B a n k of England's reserve, leaving t h e responsibility for maintaining t h e reserve t o t h e Bank. This
it does b y raising its rate when necessary, and so, if it has
control of t h e m a r k e t and its rate is " effective "—a phrase
which will be explained later—raising t h e general level of
money rates in London.
When its r a t e is not effective, t h e Bank of England finds
itself obliged t o intervene in t h e outer money market—
consisting of t h e other banks and their customers—and
control t h e rates current in it. This it does b y borrowing
some of t h e floating funds in this market, so lessening
their supply and forcing up t h e price of money. By
means of this borrowing it diminishes t h e balances kept
with it b y t h e other banks, either directly or indirectly—
directly if it borrows from them, indirectly if it borrows
from their customers who h a n d t h e advance to it in t h e
shape of a check on them. The result is t h a t so much
of t h e " c a s h a t t h e Bank of England," which t h e English
banking community uses as p a r t of its basis of credit, is
wiped out, money—which in London generally means
the price a t which t h e bankers are prepared t o lend for a
day or for a short period t o t h e discount houses—becomes
dearer, t h e m a r k e t rate of discount consequently tends t o
advance, t h e foreign exchanges move in favor of London,
and t h e tide of gold sets in t h e direction of t h e Bank of
England's vaults, and it is enabled to replenish its reserve
or check t h e drain on it. T h a t t h e Bank of England should
have t o go through this clumsy ceremony of borrowing

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money that it does not want, in order to deprive the outer
market of a surplus which depresses discount rates in a
manner that is dangerous owing to its effect on the foreign
exchanges, arises from the want of connection between
bank rate and market rate. In former days the London
money market never had enough money to work with
without help from the Bank of England. Bagehot, in his
great work on Lombard street, published in 1873, says
that " at all ordinary moments there is not money enough
in Lombard street to discount all the bills in Lombard
street without taking some money from the Bank of
England."
As long as this was so, Bank rate—the price at which
the bank would discount bills—was at all times an important influence on the market rate. Since then, however,
the business of credit making has been so quickly and skillfully extended that Lombard street is frequently able to
ignore Bank rate, knowing that it will easily be able to
supply its needs from the other banks, at rates which are
normally below it. Currency in England consists of
checks drawn against deposits which are largely created
by the loans and discounts of the other banks. There is no
legal limit whatever on the extent to which these loans
and discounts can be multiplied, and the only limits imposed are those of publicity, which is applied rarely in all
cases and in some not at all, and of the prudence with
which the banks conduct their business. Hence it follows
that competition between the banks often impels them to
continue to make advances or discount bills at low rates
when the Bank of England, as custodian of tlie English
gold reserve, thinks it advisable in the interests of the

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foreign exchanges to impose a higher level. This it does
by borrowing some of the credit manufactured by the other
banks, in order to create artificial scarcity of money, and
make its own official rate effective.
It thus appears that the Bank of England's official rate
is often through long periods a mere empty symbol, bearing no actual relation to the real price of money in London; and only becomes effective, and a factor in the
monetary position (i) when the trade demand for credit
is keen enough to tax the credit-making facilities of
the other banks to their full extent, (2) when the payment of taxes transfers large sums from the other
banks to the Government's account at the Bank of
England, so reducing the "cash at the Bank" on which
they build credit operations, and (3) when, owing to
foreign demands for gold, the Bank of England takes
measures, by borrowing, to restrict credits in the open
market and to make its rate effective. In other respects its official rate differs materially from the rates
quoted by ordinary dealers in credit. It does not fluctuate according to the supply and demand for bills, but is
regularly fixed once a week at the meetings of the Bank of
England court on Thursday morning. It is extremely
rare for any change to be made in the Bank of England
rate on any day except Thursday. Instances occur rarely
when some sudden change of position makes it essential,
as at the end of 1906, when the Bank rate was raised to
6 per cent on a Friday morning. In normal times the rate
which is fixed on one Thursday is maintained until the
next, though the rate is only a minimum and the Bank of
England occasionally takes advantage of this fact and

National
T~

Monetary

Commission
—

refuses to discount at its minimum, which still remains
ostensibly the Bank rate, while the bank actually makes
a rather higher charge, which is usually made the official
rate on the next Thursday.
But it must not be supposed that when Bank rate is
ineffective the Bank of England is doing no business.
It discounts bills and makes advances at market rates at
its branches, and also at its head office to its private customers. Bank rate may be described as the price at
which the Bank is prepared to discount in its official
capacity as center of the London market, and it is because appeal is only made in exceptional circumstances
to the Bank to provide credit in this capacity that Bank
rate is often ineffective.
Finally, the position of the Bank of England, and its
relation to the English money market, as a local and
insular affair, may be summed up by saying that the
Bank, by means of the prestige which makes a credit in
its books as good as gold enables the banking community
to expand credits and make check currency as long as it
is prepared to lend credit. And the extent to which it is
prepared to lend credit is only regulated by its own discretion and consideration for the proportion between its
cash and liabilities. At the end of the half year it is
sometimes applied to for fresh credits to the extent of
over twenty millions sterling, chiefly in the form of
advances for a few days. On one side of its account its
holding of securities is expanded by this amount and on
the other its liability on deposits is similarly swollen.
At the end of 1902, the last occasion when the Bank's
weekly return was made up on December 31, and so

National

Monetary

Commission

will be seen that the regulation laid down by the law is
much more important in Scotland than in England.
These regulations were largely based upon the principles
which dictated Peel's Act of 1844 for regulating the note
circulation of the Bank of England and of the English
banks. It will be remembered that with regard to English
banking Peel laid down that from that time forward no
increase in the Bank of England's note issue could be
permitted unless backed by an equivalent amount of
bullion, and that the English country banks should under
no circumstances whatever be permitted to increase their
circulation of notes. In Scotland, since there was no
leading institution enjoying any monopoly, the regulation
which was applied to the Bank of England was applied
to all the bankers as a whole. That is to say, the average
amount of their circulation was ascertained, and it was
laid down that in future any increase in that amount must
be backed by an equivalent amount of bullion. It naturally followed from the terms of this act for regulating
Scottish banking, passed in 1845, that any new bank
thereafter created would not have the right of note issue
and the result of this was that the then existing banks
were given what amounted to a joint monopoly of the
banking field in Scotland.
This fact has no doubt to some extent accounted for the
completeness with which the Scottish banks have been
able to make a hard and fast combination among themselves with regard to the rates at which they are prepared
to do business with their customers. It has protected
them from competition, either by any new rival who
might arise or by any English bank which might be bold

The

English

Banking

By investments—Continued.
Transvaal Government 3 per
cent stock (£537,635 at 93)._

System

£
s. d.
500,000 o o

1,500,000 o
Securities of, or guaranteed by,
the British Government
1, 049, 757 15
Government of India and colonial government securities.
95, 121 o

o
4
o

£
s. d.
2,644,878 15 4
6,512, 294 1 9 1 0
370,000 o o

By bills discounted, loans, and other securities
By bank premises (freehold)

16,842,943 17
L.

M. G.

GI,YN,

Managing
JANUARY I I ,

CURRIE,

Partners.

1909.
AUDITOR'S CERTIFICATE AND R E P O R T .

In accordance with the provisions of subsection 2 of section 19 of the
companies act 1907, I report t h a t I have examined the above balance sheet
with the books of the bank, I have obtained all the information and explanations I have required, and I am of opinion t h a t such balance sheet is
properly drawn up so as to exhibit a true and correct view of the state of
t h e bank's affairs according to the best of my information and the explanations given to me, and as shown by the books.
C.

K E M P , F . C.

Public
JANUARY I I ,

A.,

Accountant.

1909.

(D) THE SCOTCH BANKS.

In the case of the Scottish banks the law is very similar
in essence to that which governs their English brethren.
That is to say, it has laid strict and important regulations
upon the note issue, and has left the other important
banking functions practically to the discretion of the
bankers. But since all the great Scottish banks possess
the right of note issue, and regard it as a very valuable
asset, whereas in the case of the English banks the note
issue is now a negligible part of the banker's function, it
76651—10

National

Monetary

Commission

to make a statement to the Government of the names
and addresses of their partners. The number of their
partners, which was not to be more than six at the time of
the Bank of England's original charter, has now been raised
to a possible ten. Above that number they have to register as joint stock companies. There is no provision of
any kind for any statement of their assets and liabilities,
and though most of them do, in fact, publish half-yearly
or yearly balance sheets, there are still one or two private
banking institutions which never make public any statement whatever concerning their position. Appended is a
balance sheet of a leading private banking firm:
Forty-ninth

statement of assets and liabilities of Glyn, Mills, Currie & Co.,
December 31, 1908.
LIABILITIES

£
To capital paid up
To reserve fund
To current accounts
To deposit accounts
To reduction of the bank premises account

s. d.

I,OOO, OOO O O
500,000 o o
1 0 , 7 5 0 , 6 3 0 13 10

4,550,465 14
41,847 8

9
7

16,842,943 17

Memorandum.
Liabilities on account of acceptances,
indorsements, etc. (covered by
securities), not included in balance
£
sheet
1,218,544

s. d.
8 7

ASSETS.

By cash in hand and at Bank of England
By money at call and at short notice
By investments:
Two-and-a-half per cent con£
s. d.
sols (£1,219,513 at 82)
1,000,000 o o

£
2, 064, 020
5> 2 5i»750

s. d.
2 o
o o

The

English

Banking

System

With regard to the liability of shareholders, the law
again makes no definite regulation, but it is the general
custom for English joint stock companies to have a comparatively small amount of their capital actually paid up,
so that there is a heavy reserve liability which can be called
in in case of liquidation. All the chief joint stock banks
are now registered under limited liability. Since the reserve liability involved by the fact that only a small proportion of their shares is paid up is an important item in
their credit, it follows that the directors of banking companies exercise a considerable amount of care concerning
the persons into whose names their shares are transferred.
They have the right to refuse transfers of shares into the
names of persons of whose financial ability to meet the
liability in case of need they are not sufficiently assured,
and this right is frequently exercised.
It will be observed that the above regulations make no
provision with regard to capital and reserve funds, the
amount "of which is left entirely to the discretion of those
responsible for the bank's affairs, and that there is no provision for any inspection, supervision, or examination by
government officials, except in the case of those country
banks which still retain the right of note issue.
(C) THE PRIVATE BANKS.

Proceeding to the private firms, we find that as far as
they are concerned the law has practically nothing to say,
always excepting the case of those few country institutions which retain the right of note circulation, with regard
to which the regulations are the same as those enumerated for the joint stock companies. Private firms have

National

Monetary

Commission

statement was made by a president of the Bankers' Institute who, as chairman of the largest joint stock bank in
England, may be taken to have had exceptional opportunities for the exploration of banking accounts. He
spoke as follows:
" I may add that a joint stock bank which came into our
fold some years ago, whose reputation and position were
second to none in the Kingdom, and justly so, too, and
was a model of good management in other respects, employed every farthing they possessed, save and except
what they required for till money, up to the hilt every
day; feeling sure that by means of their investments,
which were gilt-edged though not consols, they would
always be helped over the stile if pressure came. And
that, I may say, is not an exceptional case."
It follows from this state of things, under which country
banks, competing keenly in the provinces with the
branches of the great London institutions, keep practically
no cash reserves at all, that the agitation for more complete and genuine publicity on the part of the great London banks is to some extent unfair, and that reform, if
any could ever be carried out, should first apply itself to
compelling all the banks to make clearer periodical statements. In this matter the law might well intervene by
insuring due publicity and uniform statements from all
banks in England. In other respects its regulations
might very probably be harmful, but it could not be asking too much from the banks if it compelled them to show
periodically genuine statements of their position, giving
the averages of the period covered, as is done by the New
York banks.

The

English

Banking

System

of what is commonly spoken of in Lombard street as " window dressing."
It is commonly urged that these statements would be
much more valuable and give a much truer idea of the
position of the several banks if they showed the position,
not on any one day, but gave the average figures for the
preceding period. It is, however, very difficult to bring
about reform in this matter, because the banks which
publish these periodical statements naturally retort that
they see no reason why they should give further publicity
as long as many of their competitors issue no such statements at all.
None of the private banks make these periodical statements, and a great amalgamation of them which was
converted into a joint stock company in 1894 has not
joined the ranks of those which produce monthly statements. So far the only effect of the agitation has been
that the London and County Bank publishes the daily
average of its cash holding, as well as its cash holding on
the day on which the statement was made up, and it
seems unlikely that anything further will be done until all
the other banks in England have been induced to agree to
give a similar amount of publicity.
The specimen of a country bank balance sheet given
above shows that even at the end of the half years when
all joint stock companies do make a public statement, the
important item of cash in hand is not separately given.
There is only too good reason to believe that the many
country banks which thus conceal the most important
item in their position make use of this concealment to
work on an extremely narrow cash basis. The following

National

Monetary
Banks1 monthly
i.

Bank.

Deposits,
etc.

Commission

statement—Continued.
2.

Acceptances,
etc.

3.
Cash in
hand and
at Bank
of
England.

Cash at
call and
notice.

Proportion
of
column
3 to
column

Proportion
of
column
3 to
columns
1 and

London and Southwestern
London and Westminster
_
National
National Provincial
Parr's
Union of London and
Smith's
Williams Deacon _
Total
A year ago

P.ct. P.ct.
14.9 14. 9

2, 901,403
1, 710,51s
9, 134.694
4,846,446

5.275.375
2,004,880
4,006,461
4.826,385

13.0
13-7
15-9
16. 4

12.3
12. 3

34,465,600 3.503.806 5,565,248 6.542,785
662,925 2,134.745 1,062,424
13.301,799

16. 1
16. 0

14.7
15.3

429,158,771 24,176,855 67, 360, 26855,22r,148 15- 7
397.312,472 24,685,002 6l, 639, 802 AS. 7Q<. A&2 15-5

14. 9
14. 6

14,591,267

27,770 2, 174.837 1.417.33o

22,346,851 1,282,281
1 2 , 5 0 3 , 2 1 0 1.396,937
721,113
57. 294.363
29, S9o, 810 2,863,163

15.7
14. 9

It is well known that some of the banks call in loans or
allow bills to mature without renewing them, in order to
show a reasonable proportion of cash in hand in these statements, and in so far as this practice is carried out, the statements are obviously misleading, since they do not show
what the position of the bank has been during the month
covered, but only upon a certain day in it. And since they
are not all made up on the same day, it is thus possible for
cash to be called in by one bank for one day, released by it
the next day, and passed on to figure in the statement of a
competitor; and the system, which was inaugurated at the
request of Lord Goschen after the crisis of 1890 in order to
insure the greater publicity which he saw to be necessary,
has thus led to a certain amount of abuse, and the practice

The

English

Banking

Billsonhand
Advances on current accounts, loans, etc
Bank premises at Halifax and branches

System
£
s.
657,423 12
2,165,566 3
42, 000 o

d.
2
2
o

4,485,096

Custom has also induced many of the chief joint stock
banks to issue a monthly statement of assets and liabilities, which is more or less based upon the statutory form
referred to above, though amplified and made to some
extent more informing.
Appended is a summary and analysis of all these statements taken from the Times newspaper in the form in
which it publishes them once a month. These statements
give the position of the various banks on one day at the
end of each month. The day in question is chosen by
each of the banks, and the dates on which they make up
their statements range over the last week or ten days of
each month.
Banks1 monthly

Bank.

Deposits,
etc.

Acceptances,
etc.

statement.a
3-

Cash in
hand and
at Bank
of
England.

Cash a t
call and
notice.

Proportion
of
column
3 to

Proportion
of
column
3 to
columns

umn
1.

£
Capital and Counties
Lloyds
London Joint Stock
London and County
London City and Midland

35.395.302

P.ct.

1 and
2.

P.ct.

557.524 5.515.924
3,662,597 12,187,917

7,241,053
6, 2 6 5 , 4 5 4

IS-6
16.8

15.3
16. 0

1.400,358 3,566,847
3. 153.873 6 , 8 6 8 , 4 3 6
7,033,194

5,301,915

12.5

43.866,938

3, 666,969

15-7

11.9
14. 6

64,850,909

4,944.5o8 10,753,256

7,610,117

16.6

15.4

72,443,932
28,507,780

o Published in the Times of March 16, 1909, showing the position of the banks a t th©
end of February,,

National

Monetary

Commission

whereas the other joint stock banks put them together in
one item. It also states separately cash in hand and cash
at the Bank of England, though its competitors give them
also in one item. It separates its loans and advances from
its bills discounted, though many, but not all, of the other
joint stock banks put these items together. Many of the
country banks do not even show a separate statement of
their cash in hand. In the appended specimen of a north
country bank's balance sheet it will be observed that the
cash in hand is included with the cash at call and short
notice, that is to say, cash that has been loaned, and,
though probably easily recalled if required, is not actually
in the bank's possession.
INABILITIES.

£
s. d.
Capital
300, 000 o o
Reserve fund
305,000
0 0
Notes in circulation
5*520 o o
Unpaid dividends
204 5 o
Amount due by the bank on current accounts, deposits,
drafts on London agents, etc
3*837,794 9 3
Rebate on bills and interest on deposits
11, 838 14 10
£
s. d.
Balance of profit and loss account
39, 738 16 4
Less interim dividend paid in August last. 15,000 o o
24,738 16 4
4,485,096

£
s.
815,84612

d.
o

804,259 i£

ASSETS.
Cash on hand, at call, and at short notice
£
s.
£250,000 consols
207,500 o
Other British government securities
215,660 7
Colonial government, English railway
debenture, and other stocks
381,099 10

d.
o
6
7

The

English

Banking

System

P R O F I T AND LOSS ACCOUNT.

£
s. d.
Interest allowed t o customers
171,864 6 6
Salaries, contributions to pension fund, and other expenses
a t head office and branches
215,749 4 9
Rebate on bills not due
29,077 5 11
Dividend on 229,341 shares a t 15s. 6d. per
share, equal to a rate of 10 per cent per
£
s. d.
annum
177,739 5 6
Balance, being undivided profit carried forward t o the next half year
190, 607 18 4
368, 347 3 10
785,038

1 o

Profit unappropriated on J u n e 30, 1908
193, 839 17 7
Gross profit for t h e half year ending December 31, 1908,
after making provision for all bad and doubtful debts and
payment of income t a x
591,198 3 5
785,038

1 o

F E L I X SCHUSTER, Governor,
J O H N TROTTER, Deputy

Governor,

H E N R Y J. B. K E N D A L L ,

Directors.
J . E. W. H O U L D I N G ,

Manager.

C. H . R. WEIDEMANN, Chief

Accountant.

REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF THE UNION OF LONDON & SMITHS BANK (LIMITED).

We have audited t h e above balance sheet with t h e books a t t h e head
office and with t h e returns from the branches. We have satisfied ourselves
as t o t h e correctness of t h e cash a n d have verified t h e investments held
by t h e bank, t h e securities held against money a t call a n d short notice
and t h e bills discounted. We have obtained all t h e information a n d explanations we have required. I n our opinion such balance sheet is properly
drawn u p so as t o exhibit a true and correct view of the state of the company's affairs according t o t h e best of our information a n d t h e explanations given to us and as shown b y the books of the company.
W M . B. P E A T ,
C. W. M. K E M P ,
ARTHUR F. WHINNEY,

Auditors.

It will be observed that the above balance sheet shows
the bank's deposit and current accounts separately stated,

National

M o net ar y

Commission
£

s. d.

Acceptances and guaranties
3,461,362 2 1
Liabilities by indorsement on foreign bills sold
24, 268 11 7
Other liabilities, being interest due on deposits, unclaimed dividends, etc
563,352 1 11
Rebate on bills not due
29,077 5 11
Profit and loss—
£
s. d.
Balance brought forward
193,839 17 7
Net profit for the half year ending
December 31, 1908
174,507 6 3
368,347 3 10
45,027,056

9
2

°
o

6, 246, 079 12

ASSETS.
Cash in hand
Cash in Bank of England

3,353,635 6 10
3,528,438 12 2

Money at call and at short notice
Investments:
Securities of and guaranteed by
the British Government
2,939,312 7
India stock and Indian Railways guaranteed bonds
313,098 6
English corporation stocks, railway and waterworks debenture and preference stocks,
colonial stocks, foreign government and railway debenture bonds
1,748,753 4
Other investments
„
94,915 13

6,882,073
6,933,965

11
10

8
o

5,096,079
Reserve fund (£567,000 consols;
1
£>5 5,5°° local loans stock; £207,600 Transvaal government 3 per
cent guaranteed stock)
1,150, 000
Bills discounted:
(a) Three months and under
(b) Exceeding three months

3, 978, 249 15
450,511 13

1
9

,428, 761 8 10
Loans and advances
15,456,759 15 1
Liabilities of customers on acceptances and guaranties,
as per contra
3,461,362 2 1
Liabilities of customers for indorsements, as per c o n t r a .
24, 268 11 7
Bank premises, chiefly freehold (at cost or under)
1, 455, 879 4 1
Other assets, being interest due on investments, etc
137, 906 7 7

45,027,056

The

English

Banking

System

Government securities.
Bills of exchange and promissory notes.
Cash at the bankers.
Other securities.
This is the only form in which publicity is imposed by
law upon banking in the ordinary sense of the word as it is
now understood in England. It need hardly be said that
from the form of the statement it conveys absolutely
nothing to the ordinary member of the public, and these
statutory statements, though they are still put up by the
banks in their offices, with more or less modification from
the original form, are perhaps the only statements issued
by them to which no attention whatever is ever paid. Custom has made the banks publish the accounts and balance
sheets which the law only compels them to lay before their
shareholders in general meeting. Appended is a specimen
of the balance sheet and profit and loss account of the
Union of London and Smiths Bank, which is selected by
reason of the fact that it presents its position with unusual
detail.
THE UNION OF LONDON & SMITHS BANK (UMlTEjD).
Statement of accounts for the half year ending December 3 1 , 1908
G E N E R A L BALANCE.
LIABILITIES.

£
s. d.
Capital subscribed, £22,934,100, in 229,341 shares of
£100 each; paid up, £15 10s. per share
3, 554, 785 10 o
Reserve fund invested in consols, local loans stock, and
Transvaal government 3 per cent guaranteed stock,
as per contra
1,150,000 o o
£
s. d.
Current accounts
25,116,492 19 4
Deposit accounts
10, 759, 370 8 o
•
35, 875, 863 7 4

National

Monetary

Commission

Apart from this, the statements of accounts which banking
companies have to produce are, with one unimportant
exception, merely those laid down by the joint stock companies acts; that is to say, once a year the accounts of
every banking company have to be examined by an
auditor or auditors. The auditors have to be elected by
the shareholders once a year, and have access to the books
and accounts of the company at all reasonable times. In
the case of a banking company, an investigation into the
company's position may be ordered by the board of trade
on the application of not less than one-third of the shareholders.
A special form of statement of capital, liabilities, and
assets for banking and similar companies was laid down
by the companies act of 1862. It provided that every
limited banking company and every insurance company
and deposit, provident, or benefit society under the act
should, on the first Monday in February and the first
Monday in August in every year, make and put up in a
conspicuous place in every office in which it carries on
business a statement showing the capital of the company,
authorized, issued, and paid up, and also a statement of
assets and liabilities of the company on the first day of
the preceding month, drawn up in the following form:
Debts owing to sundry persons by the company—
On judgment.
On specialty.
On notes or bills.
On simple contract.
On estimated liabilities.
The assets being divided into—

The

English

Banking

System

express purpose of attending to details of management.
If Mr. Cory was-deceived by his own officers there appears to me to be no case against him a* all. The provision made for bad debts, it is well said, was inadequate,
but those who assured him that it was adequate were the
very persons who were to attend to that part of the business, and so of the rest."
At the same time the law appears to lay down that the
trust reposed by directors in others must not be blind or
unqualified or to the exclusion of the exercise of their own
judgment, and they are bound to fulfill the regulations of
their own company.
The duties and liabilities of managers are left in a similar state of vagueness as far as the law is concerned. Like
the directors the manager has to account to the company
for any profits that may accrue to him in connection with
his position, that is to say, he must not conduct business
on his own account and keep the profits for himself, and
he is of course expected to use reasonable diligence and
care.
In a case in which a bank manager had obtained a commission for bringing about the amalgamation of two banks,
it was stated in the course of the judgment that since he
was a manager, bound to consult the shareholders'
interests only, he could not retain a pecuniary benefit
obtained by him in his character of manager not known
to and not sanctioned by the shareholders who employed
him.
It has been shown above that special regulations were
made for the periodical publication of the liabilities of
joint-stock banking companies under their note issue.

National

Monetary

Commission

undertake certain duties and responsibilities to which the
law expects them to apply reasonable diligence and care.
They are bound to account to the company for all profits,
and are responsible for any losses that may be incurred by
their acting ultra vires, or by their willful misconduct, or
by negligence. Innocent mistake does not appear to render them liable, and they are entitled to place a reasonable
amount of confidence in the officers of the company.
In the course of giving judgment on a case which is
quoted by Dr. Heber Hart in his work on the law of
banking, Dovey v. Cory, the Lord Chancellor made a
statement containing the following remarks:
"The charge of neglect appears to rest on the assertion
that Mr. Cory like the other directors did not attend to
any details of business not brought before them by the
general manager or the chairman, and the argument
raises a serious question as to the responsibility of all
persons holding positions like that of directors, how far
they are called upon to distrust and be on their guard
against the possibility of fraud being committed by
their subordinates of every degree. It is obvious if
there is such a duty it must render anything like an
intelligent devolution of labor impossible. Was Mr.
Cory to turn himself into an auditor, a managing director, a chairman, and find out whether managers, auditors, and directors were all alike deceiving him? I can
not think that it could be expected of a director that he
should be watching either the inferior officers of the
bank or verifying the calculations of the auditor himself. The business of life could not go on if people could
not trust those who are put into a position of trust for the

The

English

Banking

System

the names of the several places in which it carries on
business. The register of members is to be kept at the
registered office of the company, and any shareholders
in a joint stock bank can claim to inspect the list during
business hours.
A special provision with regard to the purchase and sale
of bank shares on the stock exchange was laid down by a
statute, commonly known as Leeman's Act, which provides that all contracts and claims for sale and purchase
in the shares of joint stock banking companies shall be
null and void unless they shall set forth the numbers of
the shares transferred. The object of this provision was
to prevent attacks on the credit of banks, which might have
serious results from the public point of view, by means of
bear sales on the stock exchange. Its practical result was
that nobody could sell a bank share unless be possessed
them or could borrow them from some actual holder, and
so was able to give the numbers of the shares at the time
when the sale was effected; and it was thus made impossible
by means of fictitious sales, with a view to repurchase
before the completion of the bargain, to give any appearance of weakness to the position of a bank.
With regard to the liability of directors and officers, the
banks are again subject to the ordinary law of joint stock
companies. Under this law it is permitted to companies
to provide under their memorandum of association that
the liability of the directors shall be unlimited, but this
provision is rarely, if ever, made use of. The directors of
a company, being to all intents and purposes a specially
elected committee of shareholders appointed to manage
its affairs in the interests of the company as a whole, thus

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account of the circulation of bank notes on every day
during the previous week, and also the average amount
of the circulation, and at the end of every period of four
weeks an average circulation during the four weeks is to
be stated, and also the amount of notes which the Bank
is authorized to issue under the act.
These returns were to be published by the commissioners in the London Gazette, and though, owing to the
supersession of the note by the check, they have no
practical value as a statement of English currency movements, these returns do still make their appearance in
the Gazette, an official publication which is read only by
those in search of curious information. It may be added
that any neglect of the duty of presenting this return to
the commissioners, or any falsification of the accounts,
render the Bank liable to a fine of £100. Under the act
the commissioners have the right to inspect the books of
the noteissuing banks, but this right does not appear to
have ever been exercised.
Before leaving the subject of notes, we may add that
the limitation of liability on bank shares does not apply
to the liability under notes. But here again, owing to
the insignificant dimensions of the note issue of the
English banks, this provision is of no importance. Under
the provisions of the joint stock companies acts, which
apply to all joint stock companies as such, the English
joint stock banks have to furnish to the registrar of
joint stock companies an annual list of shareholders in
the company, with their names, addresses, and occupations, and the number of shares held by them. A banking company must add to this list a statement of

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from the Bank of England, are now a quite negligible
quantity, averaging something under half a million; and
since no joint stock bank with an office in London can
possess the right of note issue, it follows that all the great
English banks, which necessarily from their position
must have an office in London, are debarred altogether
from note issuing. Nevertheless, for the sake of completeness, it would be as well to state the nature of the
restrictions upon the right of note issue which govern
those of the few country joint stock banks which still
maintain them.
By the act of 1844 it was laid down that no banking
company in England which did not then possess the right
of issue could acquire it, and that those which then exercised it could not under any circumstances increase their
note issue above the limit laid down by the act, which
was based on the average of its circulation during the
twelve weeks preceding the 27th of April, 1844. The
right of issue might only be exercised outside a circle
drawn around London with a radius of 65 miles, within
which the Bank of England's monopoly was protected
against competition by other joint stock companies.
In order to exercise the privilege, a bank must annually
take out a license subject to a duty of £30, a separate
license being necessary for every place at which notes
are issued. In respect of the note issue, the law thus
laid down an absolute limit upon English banking, and
also made strict regulations for the presentation of returns showing that it had not been exceeded. The bank
charter act provides that a weekly return shall be sent
to the commissioners of stamps and taxes, giving an
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basis of credit, should be, actually and in fact, a bullion
certificate.
The amount of the Bank of England's reserve, as shown
in its weekly return, is an item of the utmost importance
to those who have to forecast the condition of the London
money market. The amount of the reserve is now rarely
allowed to fall below 20 millions, though there are many
still alive who can remember the time when a 10-million
reserve was considered an adequate amount. When gold
is taken from the Bank, it follows that the notes issued
against it by the issue department are canceled, and thus
the amount of notes held among the assets of the banking
department are canceled likewise. The export of gold
so immediately reduces the reserve of the banking department and lowers the proportion between it and the Bank's
liabilities on public and other deposits and seven-day bills.
Both the amount of the reserve and its proportion to liabilities are carefully watched by the bank court, and any
serious reduction in them is met by measures described
above, viz, the raising of its official rate, accompanied, if
necessary, by the borrowing process by which, as has been
shown, the Bank of England frequently has to make its
rate effective.
(B) THE ENGLISH JOINT STOCK BANKS.

With regard to the provisions laid down by the law for
the organization and working of the ordinary English
joint stock banks, it may be said that, except with regard
to note issue and one or two quite unimportant details,
no special provisions are made; and it has already been
shown that the note issues of the English banks, apart

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tion being thus over 45 per cent. In the case both of the
Scotch banks and of the Bank of England the cash held
against notes is regulated by law, and above a certain
limit each note issued must be represented by bullion.
But the Scotch banks have developed deposit banking
facilities to an extent which has made their total cash
holding small in proportion to their total liabilities on
notes and deposits, while the Bank of England, owing to
the high proportion that it maintains against the liabilities
of its ordinary banking business, still shows in the return
given 45 per cent of cash against its notes outstanding
and its liability on deposit and drafts, which compares
very favorably with the proportion that we found in the
hands of the Scotch banks.
At the same time, though, as compared with Scotch
practice, the Bank of England's ideal is a high one. The
fact that the reserve of its banking department (held
against the liabilities which include the balances of the
other banks which are an important part of the basis of
English credit) consists largely of its own paper, which is
based to the extent of about one-third on government
debt or securities, is an example of credit based on credit
that is sometimes pointed to as a too successful extension
of the economy of metal which, within due limits, is one
of the most important functions of modern banking.
And there is a strong feeling among the English banking
community that the Bank's fiduciary issue should be
gradually abolished, and that the Bank of England note,
which is now held largely as a reserve by the Bank of
England and the other banks, also has become part of the

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" rest." When reference is m a d e t o t h e Bank of England's
reserve, w h a t is m e a n t is its holding of cash in t h e banking
department. This cash consists very largely of t h e Bank
of England's notes issued b y the issue department. I t
will be observed t h a t in the return before us the notes
issued, t h e liability of t h e issue department, amount t o
nearly 56 millions, while the notes held b y the Bank in
t h e banking department amount to 27^ millions. Subtracting one item from t h e other, we find t h a t some 28J
millions was t h e a m o u n t of t h e Bank's actual note circulation. I t t h u s appears t h a t a very large proportion of
the cash held by the Bank of England to meet demands
upon it consists of t h e liabilities of its issue department,
and t h e system of treating a liability as an asset, which
has been academically criticised above in t h e case of the
Scottish banks, is t h u s practiced by the Bank of England.
B u t there is this important difference between the two
cases. The Scottish banks, as was shown b y the evidence
of their own representatives, t a k e advantage of their noteissuing privilege to economize metal to t h e extent of 8 or
10 millions. And so it follows t h a t their holding of actual
cash is decidedly low when compared with their liabilities
against notes and deposits. The Bank of England, on t h e
other hand, habitually holds a very high proportion of
cash. I n t h e return given above its liability on notes outstanding is £28,672,000, taking the notes issued less those
held b y t h e banking department as an asset, and its
liabilities on public and other deposits and seven-day
a n d other bills come to £57,170,000, making a total of
£85,842,000. Against these liabilities it holds in its two
departments £39,172,000 in coin and bullion, t h e propor-

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land's return, that it has been frequently suggested that
the bankers' balances should be separated from the other
items included in the other deposits. It is unlikely,
however, that this suggestion will be revived among the
other bankers, who were its most important advocates,
because it has been borne in upon them that if this reform
were carried out the willingness of the Bank of England
to lend money at times when emergency credit is required
might be very seriously modified. There can be no doubt
that at the end of the half-year, when the Bank of England
frequently adds 15 or 20 millions to the amount of the
bankers' balances, by the loans which it makes to the bill
brokers and others who place the credit so created to the
account of their bankers at the Bank of England, these
bankers' balances must be raised to a level which is considerably above that of the Bank of England's reserve;
and it seems more than probable that if the amount of the
bankers' balances were separately published, the Bank of
England might be unwilling to allow this process to be
indulged in with the same freedom.
If this were so, the whole mechanism of the London
money market would be modified in a manner which its
components would probably find inconvenient, and since
this aspect of the case has been recognized the agitation in
favor of the separate publication of the bankers' balances
has been practically dropped.
The last two items among the assets of the banking
department contain what is usually called the "Bank of
England's reserve." It is not a reserve in the ordinary
sense of the word, accumulated profits held as a reserve
fund. That we find among the liabilities under the name

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quarter, the market was actually at the date of this
return obliged to borrow from the Bank of England in
order to restore its balances.
The item of seven-day and other bills is an oldfashioned form of remittance provided by the Bank
and used chiefly for the purposes of revenue payments.
On the other side of the account we find the Bank's
assets divided into "Government" and "Other securities' ' and its holding of its own notes and of gold and
silver coin. Here again " Government" means only the
British Government, and under the item "Government
securities" are included the Bank's holding of consols
and other British Government stocks, treasury bills, or
other forms of unfunded debt, and likewise any promises to pay that it may hold from the Government against
temporary advances that it may have made to it in the
ordinary course of its relation with it as its banker.
The "Other securities" item is equally, or still more,
comprehensive. It includes the Bank's holding of stocks
or shares, any bills that it may have taken from the
London market, its loans to private customers or to bill
brokers or stockbrokers, *and the discounts and advances
that it makes in the course of its ordinary banking business at its branches in the country. It will thus be seen
that the return in this respect is far from informing, and
it is contended, not without reason, that the Bank of
England might well set an example of clearness in the
account which it presents by separating its loans, its discounts, and its holding of securities as investments.
It may perhaps also be added while we are on this
subject of suggested improvements in the Bank of Eng-

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tion. Unlike most reserve funds, however, this item, " the
rest," fluctuates from week to week, and may be supposed
to contain the current profit and loss account balance. It
should be added that, by unwritten custom, it is never
reduced below £3,000,000, and the amount above this
level at which it stands at the end of the Bank's half year
is the amount available for distribution by way of dividend
among the proprietors.
The public deposits are the deposits of the various departments of the British Government which the Bank
holds on its account as keeper of the national balances.
In the account presented above this item is shown swollen
by the collection of the direct taxes, which proceeds during
the quarter from January to March. The other deposits
are the Bank's liabilities to all customers other than the
British Government, and so include the balances of the
other banks which use the Bank of England as their banker
and holder of a considerable portion of their cash reserves.
Included along with them, however, there are the balances
of the Bank's private customers, including municipalities,
colonial goverments, etc., and the amount of the bankers'
balances on which the resources of the London money
market, apart from the Bank of England, really depend,
can only be guessed at. It is believed that they generally average about 22 or 23 millions, and it is generally
found that when the amount of the other deposits as a
whole falls to about 41 millions, money in Lombard street
is scarce and comparatively dear.
In the account given above it will be seen that the
pressure of tax payments has reduced them below 40
millions, and, as usual during the January to March

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that the issue department contains one line of liability,
viz, the notes issued. On the other side, giving the list
of the assets held against these notes, the first line is
" Government debt," which is the original debt from the
Government to the Bank, to provide which the Bank of
England was founded in 1694, swollen from the original
£1,200,000 to over 11 millions by subsequent additions.
The next line, " Other securities/' gives the holding of
British Government stock, which raises the fiduciary
backing of the Bank of England's note issue to the
£18,450,000 at which it now stands. The rest of the notes
issued are backed by gold coin and bullion, though the
line " Silver bullion " recalls the fact that by the bank act
of 1844 the Bank was empowered to hold silver against
its notes to the extent of one-fourth of the gold or onefifth of the total bullion. But, as has been recorded
above, it is more than half a century since this right has
been exercised, and a recent attempt to put it into force
was so strongly resisted by city opinion that it was
promptly dropped.
The items in the banking department require a little
explanation. The " Proprietors' capital" speaks for
itself, except that it differs from that of other English
banking companies by being fully paid up, though, as
was observed above, there is some doubt as to whether
there is further liability on it.
The next item among the liabilities, "the rest," as it is
called, is the Bank of England's reserve fund in the ordinary sense of the word—that is to say, an accumulation of
profits which have not been divided among the proprietors
but have been kept in hand to strengthen the Bank's posi-

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BANK OF ENGLAND.
An account pursuant to the act 7 and 8 Vict. cap. 32, for the week ending
on Wednesday, the 10th day of March, 1000.
I S S U E DEPARTMENT.
DEBIT.

Notes issued

£55, 952, 170
55> 952,170
CREDIT.

Government debt
Other securities
Gold coin and bullion
Silver bullion

11,015,100
7,434, 900
37, 502, 170

55.952, 170

Dated the n t h day of March, 1909.

J. G. NAIRNE, Chief Cashier.
BANKING DEPARTMENT
DEBIT.

Proprietors' capital
£14, 553,000
Rest
3*691,483
Public deposits (including exchequer, savings banks, commissioners of national debt, and dividend accounts
17, 267, 641
Other deposits
39, 876, 393
Seven-day and other bills
. 26, 576
75,415,093
CREDIT.

Government securities
Other securities
Notes
Gold and silver coin

15, 141,108
31, 323, 272
27, 280, 175
1, 670, 538
75,415,093

Dated the n t h day of March, 1909.
J. G. NAIRNE, Chief Cashier.

These weekly accounts are commonly called "the bank
return," and are closely studied as containing the key to
the position of the Bank of England and the available
resources of the London money market. It will be seen

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no note was to be issued except with a full bullion backing. It thus, as far as it understood banking, took away
from the banker the whole of his discretion concerning
the amount of bullion which he was expected to keep
against his liabilities. Had it recognized that the check
currency, though only in its lusty infancy, was likely to
drive the bank note out of circulation for the ordinary
purposes of commerce and finance, it may be supposed
that it would have dealt with its creation in an equally
drastic manner. Fortunately it did not perceive this
development, though it had already made great progress;
it consequently left a door open by which English banking has been able to develop unfettered and unrestricted.
The regulations on the Bank of England's note issue are
now a matter of minor importance. When the banking
community goes to the Bank of England for assistance,
it does not ask it for notes, but for a credit in the books
of its banking department. As has been shown in previous sections of this memorandum, at the end of the half
years, when the English monetary community finds it
necessary to create a large amount of emergency credit
and currency, it carries out this operation easily and simply by taking security to the banking department of the
Bank of England and obtaining, to the extent of 15 or 20
millions, fresh credits in its books, which are regarded for
English banking purposes as equivalent to so much gold.
The bank act of 1844 also enacted that the Bank of
England should publish once a week a statement of the
assets and liabilities of its two departments, and a copy
of one of these statements is here appended.

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It is also well known that Peel's Act of 1844 provided
for the separation of the Bank's functions into two separate departments, one of which it called the " issue department" and the other the " banking department," the
promoters of the act being apparently of opinion that there
was some essential difference between note issuing and the
other functions of the banker, and that note issuing ought
to be very specially regulated and restricted, and that as
long as this were done all would be well with the currency
arrangements of the country.
A good deal of confusion appears to have prevailed in
the minds of those who were responsible for this curious
piece of legislation. It speaks of the " Bank of England's
exclusive privilege of banking," whereas the only exclusive
privileges that the Bank of England possessed were connected with note issue, and at the same time it draws
a hard and fast line between banking and note issuing, as
if the two functions were wholly separate. The principle on which it was based, which appears to have been
the theory that the issue of notes was the only form of
currency that needed regulation or care, involves an extraordinary oversight when it is remembered that ten years
before this act was passed joint stock banks had been
founded in London, solely for the purpose of conducting
deposit banking and handling the check currency which
deposit banking creates.
It is perhaps fortunate for English banking that the
legislature took so one-sided a view of the system which
it was attempting to regulate. Its regulation of the note
issue consisted in drawing a cast-iron line, beyond which

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The charter did not make any definite statement concerning one point which has occasionally been debated and discussed in later days, viz, the question of any liability upon
holders of Bank of England stock. It has occasionally
been contended that there is no limitation on the liability
of holders. But it need not be said that the question has
never been a practical one. Under the national debt act
of 1870, which regulated the payment of the dividends on
the national debt of Great Britain, it was provided, among
other things, that until all the stock of the English debt
had been redeemed the banks of England and Ireland
should each continue to employ within their offices a fit
person as their chief cashier and another fit person as their
accountant general. Apart from these provisions, the
law has left the question of the management and organization of the Bank of England to the discretion of the
proprietors and their directors.
The Bank of England's note issue has been regulated in
a manner which is well known by Peel's Act of 1844, which
laid down that the amount of its fiduciary issue, that is to
say, its issue of notes against securities rather than bullion,
was to be restricted to 14 millions, and that above that
point for every note issued the Bank should hold metal in
its vaults. It was also enacted that if the issues of any
country banks which had the privilege of note issue were
subsequently to lapse, the Bank of England should be
empowered to increase its fiduciary issue to the extent of
two-thirds of the lapsed issue. By means of these lapses
the amount of the fiduciary issue has been raised from the
14 millions mentioned in the act of 1844 to £18,450,000.

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Bank. The qualification for the deputy governor was
£3,000, and for directors £2,000. The governor was also
required to take an oath to the effect that he would ' ' to
the utmost of his power by all lawful ways and means
endeavour to support and maintain the body politic or
fellowship of the government and company of the Bank of
England and the liberties and privileges thereof.''
Similar oaths had to be sworn by the deputy governor
and directors and they also had to swear that they were
possessed of a sufficient holding of stock in the Bank.
Oaths were also administered to electors before they
could give any votes in the general courts and also to all
the " inferior agents or servants for the faithful and due
execution of their several places and trust in them
reposed.'' It was also appointed that "no dividend shall
at any time be made by the said governor and company
save only out of the interest, profit, or produce .arising
out of the said capital stock, or fund, or by such dealing,
buying, or selling as is allowed by the said act of Parliament, and that no dividend whatsoever shall at any time
be made without the consent of the members of the said
corporation in a general court, qualified to vote, as
aforesaid."
The management of the Bank was left in the hands of
the governor, deputy governor, and directors, subject of
course to the by-laws and directions that might at any
time be passed by the general court of proprietors.
Custom has enacted that its directors should never be
chosen from the ranks of the other bankers. They are
generally taken from the merchant firms and accepting
houses.

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(A) THE BANK OF ENGLAND.

In the case of the Bank of England, which was instituted
under special circumstances and by a special charter,
certain definite arrangements were laid down by the act
constituting the Bank concerning its organization and
directorate. The act, which was passed in 1694, states
that—
1

' William and Mary by the Grace of God do hereby
ordain and appoint that there shall be from time to time
for ever of the members of the said company, a governor,
a deputy governor, and 24 directors of and in the said corporation, which governor, deputy governor and directors,
or any 13 or more of them, of which the governor or deputy
governor to be always one, shall be and be called a court of
directors for the ordering, directing and managing the
affairs of the said corporation." The act appointed the
first governor and deputy governor and states that they
have been chosen by a majority of the subscribers, having
£500 each in the capital stock. It also makes arrangements for the holding of general meetings or courts *' for
the appointment of governor, deputy governor and directors, and for the making of bye laws, ordinances, rules,
orders or directions for the government of the said corporation, or for any other affairs or business concerning
the same." It provided for the annual election of the
governors and directors and restricted the right of voting
at the general courts to holders of at least £500 stock in
the Bank. No member was allowed to have more than
one vote. It was further provided that no one could be
governor of the Bank unless a subject of England, naturally born or naturalized, and holder of £4,000 stock in the

CHAPTER

II.

LAW AND CUSTOM IN THE ENGLISH SYSTEM.

English banking is regulated by law to a very small
extent. As has been observed in earlier parts of this
memorandum, very strict regulations were imposed by the
act, generally known as Peel's Bank Act, of 1844, upon the
note issue of the Bank of England and of other banks which
issue notes in the United Kingdom, but, as has before been
shown, these regulations are now a matter of minor importance, owing to the extent to which—partly in consequence of them—the bank note has been superseded in
England as the currency of commerce and finance by the
check. The chief function of the English banker, as it is
understood to-day, is not that of issuing notes, but of receiving deposits and making advances which take the form of
deposits and are drawn against and circulated in the form
of checks.
This part of the banker's business is not in any way
restricted or regulated by the law, and as the great majority of English bankers confine themselves to it and the
business connected with it and resulting from it, it follows
that the ordinary English banker rarely finds himself
affected by the law in the management and direction of
his business. Books on banking law are devoted almost
entirely to questions arising out of ordinary banking
practice, such as the circumstances under which a banker
who has paid money in reliance upon a forgery can recover
from the person to whom he has paid it, and give a very
small proportion of their space to the functions and questions to be discussed in this memorandum. They are left
almost entirely to the custom and tradition of the business.

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seen to be regularly used as part of the basis of credit
in England, is thus increased.
It follows from the necessities of their position that the
discount houses are liable to be affected by the least fluctuation or change in the current value of credit, either momentary or for the future. Any change in the position which
makes it appear that money is going to be dearer later on
will make a considerable difference to the price at which
they will be able to dispose of the large holding of bills which
we have seen to be their stock in trade. Any change in
the position which necessitates an immediate demand
for cash causes the bankers to call in funds from them
and drives them into the Bank of England, which discounts
bills for them at its official rate, and generally charges
one-half of i per cent more for advances. They thus
conduct their operations on terms which require extremely
alert ability and a capacity for gauging monetary probabilities not only in England, but all over the world,
since London's position as the free market in gold necessarily makes its rates extremely sensitive to any
possibility of disturbance elsewhere. Besides the money
that they habitually borrow for short periods from
bankers, the discount houses also have considerable
amounts placed on deposit with them by other lenders,
some of which they employ, especially in times when the
volume of bills is comparatively small, by loans to the
Stock Exchange for financing the speculative commitments of the public, and by holding or carrying securities
of a reasonably liquid character. They also take some
part in the underwriting of new loans and in the general
financial business of the London market.

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upon the inward and outward movement of gold. Ultimately and in the long run it is probable that the discount rates current in the London money market are
decided by the banks themselves, since if the bankers
decide that they will not buy below a certain rate that
rate is almost certain to become very speedily effective.
Nevertheless, the discount houses may have a considerable temporary effect on the rates current, since
if they take a strong view concerning monetary probabilities in London their sentiment is almost certain to
express itself on the rates current for the moment.
We have also seen that the discount houses fulfill a very
important function by borrowing funds from the bankers
at call and short notice. These funds are regarded by
the bankers, and actually described in their balance
sheets, as cash, cash at call, and short notice. It is a
somewhat elastic extension of the term "cash" to apply
it to money that is being lent to any borrower, even of
the highest credit and against the most liquid possible
collateral. But it is always assumed by the bankers
that these funds placed in the discount market can be
called in readily at any moment. That they can be
called in is practically a fact; but it arises chiefly from
the ability of the discount houses when pressed for
repayment of these loans by the bankers to fill the gap
in credit by an appeal to the Bank of England and the
production of fresh cash, as it is called, by borrowing
from it. The discount houses take security to the
Bank of England and raise with it the right to draw
checks. These checks they pay to their bankers, whose
cash at the Bank of England, which we have already
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of a class of dealers in bills who specialize in handling them
and may be regarded as intermediaries between the holders
of the bills—that is to say, originally, the drawers of them, or
their representatives or anyone else into whose hands they
may have passed them on—and the bankers, who are the
ultimate buyers and hold them as investments until maturity. It is the business of the discount houses to buy these
bills on a wholesale scale, using for this purpose funds largely
lent them by the banks, and to meet the requirements of the
bankers with regard to the date named and quality of the
bill, providing them out of the store that they keep constantly replenished. Some of the larger firms, and two
joint-stock companies which have applied the joint-stock
principle with great success to this business, constantly
keep a very considerable supply of bills in their own hands.
Nevertheless, even they still retain the appearance of intermediaries to a very great extent, and the majority of the
discount houses are intermediaries almost entirely. Some
few of them, commonly designated running brokers, hold
practically no bills and do a commission business by taking
a parcel of bills from a seller and disposing of them at the
best possible terms, charging him a brokerage on the transaction; but the most common form of the business is the
one indicated above, by which the discount houses keep a
considerable floating supply of bills always, with a view to
disposing of them to bankers, meeting the requirements of
the latter in the respects indicated.
The function of the discount houses is thus of considerable importance in the London money market, because
the terms on which they do their business may have a
considerable effect upon the foreign exchanges and so

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against unfair competition by the State thus have a
considerable basis of foundation.
The trustee savings banks were originally philanthropic
institutions founded by private persons for the encouragement of thrift, but in 1817 Parliament intervened with
regulations for their management. The most important
feature of these regulations was the obligation imposed
on the trustees to invest the whole of the funds with
the Government through the hands of the national debt
commissioners. Since the establishment of the post-office
savings banks in 1861 many of the trustee banks have
been closed, and the increase in the deposits of the rest
has not been nearly as rapid as that of the new rivals,
which have the advantage of more direct Government
control.
(G) THE DISCOUNT HOUSES.

The discount houses in London carry on a business
which is chiefly ancillary to that of the banks. It has
been shown that the bankers are large buyers of bills—
that is to say, they make large investments by discounting
bills of exchange, giving cash or credit for them some time
before they are due and holding them until their maturity.
Bills of exchange, which are necessarily and automatically
turned into cash on the day of maturity, are obviously an
ideal security for a banker's investment. They are liquid
and readily negotiable, and at due date they are cashed,
without any need for looking for a buyer and without any
question of market conditions. The great volume and
diversity of the bills of exchange which come into the
London market to be thus melted and turned into present
cash before their date of maturity has caused the existence

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contention of the bankers that they are subjected to
unfair competition is very strongly grounded. The regulations of the post-office savings banks have been expanded to an extent which permits the deposit of sums
up to £50 in one year, aggregating £200 altogether, and
it is clear that depositors who are in a position to make
deposits on such a scale as this have arrived at a point
at which assistance and stimulation by the State are
unnecessary. The rate allowed to them, though low
enough from the point of view of the depositor, is certainly high when the exceptionable nature of the security
is considered and when allowance is made for the fact that
these deposits can be withdrawn at any time—immediately up to £10 if the expense of a telegram is paid, and
after one to two days7 notice in the ordinary course of
business. In fact, the post-office savings bank gives away
one kind of banking facility, that is, the guardianship of
the money of depositors, allowing them a rate for its use
on terms with which the ordinary bankers are quite
unable to compete, and it is very fairly contended that
the amount that each depositor is allowed to place with
the savings banks should be reduced, and that the rate
allowed should also be brought more closely into touch
with the modern conditions of the money market. Probably the really careful and thrifty members of the class
for which the post-office savings bank is designed to provide facilities attach very little importance to the rate
paid to them. Certainly other banks working under
ordinary commercial conditions could not afford always
to pay depositors 2§ per cent on their money, with the
right of immediate withdrawal, and their complaints

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enough that the bankers should therefore complain
bitterly of the intrusion of Government into a business
which it does not understand and which it conducts
according to principles which would land any ordinary
banker very speedily in ruin. The post-office savings
bank keeps no attempt at a cash reserve, perfectly reasonably contending that the fact that its deposits are secured
upon the consolidated fund of the United Kingdom insures
for it a confidence and security which ordinary bankers
have to arrive at by means of a strong position with regard
to cash and liquid assets. At the same time, the savings
banks, whatever be the current price of money and whatever the difficulties they have in reinvesting funds deposited with them on terms which will enable them to
show a profit, continue to pay i\ per cent to their depositors. They did so during the period of abnormally cheap
money in 1896 and 1897, when Government securities
could not be bought to yield the 2 J per cent which the
savings banks were paying, and when consequently the
necessarily considerable expenses of the conduct of the
business involved the savings bank in heavy loss. They
have continued to do so steadily, in spite of the subsequent
depreciation of Consols and the other securities that they
hold, which reduced their finance to a position which
would be considered one of insolvency if any private or
joint stock company had to acknowledge such a state of
affairs.
Their ostensible pretext, the encouragement of thrift
among the working classes, is an extremely desirable
object in England, where thrift among the working
classes is very much to seek. At the same time, the

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(F) POSTAL AND TRUSTEE SAVINGS BANKS.

The distinctive duties of savings banks, whether postal
or other, are such that they can hardly be considered as
part of the banking system of England. A savings bank,
as they are understood in this country, performs only one
side of the banker's function, and that perhaps the least
important. It is the business of a banker to make advances, to create credit, and in England to provide the
community with currency. None of these functions are
fulfilled by the savings banks. It is also the business of
the banker to take care of money deposited with him by
the community, and this part of his function the savings
banks do carry out. They are guardians, trustees, safe
deposits, but they are not banks in the true sense of the
word, because they do not make loans and advances, they
do not discount bills, they do not facilitate trade and
finance by the creation or circulation of any credit instrument, and the sole use that they make of the funds
deposited with them is to invest them in securities of a
specially restricted class. At the same time, they have
some indirect influence upon the conduct of banking business in Great Britain, since the allowance that they make
to depositors has an effect, especially in the country districts where the banks compete keenly for deposits, upon
the allowance made by the English banks. It is complained by the joint stock bankers that whatever bank
rate may be, and whatever may be the rate for money in
London, they can not allow their country depositors less
than the 2§ per cent which is the regular allowance to
depositors in the post-office savings banks. It is natural

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with the private accepting houses, so that the system,
which appears to be full of uncomfortable possibilities on
paper, works easily enough in practice.
Other functions of the merchant firms and accepting
houses are their activity in general finance and in exchange
business. Both these functions arise out of their old
business as merchants, which gave them close connection
both with the governments and the business communities
of foreign countries. Their connection with the governments naturally led to their providing credit facilities for
them, and to their handling loans and other operations
which these governments might have to conduct in the
London market. Many of them act as regular agents of
foreign governments, making issues of bonds on their
behalf, paying their coupons, and conducting amortization
and other business in connection with their loans; and
their connection with the general business community
inevitably led to their doing a considerable exchange
business with foreign countries, financing drafts on them
for the purposes of travel and the innumerable other
arrangements which necessitate the transfer of credit from
one country to another. It should perhaps be added that
the Bank of England's court of directors is largely recruited from the ranks of the accepting firms and finance
houses, and the close connection of these firms with the
finance, both government and private, of other countries,
equips them especially well to regulate the policy of the
Bank of England, one of whose most important functions,
as we have already seen, consists in controlling the London money market with a view to foreign demands upon
its store of cash.

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mercial activity, which would be immeasurably lessened
if each transaction had to wait maturity before cash
could be raised against it, is thus enabled to proceed
with the remarkable velocity which modern conditions
make possible. Nevertheless the function of the London
accepting houses, though of enormous importance, is
still to a certain extent subordinate to the judgment of
the English banks. They finally decide whose paper is
most readily negotiable, and, in times when the credit
machine is felt to be somewhat out of gear, the bankers
occasionally discriminate against the paper of firms
which they consider to have been giving their acceptance too freely. In this respect, as in so many others,
the Bank of England remains the final arbiter, since the
paper of an accepting house which is questioned by the
other banks can be negotiated at the Bank of England
through a discount house, and the Bank of England has
before now intervened with effect when it considered
that questions raised concerning certain acceptances have
been without justification.
This business of acceptance is one into which the other
banks have themselves recently intruded with considerable
effect, accepting bills for their customers, home and foreign, for a commission; and there is a certain apparent
anomaly in the position which makes them guardians of
the volume of acceptance created by the private firms and
acceptors themselves on a steadily increasing scale. Nevertheless, this anomaly has little or no untoward effect in
practice. The bankers are naturally extremely cautious
in raising any question as to the security of general credit
in London, and they are in many ways closely connected

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of business. They gradually left off or reduced the
amount of their actual mercantile business and confined
themselves to accepting bills, for a commission, for others
whose credit was less well established. Out of bills of
exchange, originally drawn against merchandise actually
shipped, grew the finance bill drawn sometimes in anticipation of produce or merchandise to be shipped, sometimes against securities, and sometimes against the credit
of the parties to it.
The business of acceptance has thus grown up as an
important and separate function which is largely in the
hands of the leaders among the old merchant firms,
whose acceptance of a bill stamps it at once as a readily
negotiable instrument. By the service that they perform in the creation of this great mass of paper, the
merchant firms, or accepting houses, as they are generally
called, facilitate the trade of the world in a most useful
and in fact indispensable fashion by providing credits
against mercantile transactions which have not yet
matured. When the wheat of America is harvested, but
has not yet reached its market, the ultimate purchaser
of it can not be expected to pay for it in cash, but
arrangements can be made by which a bill can be drawn
against it on a first-class accepting house, and this
bill being readily negotiable and easily discounted in the
London market provides the cash, or a considerable
proportion of it, which the wheat will ultimately realize
when it has been shipped to its destination and passed
into the hands of the consumer. The same process can
be repeated with many articles of manufacture which
are still in an inchoate condition, and the world's com-

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counter, but by payment of a check on one of the banks
in the stricter sense of the term. Their function is that
of bringing into being the interesting and important credit
instruments known as bills of exchange. A bill of exchange, originally drawn on a merchant by a correspondent,
from whom he had bought goods, directing him to pay
the consideration for them at sight or at date named, has in
recent years widely extended this function and has become
an instrument by which credit can be raised against any
form of security or collateral, or in some cases against no
security at all but the credit of the parties named upon it.
It need hardly be said that there is an immeasurable difference between one bill of exchange and another. Since
the bill is an order by one party to another to pay a sum of
money, generally at a subsequent date, the ability of the
party on whom the bill is drawn to meet it at the due date
is a question of overwhelming importance. When the bill
arrives the party drawn on " accepts" it by signing his
name across the front of it, so intimating that he is liable
to pay the sum named at the date specified, and becoming
the acceptor of the bill. It is clear that a bill accepted
by a small tradesman has no value outside his own street,
if there, while one accepted by a great merchant house of
unquestioned standing is an easily negotiable credit instrument and also an ideal form of investment for bankers and
others who have to keep their resources liquid, since it can
easily be discounted or turned into as much immediate
cash as its prospective value at the due date makes it
fetch, and at maturity it has to be met by its acceptor.
The importance of the acceptor's name on a bill thus led
merchants of first-rate standing to specialize in this form

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private firms included. The functions that they perform
are, as has been said, similar in essence to those conducted
by the joint-stock banks, and differences between them,
even in degree, are so small as to be quite insignificant.
The remnants of them form, with the merchant firms and
accepting houses, a kind of aristocracy in the city of
London, and it is contended that their survival gives, from
the high traditions and dignity which they have derived
from their exceptional position, a certain high ideal of conduct in business, which is of great value. It is also occasionally asserted that their customers find them more easy
to deal with, since the managers of the joint-stock banks
are alleged to be unable to depart by a hair's breadth from
the strict rules under which they conduct business without
an appeal to their board of directors which may probably
cause delay; and also, that the private banks give a good
deal more attention to the question of finding suitable investments for their customers, and in general are enabled
to take a more close and personal interest in their business
connection with them. But these are obviously matters of
minor detail, and in general it may be said that the business
and the functions conducted by the private banking firms
of Great Britain have already been described when we
enumerated those of the joint-stock banks.
(E) THE MERCHANT BANKERS AND ACCEPTING HOUSES.

The most important function of the merchant bankers
is not that of banking, but of accepting. Banking, in the
strict sense of the term, they do not engage in—that is to
say, they are not prepared to meet claims upon them by
an immediate payment of cash or legal tender over the

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It was obviously inevitable that business of the magnitude
and widely extended responsibility that modern banking
has assumed should fall into the hands of the joint-stock
system; the regular practice which dictates, or ought to
dictate, the policy of banking, naturally lends itself to
joint-stock organization, as was pointed out more than a
century ago by Adam Smith, and further, the necessary
maintenance of a uniformly high level of business ability
and prudence is attained with some difficulty under a system which practically works by the hereditary principle.
The old private banking firms were largely family businesses, being passed from father to son or from one relative
to another almost as a matter of legacy. It was inevitable
that the younger generations which succeeded to a business
would be unlikely to devote the same unremitting attention
to its conduct as was displayed by those who were building
it up, and as the profits of banking led to rapid accumulation of wealth, it was still more natural that those who
inherited great wealth should, at least in England where
the outlet for a man's energies is so wide and varied, prefer
to give much of their time to other occupations outside the
business.
The private banks thus made but a weak resistance
against the competition of the joint-stock institutions
worked in the interests of shareholders by a set of trained
officials whose career depended to a great extent on
the success with which they managed them. Gradually
the private banks were absorbed into the joint-stock companies, and in 1896 a large number of the old private firms
were amalgamated under the joint-stock principle under the
title of Barclay & Co., so named from one of the principal

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who generally conduct the business for themselves or exert
more or less influence on it, while the joint-stock banks are
managed by salaried directors and officials on behalf of a
large body of shareholders formed into a public company,
the shares in which can as a rule be bought and sold on the
London Stock Exchange. It will be remembered that the
measure confirming the Bank of England's monopoly
enacted that it should be unlawful for " any body politic or
corporate * * * or for any other persons whatsoever
exceeding the number of six persons " to carry on the noteissuing business which was then (in 1709) regarded as the
only banking function. This measure restricted to the
Bank of England the power of uniting for banking purposes
the capital of a large number of shareholders, and left it
faced only by the competition of private banking firms,
consisting of not more than six partners.
Since private enterprise naturally precedes joint-stock
institutions, it goes without saying that the private banks
of England were the pioneers of the banking business. There
are still in existence private firms which were founded before
the Bank of England. A goldsmith called Child was doing
business of a banking character soon after 1660, and
Child's Bank still exists. Hoare's Bank was instituted in
about 1680, fourteen years before the Bank of England received its charter. Modern developments have almost
driven them out of the field, and among the leading banks
in the city of London only two are left which can still be
called private in the old sense of the word. There are one
or two other institutions which are on the borderland; and
at the west end of the town several old firms, including
Child's and Hoare's, have retained their old constitutions.

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where south of the Tweed, where rates are ruled by the
circumstances of each case, and competition and higgling
often in times of monetary ease deliver the bankers into
the hands of the borrowers. As it is, the Scotch banks
in regular conclave fix their rates in accordance with those
current in the London money market or the Bank of
England's official minimum, and, having fixed them, stick
to them. The system is very profitable to themselves,
and their customers certainly can not complain on the
whole of the facilities with which they provide them.
Nevertheless, the cast-iron rigor with which they work
hand in hand in combination appears to be an excessive
development of banking unity, and an ideal banking system would seem to lie somewhere in the middle between
the excessive competition of the English bankers and the
cast-iron combination of their Scotch brethren. Finally,
it may be added that it is a little inaccurate to speak of a
Scotch banking system, if the phrase be taken to imply
that Scotch banking stands by itself and works on its own
resources. In fact, it is only an appendage of the English system and relies habitually on drawing gold from
the Bank of England, as its center and the keeper of its
reserve.
(D) THE PRIVATE BANKS.

Any differences that exist between the private and jointstock banks of England lie in their ownership rather than
in their functions. Their functions are the same, but the
manner in which they carry them out is perhaps influenced
to a slight extent by the fact, which really distinguishes
them, that the private banks are owned by a few partners

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Though the functions that they perform are practically
the same as that of the English bankers, Scotchmen have
succeeded in avoiding the excessive competition in carrying them out which we have seen to be a weakness of
English banking. In Scotland, on the other hand, cohesion and cooperation among the banks are carried to an
extreme of which the mercantile community frequently
complains. The banks are few and stand together like a
close corporation; they agree absolutely and arbitrarily
among themselves as to the rates they will allow to depositors, the rates at which they will advance or discount, and
the terms and commissions for which they will do business
for customers. The extent to which this regulation of the
price of the product that they turn out is carried, is almost
incredible from the English point of view, and though it is
contended by the champions of the Scotch system that
it encourages that wholesome democratic influence in
Scotch banking which is in favor of the small borrower
of limited resources, who is thus able to obtain accommodation on the same terms as much larger and more
important customers, yet it must be obvious that the
Scotch banks, by making these hard and fast agreements
among themselves as to the price of the accommodation
that they will give, and maintaining it in every case, are
in fact putting the same price upon a very different article.
The result of it is beginning to tell upon them a little in
these days, since, when the big Scotch merchants and
manufacturers find that their local bankers charge them
the same rates for accommodation as the small tradesmen
of the towns, they are naturally impelled to make arrangements to provide themselves with monetary facilities some-

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banking asset. Mr. Blyth points out that these unissued
notes are "not a reserve but till money," but the distinction between till money and reserve is one upon which it is
possible to lay too much stress. In assessing the strength
of a bank it is usual to compare the amount of its cash in
hand, as a whole, with the amount of its liability to the
public on deposit and current account, etc., and note circulation if any. The cash in hand, as a whole, consists of
the till money and cash reserve. If the till money consists to any extent of the bank's own promises to pay, it
follows that the bank's cash reserve as a whole is to that
extent weakened, for it need not be said that in case of
serious trouble, which is a contingency of which all provident bankers have at all times to beware, a bank's own
promises to pay would be of little service to it. If a
bank's credit were doubted, these promises to pay would
not be available for it in meeting demands upon it. At
such periods the public requires from its bankers not
promises to pay but physical gold. In Scotland the confidence of the public in its bankers is so great, and the
readiness with which it circulates their promises to pay
appears to be so ingrained in the national character, that
the contingency of the demand of the public for gold
seems to be extremely remote. The criticism therefore
which detects a weak point in this asset upon which
Scotch banking prides itself so highly may be said to
be merely academic. Nevertheless, when we examine
Scotch banking by the test of figures, we find that it
does actually work, as indeed would be expected from
the statement of its exponents, on a cash basis which
is decidedly narrow.

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higher than they are shown to be in the above table.
Even so, however, the general level of cash proportion
would remain low; what it would be if real physical cash
alone were considered it is impossible to guess, for this is a
point on which banking accounts in Scotland, as in England, are persistently reticent.
It will also be noticed that one of the banks, which we
have consequently left out of the table, follows the bad
practice of many of the English country banks and includes
in its cash item its loans at call or short notice.
The bank's acceptances, being a liability of a special
kind, and specially secured, are not included in the table.
It should be observed that the notes which the Scotch
banks hold as till money do not appear in the above statement, for until they are issued they are not a liability, and
though they are treated by the banks in practice as an
asset, they can not figure as such in a balance sheet. That
they are practically treated as such is witnessed by Mr.
Blyth, as quoted above, when he says that without them
the banks would require to.keep 8,000,000 or 10,000,000
of gold coin. And it is, of course, this habit of regarding
unissued notes as a banking asset in the shape of till
money that accounts for the low reserve of actual cash
that the Scotch banks show.
Scotch banking is so generally regarded as one of the
highest achievements of the banking intelligence that some
hesitation is natural in criticising the system by which,
according to its own evidence, it has obtained most of its
success. At the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a
76651—10

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to be decidedly low, even when compared with English
practice. The following table speaks for itself:
[Pounds sterling ]
(i)

(2)

Note circulation.

Deposits,
drafts, etc.

1,118,838

(3)

(4)

19,172,308
1 3 , 0 5 0 , 231

1,547.782

843.212

18,053,470
12,207,019

1,764,547

974,797

14,894.337

15,869,134

1, 9 1 2 , 208

805,593
728,953

15,269,045
7,452,486

16,074,638
8,181,439

ai,146,457
956,054

7-1
11.7

1,003,428

14.335,056

15,338,484

01,425,437

9.3

Gold and
silver coin,
notes of
other banks, ProporTotal, notes,
cash at
tion of
deposits, etc.
Bank of
(4) to
England,
(3)
and checks
in course
of transmission.
Per cent.

Bank of Scotland
Clydesdale
Commercial Bank of
Scotland
National Bank of Scotland __
North of Scotland
Royal Bank of Scotland
Union Bank of Scotland
British Linen Bank

8.1
13.5
12.1

907,274

13,115,842

14,023,116

1,349,124

9.6

6,382,095
811,116

95.327,255
12,703,271

101,709,350

10,101,609

9-9

13,514.387

& i , 9 7 2 , 151

o Does not include checks in hand and in transit.
b This total includes loans at call or short notice.

It will be observed that owing to the absence of uniformity which is characteristic of British banking accounts,
it is impossible to make this table statistically satisfactory.
Two of the banks include their checks in hand or in transit
along with other items, so that it is impossible to include
them with their cash, as is done by some of the others,
while some state them as a separate item by itself. If it is
reasonable to include a check on another bank as a cash
asset (and some purists maintain that neither a check on
or a note of another bank has any right to be so treated)
the cash holding of these two banks should be somewhat

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common form of payment in daily transactions. In
Scotland, banking evaded the spirit of Peel's regulations,
which were intended to insure that every addition to
currency should be secured on an addition to the bullion
held by it, by actually economizing bullion to the extent
of £ 8 , 0 0 0 , 0 0 0 or £ 1 0 , 0 0 0 , 0 0 0 .

Scotland used the same weapons as England, namely,
the check and the development of deposit banking. The
table given below shows that the eight Scotch banks had,
according to their latest balance sheets, £7,000,000 of notes
outstanding, and £108,000,000 of liability on deposits and
drafts. With regard to the latter item Peel's regulations
had nothing to say, and since ordinary banking prudence
demanded that some cash should be held against it, and
since the gold held against notes was not specially earmarked as such, Scotch banking was able to treat its cash
against deposits as the basis both of its notes and deposits
and so produce the economy which is boasted of by its
champions. Its "authorized" note issue at the time of
Peel's Act was £3,087,000 and has since been reduced by
lapses to £2,676,000. The law thus compels it to hold
£4,500,000 of bullion against the present excess above this
limit. But the law says nothing concerning cash to be
held against deposits, and the metallic basis of these is
probably extremely slender, if the cash held against notes
is set on one side; but it is impossible to detect its actual
amount, since the Scotch banks include with their cash
their balances at the Bank of England, etc. And the net
result is, that when the proportion of its cash to its total
liabilities on notes and deposits is worked out it is found

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to extend its operations into districts which would
otherwise be quite inaccessible. It is for this reason,
and for this almost entirely, that the Scotch banks
have been able to develop their branch systems to an
extent that has made Scotland notable as having the
greatest supply of bank offices in proportion to population of all the countries of the world.''
The authority of a practical Scotch banker is equally
emphatic on the point. Mr. Robert Blyth, general
manager of the Union Bank of Scotland, read a paper at
the thirty-first annual convention of the American Banking
Association, in October, 1905, on the subject of Scottish
banking. In the course of this very interesting paper he
made the following statement: '' It is in another quarter
altogether that the Scotch banks find the value of the £1
note. It is the unissued notes in the tills of the branch
offices, forming the till money at more than a thousand
branches, wherein the real value lies. Without them the
banks would require to keep £8,000,000 or £10,000,000 of
gold coin, not as a reserve but as till money. It is these
£1 notes which have enabled branch offices to be planted
in every part of the country.''
It thus appears, from the highest possible authority,
that the Scotch banks are enabled by their right of note
issue to economize gold to the extent of £8,000,000 or
£10,000,000, and it is amusing to observe how the objects
aimed at by Peel's legislation with regard to note issue
have thus been defeated even more completely in Scotland than in England. In England, as has been shown,
banking turned the flank of Peel's Act by developing
the use of checks, which superseded the note as the

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that it is better for the bankers to stick to their obvious
and highly important function of providing the community
with credit and currency, and taking care of the money
of their customers.
(C) THE SCOTCH BANKS.

The functions performed by the Scotch banks are
essentially similar to those already described as being
carried out by their English brethren. The differences
between the currency system of the two countries are in
degree rather than in essence. In Scotland the note issue
had made a harder fight for its existence than in England,
owing no doubt to the fact that the Bank of England's
monopoly did not extend to Scotland and that the great
Scotch joint stock banks therefore extended the system
of using notes as currency, while the development of joint
stock banking in England was necessarily opposed to it,
since, as has been shown above, joint stock banks in England with an office in London were unable to issue notes.
Nevertheless, even in Scotland the advantages of the check
have told in its favor, and, as will be seen below, liabilities
of Scotch banks under note issue are now much smaller
than those under deposit as current accounts.
The article in the Banker's Magazine, from which
we have quoted above, showed that the Scotch note
circulation had increased from £5,332,000 in 1872 to
£7,173,000 in 1908. This increase, when compared with
the fact that the note issues of the English country banks
have during the same period diminished almost to vanishing point, shows that the bank note is much more tenacious of life north of the Tweed. This is partly owing to

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and that the joint-stock banks rarely have available the
special abilities that make for its proper conduct. On
the other hand, the high standing of the joint-stock banks
and their big reserve resource in the shape of their uncalled
capital makes their acceptances an exceptionally fine
credit instrument, and it seems natural enough that they
should, to a certain extent and within moderate limits,
place these facilities at the service of their customers. By
doing so, they give their hall mark to a great mass of paper
which becomes readily negotiable and easily turned into
cash by the operations of the discount market and of
the other banks. But their intrusion into this business,
which was formerly largely in the hands of the accepting
houses, is complicated, though in appearance rather than
in fact, by the bankers also exercising an important function in watching over and sometimes regulating the extent of the business done by the accepting houses. This,
however, is also a matter which will be better dealt with
later on.
Finally it may be added that the English joint-stock
banks are now showing a disposition to engage to some
extent in the business of dealing in foreign exchange
which has hitherto been left to the finance houses and
foreign firms established in London. The London and
County and the London City and Midland banks have now
established regular foreign exchange departments. This
development is generally welcomed as a sign of a desire on
the part of the banks to widen their horizon and to
come into closer touch with the affairs of the financial
world at large, but, as in the case of the banks' increasing
interest in acceptance, there are some critics who consider

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customers, of whom t h e joint-stock banks are t h e largest
a n d most important and most regular buyers, and it is
contended b y the discount houses t h a t the m a r k e t r a t e
of discount, for which they themselves are generally supposed t o be responsible, is really and in fact regulated b y
t h e price a t which t h e big joint-stock banks are prepared
t o buy. This being so, since t h e m a r k e t rate of discount
is perhaps the most important influence on t h e foreign
exchanges and so on t h e inward and outward movements
of gold, it will be seen t h a t this function of t h e bankers is
one of t h e greatest possible importance from t h e point of
t view of London's free market in gold.
Besides t h u s regulating t h e price at which bills of
exchange can be discounted in London, t h e banks h a v e
in recent years t a k e n an increasingly large and i m p o r t a n t
p a r t in t h e creation of bills of exchange by placing their
acceptances at t h e disposal of their customers. A bill of
exchange being an order signed b y A, directing B t o p a y
a certain sum of money t o himself, A, or t o a third p a r t y ,
C, it is obvious t h a t t h e standing and position of B , who
is called t h e acceptor of t h e bill, is of t h e greatest possible
importance to its negotiability. The business of acceptance will perhaps be described more opportunely when
we come t o examine t h e functions of t h e merchant firms,
of whose business it is now perhaps t h e most characteristic
p a r t . T h e increasing extent t o which t h e bankers h a v e
in recent years intruded into this class of business is a
grievance t h a t is resented rather keenly b y t h e merchant
firms, or accepting houses, as they are often called. I t is
contended by t h e latter t h a t t h e business of acceptance is
a special function for which special training is required,

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and price of securities in London. On the first day of
every settlement it is usual to see rates quoted as those at
which the banks are lending to their stock exchange
clients for the financing of speculative commitments. In
the arrangement of these rates a certain amount of combination and cooperation among the banks, or some of
them, has grown up as a matter of custom, but since for
this class of accommodation the bankers are subject to
competition on the part of the agencies of the foreign
banks and the big finance houses it is often found difficult
to maintain even this amount of harmonious working
among the bankers.
It has been shown that the rate at which the banks
make advances to the discount houses has an important
effect upon the market rate of discount in London, but
the banks exercise a still more important and direct effect
upon this discount rate by being themselves large buyers
of bills. It is impossible to gauge exactly the extent to
which they hold bills among their assets, since many of
them in their balance sheets include their discounts along
with their loans and advances. Among the many suggestions that reformers have put forward in the matter
of English banking, one is that this item of the banks'
holding of bills should be separately stated. But though
this obscurity in the statements of the English banks
makes it impossible to know the precise extent to which
they hold bills, there is no doubt their purchases of them
are on the whole the most important influence upon the
market rate of discount in London. Nearly all the discount houses, whose functions will be described later,
buy bills, largely with the intention of reselling them to

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considerable part of the money which they hold is on
current account and not on deposit. Their system of
including their current and deposit accounts together
makes it impossible to decide on what proportion of the
money for which they are responsible they are paying
interest. Only one of the large joint-stock banks separates its current from its deposit accounts in its balance
sheets. This is the Union of London and Smith's Bank,
the latest balance sheet of which, dated December 31,
1908, showed that while its current accounts stood at 25
millions, the amount that it held on deposit only amounted
to 1 of millions.
If this proportion were general throughout the banking
community it is evident that a large proportion of the
moneys that they hold on behalf of the public is earning
no interest from the banks, since it is not usual for interest to be paid upon current accounts, but since most of
the bankers leave the proportion between their current
and deposit accounts in obscurity, it is impossible to speak
positively on this point. We can only be certain that the
bankers occasionally do make loans to the discount houses
at rates which are below the allowance that they make to
their depositors, which in London are usually i | per cent
below Bank rate. This it may be remarked is the only
direct connection between the official rate and the rates
granted or charged by the other banks.
Some of the banks include under this heading " cash at
call and short notice" advances which they make to the
Stock Exchange for the fortnightly periods that elapse
between its settlements. The funds that they so use obviously have an important effect upon the marketability

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other banks* branches at a very much higher figure, and
points out that it is very desirable that statements should
be made by the banks of England and Wales as to the
amount of Bank of England notes which they hold. Certainly any such light that the banks could be prevailed
upon to provide as to the nature of the cash that they
keep against demands would be of very great interest;
but the banking community does not show itself very
eager to respond to such requests as these for light upon
the manner in which it conducts its business.
Besides thus providing the mercantile community of
England with currency and credit, the banks fulfill highly
important functions in the discount market of London.
We have already seen that an important item in their
assets is one described as cash at call and short notice.
This so-called cash is, in fact, credits given by the banks
to the discount houses of London enabling them to carry
on their business of discounting the bills, which are so important a feature of London's monetary system. The
rate at which they make these advances at call and short
notice has a very direct influence upon the rate at which
the discount houses will take bills, and consequently upon
the foreign exchanges, and it has already been shown
that excessive competition among the banks often
delivers them into the hands of the discount houses and
impels them to lend money at lower rates than those
which they are receiving on it. The policy upon which
they appear to work is the theory that it is better to
have any rate for these amounts that they lend to borrowers of exceptionally good credit than none, and they
are enabled to do so without material loss, because a

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ive degree, and by the wide local distribution of their
liabilities enhances the possibility of strain on them in
times of difficulty.
The rapid increase in these various centers at which the
public can obtain banking facilities of the modern English
kind—that is to say, the right to draw checks—is certainly
one of the influences which have reduced the circulation of
bank notes in England in the hands of the public, but it
has probably tended slightly to increase or maintain the
circulation, or at least issue, of Bank of England notes, since
all these widely dispersed branches of the other banks
require to have a certain number of Bank of England notes
in their tills as reserve against demands on them. An article in the Bankers' Magazine of February, 1909, from which
the above figures of banking branch development were
taken, discusses this interesting point, and the extent to
which these two influences balance one another. It shows
that the circulation of English country bank notes has
diminished from an average for the year 1872 of over 5 millions, to an average for the year 1908 of less than half a million—£439,800 to be exact. During the same period the
Bank of England's note circulation has risen from 25! millions in 1872 to about 28£ millions for the average of 1908.
It estimates that there are fully 4,600 bank offices in England and Wales requiring Bank of England notes as till
money, which did not do so in 1872, and points out that if
on the average each office held about £700 of Bank of England notes as reserve against demands, the increase in the
Bank of England note issue would thus be roughly accounted for. It adds that some banking authorities estimate the amount of Bank of England notes held by the

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his claim against the paying bank is nil. With these
safeguards, and with the enormous convenience of being
drawn to any amount to fit the exact requirements of
each transaction, the check, although not legal tender,
has been enabled to supersede the bank note in English
currency.
The chief function of the joint stock banks having thus
been shown to be the provision of currency for the English
community, it may further be noted that a remarkable
development of their activity has been the rapidity with
which they have covered England with branch establishments. It was estimated in 1858 that the total number of
bank offices in the whole of the United Kingdom was just
over 2,000; at the present moment the aggregate branch
offices of four of the English joint stock banks which are
richest in respect of branch establishments have exceeded
this total. One bank in England has over 600 offices, one
has over 550, two have over 400, three have more than
200, twelve have more than 100. This multiplication of
branch offices has been carried out partly by the absorption by the joint stock banks of the smaller institutions
in the country, whether private or joint stock, and partly
by the rapidity with which they have opened branches in
the great provincial centers and their suburbs, and to a
moderate extent in the small country towns. The result
of it is to give the English monetary system the power of
easily supplying the needs of the various parts of the
community as the requirements of others ebb and flow.
At the same time this rapid development increases the
competition between the various English banks, which
we have already shown to be carried to an almost excess-

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mark it is shown that the check is not to be paid in cash
across the counter by the bank drawn on, but must be
paid into a bank by the payee, and so only becomes credited to him in his own banking account through the operations of the clearing house. It is evident that this protection greatly increases the safety of the check, since if
it fell into the wrong hands its chance of being made
fraudulent use of is greatly diminished. As the lines
drawn across the face of the check by the bankers' customers are often faint and irregular, it has been found in
practice that they lend themselves to the ingenuity of
the fraudulent, who are easily enabled to erase them and
so obtain possession of money that is not meant for them.
Some of the banks therefore print these crossing lines on
all the checks that they issue to their customers to be
filled in, and when the customer wishes to obtain cash
from his bank on one of these checks he is consequently
obliged to write upon it "Please pay cash," and sign this
note upon it. The extensive use of crossed checks thus
tends to make the check still further an instrument which
merely transfers banking credits from the books of one
bank to another, since every crossed check implies that
it can not be turned into cash directly, but can only transfer credit with one bank to credit with another. Another
restriction with which custom has protected the English
check is the system of writing "not negotiable" on the
face of it. These words do not mean that the check is
really not negotiable, but their legal effect is that the
holder of the check can not establish a better right to it
than the party from whom he received it. If therefore
the party from whom he received it had no right to it,

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the most important borrowing customers of the banks in
London, are enabled by the use of this weapon of competition to obtain loans from the banks at rates which
are often below the price that the bankers are paying to
their depositors. Hence, it follows that in these times of
monetary ease the credit machine goes on turning out its
product at rates which are quite unremunerative and
have a detrimental effect on the market rate of discount,
and so on the foreign exchanges, thus increasing the
difficulties of the Bank of England, which at these times
of extreme ease is without any control of the position.
Against this weakness of the system, however, must be set
the advantage which the unrestricted and fiercely competitive manufacture of credit confers on the mercantile
and trading community.
A few words should be said concerning the form of
checks with which the English banks provide their customers as currency. Legally a check is a bill of exchange
drawn on a bank and payable on demand. That is to
say, it is an order signed by a customer of the bank
directing it to pay a certain sum to another party or to
himself. The form, however, can be varied in various
methods, increasing or diminishing the ease with which
the check can be turned into cash. The check can be
made payable to A. B. or bearer, and in this form can be
taken to the bank drawn on and immediately turned into
cash. When drawn to A. B. or order, a check has to be
indorsed, or signed on the back, by A. B. before the bank
drawn on will pay it. A still further restriction is the
English system of crossing checks, that is to say, of
drawing two lines across the face of the check, by which

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tiplied without any legal restriction, has completely freed
the English monetary machine from any regulations
except those imposed by its own sense of duty and the
possible criticism of the public; and the development of
the use of checks has thus completely nullified the attempt
to regulate the English currency system made by Peel's
Bank Act of 1844, which will be considered later when we
examine the legal restrictions imposed on the Bank of
England. Besides this absence of outside regulation,
the English monetary system is also distinguished by a
remarkable lack of cohesion and cooperation among the
members of its own body. Except to a certain extent in
the country districts, where the rates allowed to depositors and charged to customers are to a certain extent
a matter of convention, English banking works almost
entirely at the mercy of very keen internal competition.
It is true that in London the rate allowed to depositors is
to a certain extent regulated by the Bank of England's
official rate, and is fixed and published. Even in this
case, however, bankers frequently make variations according to the length of the time for which the depositor is prepared to fix the transaction, and on the other side of the
account the rate that the banks charge for loans and
discounts is left entirely to the higgling of the market,
each transaction being regulated by the exigencies of the
moment, the nature of the security, and the standing of
the customer. This extreme development of competition
leaves the market liable to pronounced depression in rates
at times when slackness of trade or other causes decrease
the demand for credits. At these times the adroit bill
brokers and discount houses, which are in some respects
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customers the banks can advance against them to any
extent that they consider prudent. Prudence dictates
in the case of the great majority of them that a certain
proportion of cash to liabilities shall be maintained, but,
as was shown above in dealing with the Bank of England,
the cash of English banking consists partly of credits with
the Bank of England. These credits with the Bank of
England, and consequently the cash credits of English
banking, can be multiplied as rapidly as the Bank of
England is prepared to make advances or discount bills,
and so give credit in its books. The Bank of England is
subjected to weekly publicity by the appearance of its
account, which will be dealt with later, and it watches
over its proportion of cash to liabilities with a vigilance
which is greater than that of the rest of the banking community as a whole. Nevertheless, its prudence in this
respect is the only restriction on it, and we thus arrive
at the conclusion that the chief function of the English
joint stock banks, that of providing the mercantile community with currency and credit, can be carried out to
any extent as long as their customers have security to
offer and their proportion of cash remains adequate to
their sense of prudence. And further, their proportion
of cash can be increased as rapidly as the Bank of England
is prepared to make advances, which it can and does to
an extent which again is only limited by its own prudence.
It follows that this system, by which checks drawn
against banking credits are the chief currency in England,
while banking credits can be multiplied to any extent that
the prudence of bankers considers right and are based on
credits at the Bank of England which can again be mul-

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cash basis is an element of some danger to the whole
English banking community if at any time banking trouble
should arise in England. It has been stated by a president of the English Bankers' Institute that the proportion
of cash to liabilities shown by country banks ranges down
to a point as low as 2.2 per cent. No one can contend
that this is an adequate cash basis for banking to work on,
and as long as certain members of the banking community
conduct their business on these lines an obvious hardship
is involved on those which keep a more prudent and strong
reserve of cash. It is contended by the big strong banks
that their smaller brethren compete with them by providing more credit than they have any right to create, relying
on their assistance in times of difficulty.
The position is an extremely delicate and difficult one;
the banking community as a whole resents any suggestion
of interference by the Government, or of dictation from
outside; it habitually, in the course of half-yearly meetings and of addresses at the Bankers' Institute, admits
the fact that it conducts its business on inadequate cash
reserves, and yet it is unable to put its own house in order
owing to its own divergent interests and the difficulty of
inducing the smaller banks to work on the same ideals as
those which dictate the policy of the larger and stronger
ones. Apart from this danger of the over-multiplication
of credit on an inadequate cash basis, the complete absence
of any legal or other restrictions on the operations of
English banking enables it to work with extraordinary
ease and readiness. As long as good unpledged security,
whether in the form of bills of exchange, commodities,
or Stock Exchange securities, are available in the hands of

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as far as it went, but it was not adopted by all the London
banks. None of the private banks thought that it applied
in any way to them, and a large agglomeration of private
banks, which has since then been united as a great joint
stock bank, has not adopted the policy of a monthly
statement. None of the country banks have joined the
movement, and the application of publicity is thus partial
and in some respects unfair.
It has been contended that before those banks which
publish monthly statements can be expected to make
them fuller or more fairly representative of their average
position throughout the month the system should be
applied more generally to the banking community as a
whole, and especially that the country banks, which compete keenly in the large provincial centers with the branches
of the London banks, should have the same extent of publicity applied to them as to their brethren who have head
offices in London. It is extremely difficult, however, for
those in favor of this reform to induce the country bankers
to come into line in the matter, and since if they did so
the extent of their credit operations would probably be
considerably reduced, the mercantile community, which
naturally resents any measure which would tend to restrict
the supply of credit and possibly make it dearer, has not
hitherto shown much enthusiasm for the reform. It has,
however, been advocated by a committee of the Associated
Chambers of Commerce of the United Kingdom that all
the banks should publish monthly statements showing
their average holding of cash, deposits, and other details.
Certainly the operations of these smaller banks and the
extent to which they raise a pyramid of credit on a small

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far. He therefore urged upon the London banks that
they should make a monthly statement of their position,
and this suggestion was adopted by the majority of them.
The result was that they published a monthly statement
showing how they stood on one day at the end of each
month, and it thus followed that on one day at the end
of each month the banks showed a proportion of cash
to liabilities which they considered sufficiently adequate
to stand the light of publicity. But the system has long
been seen to be faulty, and a certain amount of abuse has
grown up round it. It is strongly suspected, for example,
that some of the banks which publish these statements
make preparations for them by calling in loans or reducing
their discounts for the day on which the statements are
drawn up. As far as this is done the statement is to a
certain extent misleading, and this practice of " window
dressing/' as it is called in Lombard street, has been
subject to frequent criticism, so much so that one of the
leading London banks—the London and County—adopted
early in 1908 the practice of showing its daily average
cash holding, thus demonstrating that it was not in the
habit of preparing a statement which did not represent
its position fairly throughout the month. So far the
other banks have not followed its example, and it is very
reasonably contended on their part that the monthly
publicity to which they are subjected is an unfair handicap to them in the conduct of their business, seeing that
they have to compete with other banks which do not make
any such statement, and only show their position at the
end of each half year when they draw up their half-yearly
balance sheets. Lord Goschen's reform was a good one

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another. In the rare cases in which the customer uses
his credit for the withdrawal of coin or notes, the same
process will work; he will pass them on to a creditor
who will ultimately pay them into a bank, in the enormous majority of cases. The extent to which the banks
can create credit by means of loans and discounts is
regulated only by their prudence and by the rules which
they apply to their business. If they advance too much,
their credit at the Bank of England will be diminished,
owing to the fact that the claims against them in the
clearing house will be heavier than the claims which they
have to present against other banks. The result will be
that the proportion of their cash and liabilities will be
brought down to a point which is lower than they consider prudent.
There is no legal obligation of any sort on them to maintain any regular proportion between cash and liabilities,
and as their position in this respect is only subjected to
occasional publicity they are not obliged to consider even
the effect upon their customers of any considerable variation in the proportion between cash and liabilities which
they keep. The system thus works with extreme elasticity and banking facilities can be provided in England
with extraordinary ease. It has of late years been frequently contended that the ease and elasticity with which
it works have carried the English banking machinery to
a somewhat extreme length in the matter of the economy
of gold and legal tenders and the extent of the credit
pyramid which it builds up on them. After the crisis of
1890 Lord Goschen seems to have been strongly imbued
with the conviction that the system had been carried too

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involving a promise on their part to meet the checks on
demand. These checks drawn are paid in to the other
banks, and the check currency of England thus consists to
a great extent of certificates of mutual indebtedness between the banks and their customers. The loans and
discounts made by one bank create the deposits of another,
and the check currency represents transfers of the credit
so created. If the balance sheet of an English bank is
examined, it will be found that its liabilities consist to a
small extent of its capital and reserve fund, to a very
large extent of its current and deposit accounts, which are
its liabilities to its customers, and again to a small extent
of acceptances.
On the assets side will be found "cash in hand and at
the Bank of England/' which represents the till money and
cash reserve—the coin and legal tender actually held by the
bank—and its credit at the Bank of England. The next
item is generally cash at call and short notice, which consists chiefly of the bank's loans to discount houses and also
in some cases of advances to stockbrokers and others
from whom it may expect to be easily able to call them
in. Its investments will be a fairly considerable item,
but in most cases a large proportion of assets will consist of discounts, loans, and advances. By making these
discounts, loans, and advances the banks create deposits
for themselves and for one another. A customer who
has raised a credit by a discount or advance makes use
of this credit to draw a check. He passes the check to
his creditor, his creditor pays it in to his own bank,
and as long as the discount or advance is current there
will be a deposit against it in the books of one bank or

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The note issues are almost obsolete as currency, the Bank
of England's being used chiefly as reserve by the other
banks, while the issues of the country banks are so small
as to be negligible. Most of the commercial and financial
transactions of England to-day are settled by checks
drawn on the banks by their customers. These checks
are not legal tender, since it would obviously be impossible
that a check drawn by an individual on a bank could
be legally made acceptable by a creditor whether he wished
to take it or not.
Nevertheless, the protection which the check affords
to its users against fraud has been sufficient to make its
use general. And the English community* thus conducts
exchanges between itself by means of an enormous number of pieces of paper drawn upon banks which purport
to give the holder the right to demand gold or legal tender,
but are, as a matter of fact, in an overwhelming proportion crossed off against one another in the bankers'
clearing houses. This check currency is provided by the
banks without any legal restriction or supervision. It
has been, ever since the beginning of banking, the business of the banker to finance trade and commerce by
lending it what is called money. Before printed instruments were known, bankers, who were in those days goldsmiths and bullion dealers, lent actual coin to their customers. When bank notes were invented, the bankers
lent their own promises to pay, which were circulated
among the community and took the place of coin currency.
When the use of checks drove out the bank note, as happened in England, the bankers lent their customers not
their own promises to pay but the right to draw checks,

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(B) THE JOINT STOCK BANKS.

The most obvious function of the joint stock banks of
England is the business of taking care of money for customers and meeting checks drawn against their balances.
Customers place money with them either on current or
deposit account. On current account it can be withdrawn
at any time and earns, as a rule, no interest. Many banks
make it a condition that unless the current account is
maintained at a certain figure, generally £100, a charge
shall be made for keeping it. A usual charge is £ i 5s. od.
each half year, but arrangements vary according to the
terms agreed with different customers, and the keen
competition now prevalent enables many to obtain the
convenience of a bank account for nothing. Sums left on
deposit are generally placed for a week or longer, and if
placed for a week the rate paid on them by the banks is
generally i | per cent below Bank rate.
Out of this function of meeting checks drawn by
customers against the sums deposited has grown the
banker's chief duty, which is now the provision of check
currency for the mercantile and financial community.
Currency in England consists of coins, notes, and checks.
The coins are minted by the Government, gold coin being
legal tender to any extent, silver to the extent of £2,
copper to the extent of Is. The silver and copper coins
are mere tokens, passing at a conventional value which is
far above that of the metal contained in them. The use of
this metallic currency is almost entirely confined to small
retail transactions, especially among the poorer classes
which can not afford the luxury of a banking account.

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The problem of providing emergency credit and currency capable of easy expansion and rapid contraction is
thus solved by means of this convention, backed by the
use of the check currency which cancels itself day by day,
each check existing only for the purpose of the transaction which it completes.
At the same time the Bank of England is obliged by the
pressure of external conditions frequently to regulate the
price of money in London. This necessity for regulation
is a fact which is only dimly grasped by the London money
market as a whole, which frequently resents the operations of the Bank of England and contends that the price
of money ought to be left to the natural laws of supply
and demand. The position of the London money market,
however, as the only one in which gold can at all times be
obtained, to any extent and without question, clearly
makes some regulation of the rates at which it is prepared
to work inevitable. None of the various items which compose the market can be expected to conduct their business
with a view to the necessities of the market as a whole. If
a banker wants to increase his holding of bills, he naturally
does so at the market rate, without considering whether
his doing so is likely to turn the foreign exchanges against
London and so cause a demand on London for gold. Consequently the exigencies of their daily business, and the
strong competition between them, impel the banks and
discount houses to do business at rates which may sometimes be dangerous to the general interest, and it is thus
clearly necessary that some institution with a commanding position at the head of the machine should occasionally
intervene and regulate its operations.

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showed the full extent of the extra credit provided by it
at the end of the year, the other securities a rose from
£27,647,000 on December 17 to £47,736,000 on December
31. The other deposits 6 at the same time rose from
£36,653,000 to £55,259,000, and this increase in the
basis of credit was perhaps used by the other banks for
the provision of five to ten times as much accommodation
for their customers. A week later the other securities
had declined to £29,625,000 and the other deposits to
£41,073,000, though reinforced in the meantime by the
payment of government dividends; the emergency credit
had been wiped out, when no longer required, by the
simple process of repayment to the Bank of England of
the sums borrowed from it; and the Bank's proportion of
cash to liabilities, which had fallen to 28 per cent on
December 31, had risen to 3 8 ^ per cent.
Money in England is thus to a great extent a convention based on the assumption by the community that a
credit in the Bank of England's books is as good as gold.
This assumption the Bank cultivates by means of the high
proportion of cash that it keeps in normal times. At the
end of the year it allows it, as has been shown, to run down
rapidly, knowing that the demand on it at that period is
short lived and is chiefly on account of borrowers who
will leave the sums borrowed to their credit in its books;
but at other times its cash proportion is carefully controlled
by movements in its official rate and the measures described above.
a

Other securities in the Bank of England's return, which is explained in

detail later, are securities other than British Government obligations.
& Other deposits are deposits other than those of the British Government.

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enough to cross the border. It is not for a moment suggested that the Scottish banks have in any way abused
the joint monopoly which was thus conferred upon them;
it is only implied that the fact of this monopoly has
enabled them to work together in a manner which has
been found quite impossible by their English counterparts.
To proceed to the details of the act, it may be observed
that the average circulation of each bank was arrived at
from the figures for the year preceding the ist of May,
1845. On the basis of these figures the commissioners of
stamps and taxes were instructed to give each of the banks
a certificate stating the amount of notes which they might
in future issue without holding any gold or silver against
it, this amount being called the authorized circulation.
Above this line each bank must hold gold or silver coin
to an amount equal to the excess, and the silver was not
allowed to exceed one-fourth of the gold—that is to say,
one-fifth of the total bullion held.
The excess circulation was to be arrived at upon an
average of four weeks. Weekly accounts had to be
rendered to the commissioners of stamps and taxes stating
the amount of notes in circulation on the previous Saturday, the gold and silver coin held at the head office of the
bank on each day of the week ending on the same Saturday,
and the gold and silver coin held at the close of business
on that Saturday. At the end of each successive period
of four weeks each bank had to show the average amount
of circulation during the four weeks and the average
amounts of gold and silver coin held at the head office
during the four weeks.

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The commissioners were instructed to publish these
accounts in the London Gazette, and they are also published in the Edinburgh Gazette.
The commissioners of stamps and taxes were empowered
to inspect the books and papers of the banks, and to examine the amount of coin held by them at all reasonable
times; but this right of inspection never appears to be
exercised.
It may be added that, as in the case of the English joint
stock banks with a right of note issue, the liabilities of
Scottish bank shareholders, in banks which are under the
limited liability acts, is unlimited with regard to note
issue. Three of the oldest of the Scottish banks, which
were organized under charters, are believed to involve no
further liability to their shareholders beyond the amount
paid up on the shares, but, as in the case of the Bank of
England, there is a certain amount of doubt with regard to
the question of liability on shareholders.
The Scottish banks regularly publish annual balance
sheets, but the system of monthly statements adopted by
most of the leading English banks has not penetrated
north of the Tweed.

CHAPTER

III.

THE BANKING BUSINESS IN ENGLAND AND SCOTLAND.
(A) ENGLISH ARRANGEMENTS.

The general nature of the business done by the English
banks consists as elsewhere in taking care of money for
one set of customers and lending it to another, a certain
proportion being held in cash or invested in marketable
securities. In England the bankers are also the chief
creators of currency, since by means of the loans that they
make in the form of advances and discounts they create
deposits for themselves and one another against which
the checks are drawn which form by far the most important part of English currency.
As a rule it may be said that whatever be the class of
community for which each bank or banking branch is providing facilities, the customers to whom it lends will be
chiefly the producing and mercantile classes, and the customers for whom it takes care of money will be the investing classes, that is, the professional, land-owning, and
propertied classes, though it will also hold the current balances of the producers and distributors, who are as a rule
the most important borrowers.
Owing to the rapid extension of banking by branches,
the business in England has lately been democratized to
a very remarkable extent. Not many years ago some
banks deprecated the drawing of checks by their customers

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for a smaller amount than £ 5 ; nowadays the check is
frequently used for the settlement of the smallest retail
transaction, and is even drawn for sums smaller than £ 1 .
By this development, the alleged advantage of the Scottish banking system, which provides its customers with a
credit instrument in the shape of the £1 note, has been
largely done away with, since the flexibility and adaptability of the check give it obvious advantages.
The business done by the English banks in the provinces
is with all classes, from the small farmer or shopkeeper in
rural districts to the large merchants and manufacturers
in centers such as Liverpool and Manchester. In all districts they also provide banking facilities for what may
be called the private or investing classes, but in their case,
as has already been pointed out, the banker acts chiefly
as the custodian or guardian of money, while in the case
of the mercantile and producing sections of the community he also acts as its provider, making credit and currency for them by means of loans and discounts.
With regard to the rates charged, it is impossible to lay
down any rule which would not at once be overwhelmed
by exceptions. Banking in England is infinitely flexible.
It adapts itself to the case of every borrower and takes into
consideration both his standing and the security offered.
The arrangements that it makes with its depositors are to a
greater extent regulated by use and wont, but even in their
case it would be misleading to make too definite statements.
Arrangements very frequently vary in accordance with the
length of time for which the deposit is placed with the bank,
and are sometimes modified by the keenness and business
acumen of the depositor, who is occasionally able to squeeze

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his banker by hints at more favorable accommodation to be
obtained from competitors.
The liabilities of banks to the public—that is to say, the
money that they receive and take care of for it—are divided
into current and deposit accounts. Current accounts are
held by the banks on behalf of every kind of customer.
Anybody, that is to say, who wishes to make use of banking facilities opens a current account with his banker,
either by paying in cash or credit instruments, or by obtaining a loan from the banker, and uses this current account
in order to draw checks against it for the purposes of his
business if he be a business man, or for his necessary
purchases if he be a private investor living on accumulated
or inherited capital. This class of account is clearly a
convenience provided by the banker to the customer; the
checks drawn by the customer involve a large amount of
clerical work on the staff of the bank, and unless the
account is habitually kept at a sufficiently remunerative
level no interest can be allowed upon it by the banker;
most banks stipulate that unless the balance is maintained
at at least £100 the customer must pay, for the facilities
given by means of it, either a regular payment at the end
of each half-year or a small commission upon the turnover.
When the current account is provided by means of a
loan from the bank, the charge or commission is still
made over and above the interest on the loan, and when
there is no definite arrangement of a loan, but a customer
is allowed to draw checks up to a certain amount by
way of overdraft, the commission is charged as well as
the rate of interest on the borrowing which the overdraft
represents.

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Proceeding to the deposit accounts, we may say that
these chiefly represent temporary investments on behalf
of members of the community who have money in hand
which they wish to keep readily available. In some cases
they are of a more permanent character, being placed by
customers who wish always to have funds available without the expense and delay involved by the realization of
securities. The rates allowed upon them in London vary
roughly in accordance with the Bank rate and are usually
i y2 per cent below it. But it must be remembered that
special arrangements are often made with the banks by
customers who are prepared to place deposits for longer
periods than the one week's notice which is always insisted
on in theory, though very rarely enforced in practice.
If a customer wished to remove deposit funds immediately,
very few bankers would refuse to permit him to do so.
In the provinces the rates allowed to depositors do not
fluctuate in accordance with Bank rate, but are kept
much steadier. As a general rule their minimum is 2 J
per cent, probably because this is the amount allowed to
depositors by the post-office savings bank, as was noted
in an earlier part of this memorandum, so that the keenness with which modern banks compete for small depositors
makes it necessary for them rarely to give less than this
rate. Bankers, however, though by this custom. they
frequently give their depositors during periods of cheap
money a higher rate than is apparently warranted by the
quotations current in the London market, recoup themselves to some extent when money is dearer by the steadiness which they maintain in the rate allowed to country
depositors. That is to say, in districts where 2\ per cent

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is the normal charge it will only be at times when Bank
rate is exceptionally high that depositors will receive
more than their usual allowance, so that at periods of
comparatively dear money the bargain is to some extent
on the side of the banker, though here again, as always, it
must be remembered that he is liable to be squeezed by
the stress of competition and the keenness of customers
who are able to make use of it.
With regard to loans and discounts it need hardly be
said that their nature is chiefly dictated by the form of
business or industry in which the community for which
the bank provides facilities is chiefly employed. The
bills discounted vary from the promissory notes of customers for the purposes of temporary borrowing to the
large trade acceptances of merchants, shipbuilders, etc.
According to the nature of the community served, advances made by the bank will be largely against produce
and commodities, or against marketable securities; owing
to the greater convenience and simplicity in handling
enjoyed by the latter class of collateral, loans against it
are generally made on rather more favorable terms.
In the city of London, the business of which is chiefly
finance, it follows that the business done by the banks
chiefly consists in providing facilities for financial customers; the bills that they discount are largely those
accepted by the great accepting houses or by themselves,
or by the other banks, and the advances that they make
are largely against marketable securities, or against the
bills of exchange brought to them as collateral by the bill
brokers and discount houses. The current rates for
loans quoted in London may be said roughly to express

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the price at which the bankers are prepared to make these
advances to the bill brokers, and owing to the nature of
the security and the standing of the borrower are habitually lower than those charged to any other class of
customer.
A large business is also done by the banks in making
advances to members of the stock exchange for financing the speculative commitments of the public. These
advances are made from one account to another on the
London Stock Exchange. The account is the term for
the settlements which this body carries out twice in
every month, and it thus follows that advances of this
kind usually run for about a fortnight. Most of the
bankers divide these advances into two classes; one, on
which they charge a slightly higher rate, they make to
their ordinary stock-exchange customers, the other, on
slightly more favorable terms, is arranged with a few
leading firms who act as money brokers between the
banks and the rest of the stock exchange, borrowing in
large amounts from the banks and making a small profit
by relending to other members of the stock exchange
whose standing and borrowing facilities are not quite so
high as their own. Some of the banks, however, do not
recognize this distinction, but consider themselves sufficiently well informed concerning the position of all their
stock-exchange clients to make advances to them directly
without the intervention of an intermediary.
As to the acceptances of the banks, they are largely
entered into on behalf of their trade customers and, in
so far as this is the case, are confined to bills against
genuine produce moving into consumption. A com-

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mission of one-eighth to one-fourth of i per cent is generally charged by the bank for accepting the bills. Of late
years, as has been noted above, the extent to which the
banks have entered into the acceptance business has shown
a considerable increase, and in the case of some of them
the acceptance business done is less of a purely commercial character, involving the handling of a good deal
of merely financial paper drawn against securities.
(B) SCOTCH ARRANGEMENTS.

In Scotland the arrangements between bankers and
their customers are very similar to those prevalent in
England, differences between them being a matter of
degree rather than of essence. The cash credit system,
which is usually pointed to as a characteristic feature of
Scottish banking, has been described in an earlier part of
this memorandum, and it was then pointed out that this
system of allowing a customer to obtain credit with the
assistance of the pledge of a friend is by no means unknown
in England, and also that in the chief centers of Scotch
banking activity the English system of lending chiefly
against definite collateral security is now largely prevalent.
But in the matter of the rates charged there is an important difference between English and Scottish banking,
which also has been noted above. - It lies in the fact that
the Scottish banks form a combination which works together in complete harmony and unanimity. There is no
possibility in Scotland for a customer who thinks that he
might obtain a higher rate for a deposit or a lower rate for
an advance to threaten his banker that he will go across
the street to a competitor. The Scotch banks stand together and adhere to the rates on which they agree among

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themselves as being equitable under the circumstances of
the money market. The rates that they allow to depositors they usually regulate more or less in accordance with
the London Bank rate, but their minimum is i per cent
and their maximum is 4 per cent. They make no allowance on current accounts and nothing is allowed to depositors except on money which has remained in the hands
of the bank for at least thirty days. The rates at which
they will make advances or discount bills are equally
definite and determined. They are arranged by the
banks in accordance with what they consider to be fair
from the rates current in the London discount market,
but they do not necessarily fluctuate with London's movements, and when they are altered the alterations are by
at least one-half of 1 per cent at a time. When it is remembered that the London discount markets fluctuate
by sixteenths of 1 per cent it is at once apparent how successfully the Scottish bankers control the price of the commodity that they deal in. But it must be remembered
that the control which they exercise is modified to some
extent by the competition of the London money market,
since their big customers sometimes resent the hard and
fast rules of the Scottish monetary system and go south
of the Tweed for accommodation.
(C) ENGLISH BANKING ASSOCIATIONS.

The chief organizations or associations of banks other
than clearing houses in England are the Institute of
Bankers, the Central Association of Bankers, and the
Association of English Country Bankers. Since the
functions of these associations are being described by

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another writer who is intimate with the details of their
working, it need only be said here that they have little or
no practical power in regulating the manner in which the
banks conduct their business. They meet to discuss questions of banking practice, but their power over those of
their members who do not choose to follow the conclusions
arrived at is practically nonexistent. The only regulating
influence in English banking is that of the Bank of England,
and it is only exercised occasionally and under exceptional
circumstances. Occasions have been known on which the
governor of the bank has summoned the manager of one of
the banks whose action he thought fit to question and
administered remonstrance and rebuke; but such an occurrence is extremely rare. Moreover, as has been shown in
earlier portions of this memorandum, the Bank of England
intervenes and regulates the price of money in London by
means of measures which have already been described,
namely, by borrowing in order to make its own rate
effective, and raising that rate if it thinks it necessary in
the interests of the market as a whole. These measures it
has to take more or less frequently, but, nevertheless, they
are only taken when the circumstances of the case require
it, and at other times the London money market is left
practically without regulation, with the result that the
keen competition between the bankers causes them to
create credit at rates which are barely remunerative to
themselves and sometimes have an adverse effect in depressing discount rates and turning the foreign exchanges
against London. This lack of cohesion and regulation is a
necessary result of the enormous extension of the power
and business of what are commonly called the clearing

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banks, a that is to say, the chief joint stock banking companies and the few private banks which survive as important factors in the London money market. They are now
the chief manufacturers of credit and currency for London
and for England, and since there is no legal restriction
whatever concerning the proportion of cash to liabilities
that they are obliged to hold, or any other detail of their
credit-making business, it follows that they work entirely
in accordance with the dictates of their own prudence,
their large body of accumulated experience, and the fine
traditions which influence the best of them.
The working of the English machine is thus distinguished
by extraordinary ease and elasticity, the perfection of
which is only marred by this lack of cohesion which
makes the machine work perhaps rather too easily in normal times and in periods of pronounced monetary abundance. In times of difficulty, when the Bank of England
is taking measures to obtain control, the clearing banks
usually support it loyally, and work with a view to assisting the objects which it is trying to secure. But in normal times the lack of cohesion sometimes results in overfinancing, which has unfortunate subsequent effects. It
is clearly desirable that the cooperation between the
Bank of England and the clearing banks, which is generally found in times of difficulty, should be extended to
the periods of more normal conditions. And it may
also be said that some closer agreement with regard to
the rates charged among the English banks is perhaps
desirable on the lines of the Scottish model, but with less
cast-iron inflexibility.
a
Literally this phrase means the banks which are members of the
clearing house.
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(D) CONCLUSION.

In summing up the aspects of English banking, we may
point, as its most obvious feature, to its complete freedom
from restriction and regulation by the law of the country.
English bankers are all agreed, and most critics who have
studied the flounderings of Peel's Act of 1844 will probably agree with them, that this absence of legal restriction
has been of very great benefit to English banking. By
a fortunate coincidence the restrictions which Peel's Act
attempted to impose actually assisted the banks to proceed along a higher line of development. Peel's Act laid
down arbitrary restrictions on the issue of notes, with the
result that English banking turned its attention to the
development of the most perfectly flexible and adaptable
credit instrument, the check. From the experiences of
the English system the conclusion would seem to emerge
that in a civilized and well-ordered community the less
banking is restricted by the legislature the more satisfactory and adaptable its progress is likely to be. At the
same time, from the great difficulty that has been experienced by the leading English bankers in inducing the
smaller and weaker banks to follow a high ideal of business, it may be concluded that there is one regulation
which legislatures could with excellent and wholesome
effect lay down upon banking. For the smaller and
weaker English banks have been tempted to follow principles which would be dangerous if adhered to by the
banking community as a whole, by the complete absence
of publicity under which they work. We have seen that
the law only requires them to make a wholly unmeaning

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declaration twice a year, and though they do in fact publish yearly and half-yearly balance sheets, many of them
make these statements useless as a guide to their actual
position by omitting to state separately the amount of
their cash in hand or with other bankers. If the law
obliged all bankers in England to publish a uniform balance
sheet, or at any rate a balance sheet showing the amount
of their cash in hand, and if at the same time regulations
were made by which "window-dressing" operations for
these balance sheets were impossible, there is no doubt
that an important weak spot in English banking would
be eliminated.
And the conclusion may thus be arrived at, from the
experience of England, that the less the law does for
banking the better, except that it is desirable that it
should insist upon universal and genuine publicity being
applied to the banking community, and that bankers
should all be made to show their position, not only on a
certain day, but by means of averages, throughout the
period covered by the statement. The fear of external
criticism among bankers is so great, and the fact that they
depend upon the confidence of the public is so clearly
grasped by them, that if the amount of publicity implied
be only full enough, and if the tests applied to the genuineness of the statements are only sufficiently complete, there
seems to be good reason to expect that bankers will, if
otherwise left to themselves, take the best possible care
of the business that they conduct for their own shareholders and for the community.

CHAPTER

IV.

THE LONDON STOCK EXCHANGE.
(A) THE INSTITUTION OF THE JOBBER.

In several important respects the London Stock Exchange
differs widely from similar institutions in other centers;
but the most characteristic feature of its organization lies
iji the division of its members into two classes, brokers and
dealers, the latter being more commonly described as
jobbers. The broker, as such, buys or sells securities on
behalf of another party, who is called his client and pays
him a commission; the dealer or jobber provides the market
to which the broker applies, the former being prepared to
buy or sell any of a certain number of securities in which
he specializes and trusting to cover his bargains at a profit
by " undoing" them, as it is called, with another broker
or jobber.
The broker, of course, is a constant feature on all stock
exchanges. He executes the orders of the general public,
buying and selling securities on its behalf, arranging their
delivery when the bargains are real, or their financing
when the dealings are speculative, and charging a commission for his work. The institution of the jobber is
peculiar to London, and his existence makes the whole
aspect and organization of London's business unique in
this respect. In other centers the place of the jobber is
supplied, to some extent, by "room traders," by members who specialize on certain securities; but as definitely
organized into a separate group, the jobber is only to be
found in London. The floor of the London Stock Exchange
is divided into groups of these jobbers, who are always to
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be found in a particular place. Each group constitutes a
market in a special class of securities—British government
stocks, foreign government bonds, American railroad
stocks, South African mining shares, etc.—so that any
broker who receives an order to buy or sell any security
dealt in in London can walk straight to a certain place in
the stock exchange, knowing that he will there find a knot
of jobbers prepared to buy or sell it, at a price, and to
name the prices at which they will buy or sell before they
know which they are to be asked to do. Hence it follows
that when asked to name a dealing quotation, they always
give a double price, meaning that they will buy at the
lower or sell at the higher, trusting to cover the bargain at
a profit by means of the margin in their favor which the
double price gives them.
The extent of this margin varies according to the freedom of the market in the security that is dealt in. In the
case of securities of average marketability in London, such
as British and American railway stocks and foreign government bonds, the margin usually quoted is one-fourth
of i per cent. Thus the quotation for London and Northwestern Railway stock would be 131 X> \$\%\ for Erie
shares, 38 to 3 8 ^ ; f° r Russian fives, 99K, 9 9 ^ - But in
actual dealing, as will be shown later, a skillful broker will
probably impel his jobber to come a little closer—that is,
to name a rather narrower margin, three-sixteenths or
even one-eighth of 1 per cent. In the case of a stock like
British consols, the market in which is especially free, the
usual quotation gives a margin of one-eighth of 1 per
cent—84^ to 8 4 ^ ; and when it is a question of mining and
industrial shares of small denomination, which are quoted

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on the basis of so much per share and not in hundreds of
stock, the margin is often reduced to 3d, or even less.
For instance, the share of the British South Africa Company will be quoted at 29s. to 29s. 3d., because it is evident
that a small margin enables the dealer to make a big profit
when it applies to each share in every hundred turned over.
The profit made by the jobber or jobbers by means of
this margin is called his " turn," and it obviously averages
half the margin. If a jobber knows that a stock is changing hands in the market at 9 9 ^ , he will make his price to
a broker who comes to him 99^8,99^, and having bought
at 9 9 ^ or sold at 99^8 expects to even himself at 9 9 ^ . In
the case of a mining share his turn may thus only amount
to 1 }4d.; but in the first case he makes a turn of one-eighth
of 1 per cent on each £100 stock; in the second he makes
i%A. on each share. Thus if he deals in £1,000 stock he
earns ten-eighths of 1 per cent, £ 1, 5s. od.; if in 200 mining
shares his turn will be 30od., £1 5s. od. again. In the case
of securities seldom dealt in, and in which the market is
consequently not free, the margin between the buying
and selling quotation will be 1 per cent or more, because
the chance of the jobber's being able to cover himself
quickly and at a profit is obviously lessened by the comparative rarity of sellers and buyers. And sometimes
when the market in securities is especially narrow, jobbers
do not attempt to "make prices"—that is, to name two
quotations at which they are prepared to deal outright—
but negotiate the purchase or sale for the broker (who
then has to disclose the nature of his business), and
charge a " t u r n " for their trouble and special knowledge.
Illustrating this peculiarity of London Stock Exchange

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business by a concrete example, we may imagine that a
broker receives an order from a client to buy ioo shares
in the Union Pacific Railroad. He goes to that part of
the " house," as the stock exchange calls itself, in which
a seething mass of shouting jobbers is gathered who constitute the American market. He is promptly accosted
by one of the jobbers and asked if he has anything to do,
and replies that he wants to deal in a few Unions. The
jobber, knowing that the current price of Unions is 1 9 8 ^ ,
intimates that he will buy at 198^8 and sell at 1 9 8 ^ ; this
he does by merely naming the two fractions " a n eighth,
three-eights," since the figure is supposed to be already
known to the broker. The latter by merely looking expectant, or by showing an inclination to move on to another jobber, or by asking his jobber to "come closer,"
generally induces the latter to quote a narrower margin.
''Three-sixteenths, three-eighths," says the jobber, guessing him to be probably a buyer. The broker shakes his
head and goes on to another jobber, and finally either
succeeds in getting his shares at 1 9 8 ^ , or at least satisfies himself that 1 9 8 ^ is the best that he can do for his
client.
The broker is thus protected by the fact that the jobber
does not know, when naming his price, whether he will be
made to buy or sell the shares, for, having made the price,
he is bound to accept the bargain whichever way the
broker may declare himself; and, as has been shown, the
broker, unless he definitely asks for a price to be made on
a certain basis, can always go from one jobber to another
trying to get a price made which suits his client's business.
Competition between one jobber and another enables the

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broker to deal on the narrowest possible margin, and tends
continually to reduce the " t u r n s " which the jobbers earn.
It must be noted that when a jobber makes a price without the number of shares or amount of stock being stated,
he is bound to deal, in even sums, up to the amount of
either £1,000 stock or bonds, or the equivalent in foreign
currency; ioo shares of a market value of £ i or under; 50
shares of a market value of £ 1 to £ 15; 10 shares of a market
value of over £15; or 100 American shares of $100.
If, when the jobber has named his original price, the
broker asks him to "come closer," the former is at once
released from his obligation to deal at the price originally
named. The capacity of jobbers to deal readily and
freely, and at close prices, is obviously increased when they
are not always anxious to keep their accounts even, and
cover every bargain, but are prepared to "run a book" as
it is called, taking stock when it is offered freely and being
ready to carry it for a time, or if the market is the other
way, facing the position of being "short." Their power
thus to act as merchants rather than mere dealers has been
lessened by the great increase that has taken place in recent
years in their number; since the consequent diminution in
the volume of business done by each, and the narrowing of
turns, has made them less able to take the greater risk
involved by running a book. Those who still do so, however, have the advantage of getting more custom from the
brokers, and they are thus better able to tell what the outside public is doing in the stocks in which they specialize.
When acting as a pure dealer, the jobber is always liable to the risk that the market may have gone against him
before he can undo his bargain. If a number of brokers

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are buying or selling simultaneously this may easily happen, and the jobber requires a very active and alert intelligence in order to keep closely in touch with the true state
of the market. He is not bound to make a price if he is
asked to do so, and sometimes when the market is altogether demoralized it happens that jobbers refuse to deal
on the system described above. This is quite a rare occurrence, however, and as a rule it is expected of them that
they should be prepared to provide a market and take the
risks of their position. The jobber's business is on the
whole a profitable one, and when the market is active and
free he makes profits rapidly, the volume of his turnover
fully compensating him for the narrowness of the margin
on which he works. His office expenses are small when
compared with those of the broker, who has to conduct
correspondence with clients, and from the nature of his
business he has less reason to fear bad debts; for the
jobber, as such, deals only with other members of the
stock exchange, brokers or other jobbers, and they have to
meet their debts on settling day, or declare themselves
defaulters. But the broker deals for outside clients, and if
they are unable to meet their speculative losses the broker
has to pay and take his chance of recovering the debt by
means of legal proceedings.
The justification of the jobber lies in the ease and freedom
which his existence imparts to business in London. London's business is so diverse, and the number of different
securities there dealt in is so great, that if every broker who
received an order had to look for another who wanted to
buy what he wanted to sell or vice versa, the work which is
now done could never be got through. The English public,

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which only comprehends the system in a very hazy manner,
often blunders into a theory that the jobber is an expensive
luxury, and can not understand why it should have to pay
the jobber's turn as well as the broker's commission. But
in fact the jobber is an ingenious example of the division of
labor and without him the brokers would have to charge
their clients extra commissions, which would more than
make up for the saving of the jobber's turn, and much of
the business that is now done readily and quickly could not
be got through at all.
In recent years there has been a tendency toward the
blurring of the line that divides the two classes of members
of the London Stock Exchange. Certain of the brokers
have taken to specializing in various securities and making
prices in them like jobbers, to the detriment of the business
of the latter, and a practice has also now been developed,
by which brokers with orders to execute, sometimes find
it advisable to do their business with outside firms instead
of with the jobbers in the House. This was especially the
case with South African shares, large orders in which were
frequently transacted with the South African firms, and
American bonds in which the Anglo-American houses were
often able to provide dealing facilities on more favorable
terms than the jobbers. And since the brokers who dealt
outside the House received a commission from both parties,
it was plausibly urged by the jobbers who opposed the
system that it led to their sometimes doing so even when
their clients' interests would have been best served by a
bargain with a jobber.
While the brokers were thus encroaching on, or ignoring,
the jobbers in the transaction of business, the latter were

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at the same time retaliating by opening business connections outside the stock exchange. The most notable
example of this process was the development of arbitrage
business between Wall street and the jobber in the American market in London, and of similar transactions between
the English provincial stock exchanges and the jobbers in
the various markets. Formerly the provincial brokers
when they had an order to execute in London sent the
order to a firm of London brokers; but many of them
gradually adopted the plan of opening up direct relations
with a firm of jobbers in each of the principal markets in
the London Stock Exchange and doing a business with
them, similar to arbitrage in securities with a foreign
center, but commonly called " shunting." The provincial
broker, being kept advised of the state of the market in
London by his allied jobber, bought and sold in Liverpool,
or wherever else he might be established, and covered his
bargains in London, dividing the profits or losses with
the jobber. From the nature of these relations it followed that the provincial brokers were unable to avail
themselves of one of the most important safeguards which
the English system gives to the London brokers in dealing
for their clients, namely, their power of going on from one
jobber to another, if they believe that they can so get better
terms for their clients. The provincial broker was evidently in the hands of the jobber with whom he entered
into relations, and it was consequently contended that his
client's business was not done any more cheaply for the
elimination of the commission paid to the London broker,
which earned for the client the power to take advantage of
the higgling of the market.

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In any case the tendency by which brokers and jobbers
were encroaching on one another's functions and breaking
down the boundary which originally divided the two
classes of members was noted with strong disapproval
by a majority of their number, and led in 1908 to a reaction which produced an amendment of the rules, by
which the functions of the two classes were more clearly
defined and brokers and jobbers were expressly forbidden
to poach on one another's preserves. No alteration was
made in the matter of arbitrage transactions with foreign
centers, but "shunting"
business with provincial exchanges was forbidden. Critics of this reform promptly
demonstrated its illogical nature, but the English mind
is never afraid of disregarding logic. Jobbers were restricted to their original function of making prices for
brokers who came to them with business to do, and
brokers were forbidden to do business exgept with jobbers, unless they had first ascertained that they could
thereby buy or sell on more favorable terms, and if they
found that they could deal to greater advantage outside,
they were forbidden to take two commissions.
These measures were strongly objected to by an important section of the members of the stock exchange,
most of the leading firms opposing them. Since these
leading firms had built up or increased their business
under the freer conditions previously prevalent, it was
natural that they should regard as reactionary and undesirable a change which modified these conditions profoundly. But the rank and file of the members took the
contrary view, being apparently convinced that the institution of the jobber is a useful and indispensable wheel

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in London's machinery, enabling it to conduct an enormously diversified business with remarkable economy and
dispatch, and that a tendency under which the distinction
between him and the broker was being gradually eliminated had to be checked. And the 1909 election of the
committee for general purposes, which is responsible for
the framing and interpretation of the rules governing
these details of business, emphatically indorsed the reform
of 1908 by which the division of members into brokers and
jobbers was defined more strictly and more rigorously
enforced. But it should be added that the majority of
the leading firms persist in the view that this " reform " is
a step backward, and since the jobbers constitute a majority of the members, and their existence was threatened
by the tendency against which the new rules were directed, their emphatic indorsement of them must have
been to some extent biased by considerations of personal
interest.
(B) CONSTITUTION AND MEMBERSHIP.
As compared with the New York Exchange or the Paris
Bourse, the London Stock Exchange has hitherto made
very inadequate stipulations for the financial strength
and stability of its members. And it is generally supposed that this neglect of a very important detail arose
from the nature of its constitution. It is practically a
proprietary club, owned by shareholders in whose eyes
the extent of the annual profits and the bulk of the dividends they receive are naturally the most important consideration. From their point of view, since the chief
source of revenue of the company was the annual sub-

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scriptions of the members, it followed that a rapid and
constant increase in their numbers was the consummation
most of all to be desired, and that any attempt at an
examination of their financial status was almost entirely
left out. The consequence of this defect is that a considerable number of members are supported by resources
which are quite inadequate when compared with the
standard of New York or Paris, and that in this respect
the London Stock Exchange is a less helpful handmaid to
the English banking system than it might be. Since it is
highly important to bankers that the securities which they
handle, invest in, and advance against, should be readily
realizable in time of difficulty, it follows that the ability
of the stock exchange to suffer shocks with equanimity is
a matter of great moment from the banking point of view.
And it can not be doubted that the number of members
whose resources are comparatively slender, and the consequent comparatively high proportion of failures among
them, give a certain amount of instability to markets in
London. But it is easy to exaggerate the importance of
this consideration, and the great aggregate wealth of the
members, and the ease and elasticity with which the English banking system provides credit facilities, go far
toward mitigating it.
Some attempt has been made at reform in this connection, though the direct object aimed at by the reformers was not, perhaps, an increase in the financial stability
of the members so much as a restriction in the increase in
their numbers and the creation of a vested interest for the
existing members of their body. The proprietors, or
shareholders, in the stock exchange were all of them

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necessarily members of it, but members were not necessarily shareholders, and this fact tended to a diversity of
interest. As has been shown, the shareholders from the
point of view of an increasing revenue desired a constant
addition to the number of the members, from whose
entrance fees and subscriptions their revenue was derived.
The members, as a whole, especially in times when the
volume of business was small, naturally considered that
the constant addition to their number was an inconvenient
process, since it tended to whet the edge of competition
and so reduce the commissions earned by the brokers and
the turns made by the jobbers. (For it should be noted
that in London the commissions charged have n o t a
hitherto been in any way regulated by the governing
authority, but are left to arrangement between brokers
and their clients.) From the point of view of the public,
this increase of competition and cheapening of stock
exchange facilities was an obvious gain, but against it we
have to set the disadvantage caused by the comparative
insecurity arising out of the constant influx of members
whose financial resources were limited. From the public's
point of view, as well as that of the bankers, it is highly
important that the members of the institution which
buys and sells securities for it should be well supplied
with capital and credit. If a considerable number of them
are comparatively poor, the fear of default by clients or
of being locked up with securities that can not be realized
except at a loss, has an exaggerated effect on their nerves
and on their actions in times when markets are demoralo-June, 1909. The question of an authorized scale is now engaging
the attention of the committee.

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ized by any political or financial accident; and consequently a leaven of weakness among the members of the
stock exchange, who are apt to rush to realize and reduce
commitments on behalf of themselves or their clients at
the first hint of difficulty or trouble, has some effect in
diminishing the stability of markets.
Formerly the utmost that was required of anyone aspiring to become a member of the London Stock Exchange
was that he should pay an entrance fee of £510, and find
three members who would be sureties for him to the extent of £500 each for a period of four years; that is to
say, if he failed before this period had passed, his sureties
were bound to pay up to that amount to his creditors on
the stock exchange. Afterwards he stood on his own
legs, and since his entrance fee had passed to the shareholders, there was nothing but his own capital that any
creditor could depend on. Concerning the amount of
his capital, there was no stipulation or inquiry, and instances have been known of members beginning business
with £500, or less.
By new rules made in 1904 each candidate for admission to membership must obtain a nomination either
from a member willing to retire in his favor, or from one
who has retired within the previous twelve months, or
from the legal representatives of one who has died within
the previous twelve months; and also has to become a
proprietor in the stock exchange by acquiring one or
more shares.
The object of these regulations was to insure that henceforward members of the "house" should be possessed of
something of which they could dispose on retirement, but

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since one of the rules embodying them laid it down that
the right of nomination should not be exercised by a defaulter, they did not go far toward strengthening the position of creditors in case of failure.
A certain number of candidates for election may be
admitted each year without nomination; the number is
fixed annually by the committee, and these nominated
candidates are confined to the ranks of clerks who have
served for three years in the "house*' or four years in the
settling room. It should be explained that a clerk in the
''house" is one who has the right of entry to the stock
exchange itself in which the business of dealing is carried
on (he is not necessarily empowered to deal, and can not
be, until he has served two years as a clerk in the " house;"
if he is, he is called an authorized clerk). A settling room
clerk only has the right of entry to the rooms in which the
business of checking bargains is done and part of the detail work of the settlement is carried out. Clerks in the
" house " and settling room clerks wear distinctive badges.
Those who desire to become members without the expense of procuring a nomination must have served four
years in the "house'' or settling room, with a minimum
service in the "house" of three years.
Clerks of this standing are also privileged in the matter
of sureties or recommenders, since they are only required
to find two who will guarantee them to the extent of £300
for four years. Other applicants must find three recommenders, who will each engage to pay £500 to their creditors
if they default within four years. In any case the recommenders must be members of the stock exchange of not
less than four years' standing, who have fulfilled all their

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engagements and are not indemnified. Applicants who
enter with two sureties only have to pay half the entrance
fee charged to the less privileged class. It is 500 guineas
for the latter, 250 guineas for the former.
The recommenders have to answer, concerning the candidate whom they recommend, certain questions, as to
whether he has ever been bankrupt, etc., and among them,
1
'Would you take his check for £3,000 in the ordinary
way of business?" But it must not be supposed that an
affirmative answer to this question implies that the candidate has £3,000 of his own. It does imply that in the
opinion of the recommender he would not draw such a
check unless there were funds at his back to meet it; but
it is only an expression of opinion and does not in any way
bind the recommender. This inquiry is an institution of
old standing, and it has not prevented the introduction
of many members whose resources were far below the
sum named in it.
It should be noted that clerks who before their employment on the stock exchange were engaged as principals in
any other business must produce three sureties for £500.
To return to the acquisition of proprietorship that is now
necessary before admission, in this case again the way is
made easier for candidates who have served a qualifying
period as clerks; they have to acquire one share in the company that owns the stock exchange, whereas those who
come in with three sureties must become possessed of three
shares. By this process, in course of time all members of
the stock exchange will ultimately be share-holders, and
the diversity in the interests of the proprietors and members will thus gradually be abolished.

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Summing up the payments and preliminaries that have
to be gone through before an applicant can become a member of the stock exchange, we find that he now has (i) to
pay an entrance fee of £525, if entering with three sureties,
or £262 10s. od. if entering with two sureties; (2) to buy a
nomination (now, June, 1909, said to be worth £100 to
£125), unless specially admitted by leave of the committee;
(3) to buy one share (priced now at £177) if a clerk of four
years' standing, or three shares if not, or if previously a
principal in some other business; (4) to obtain two sureties
(whom he must not indemnify) for £300 for four years if a
clerk of four years' standing, or three sureties for £500 if
not, or if previously a principal in some other business.
The most that he can be required to pay is thus £1,181,
and the least £439 10s. od. If he becomes a defaulter he
forfeits the right of nomination, arid so the minimum that
he must certainly be possessed of in that case is one share
in the stock exchange. In Paris each agent de change
has to buy a seat, costing about £60,000 and show that he
possesses a working capital of £20,000, and deposit £12,000
making a total necessary capital of about £92,000, and his
solvency is guaranteed by all the rest; and in New York,
each member has a seat to dispose of, the value of which
ranges about £16,000; and it is thus evident that the
financial strength of the members of the London Stock
Exchange is, comparatively, extremely limited, and the
much greater frequency of failures in London is thus easily
accounted for.
This weakness of the London Stock Exchange, proceeding from the limited financial resources of many of the
members, has arisen largely from the fact that it is a pro-

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prietary establishment conducted for the profit of a body
of shareholders, which profit was most obviously secured
by the rapid increase in the number of members. This
increase has tended to cheapening of stock exchange
facilities through competition and so increased the difficulty of making money rapidly among the members, and
made them more reluctant to take risks in order to support
markets, and more likely to be nervous when any shock
occurs.
(C) THE GOVERNMENT OF THE EXCHANGE.

The diversity of interest between the shareholders and
members also necessitates dual control. There are two
committees, one composed of nine members, and called the
trustees and managers, or more commonly the managers.
This committee is practically the board of the company
that owns the stock exchange building, and is elected by
the shareholders. It decides questions of entrance fees and
subscriptions and the disposition of the company's revenue. There is also the committee for general purposes,
commonly spoken of as the committee, which consists of
thirty, elected by the members of the stock exchange; it
regulates the relations between members, as such, in their
business dealings, punishes them with suspension or
expulsion i^they break the letter or the spirit of its rules,
settles all questions connected with the intricacies of
market operations, and decides concerning the granting of
settlements and quotations to new securities. It has no
revenue to handle, and if it desires any expenditure can
only make recommendations to the managers. In practice this system of dual control works quite smoothly, and
the new rule, which makes every new member a share76651—10

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holder, will gradually abolish the diversity of interest that
brought it into being.
(D) THE SETTLEMENT AND OTHER DETAILS.
Business in the London Stock Exchange is complicated
by the fact that a large number of the securities in which
it deals are not to bearer, but registered and transferable
by deed. In the case of a bearer security, the buyer pays
his check, or passes over currency or any acceptable form
of credit instruments, takes his bonds or shares, the possession of which is in itself evidence that he is their owner,
and the bargain is concluded. And thus, in settling
business in securities of this kind, it is merely a question
of bringing the real buyer and the real seller together
through the machinery of the clearing house and the thing
is done.
But when registered stock and shares are transferred, the
process is much more complicated, for in this case nothing
passes from seller to buyer which gives the latter immediate possession. A holder of these securities is registered
as such in the books of the company, or, in the case of
government and municipal stocks, of the bank or other
agent that keeps the register, and only possesses a certificate stating that he is so registered, which is a mere
memorandum carrying no evidence of title.. The transfer
from one holder to another is effected by a deed of transfer,
to which this certificate is usually attached, and consequently before the bargain can be completed it is necessary
that the selling broker should be informed of the name,
address, and style of the transferee to whom the stock or
shares are to be passed, so that he may be enabled to make

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out a deed of transfer, signifying that, in consideration of
such and such a sum paid by A the transferee, B the transferrer sells to him so much stock or so many shares. This
deed, duly stamped and either certified or accompanied
by the certificate, being delivered to the buying broker, he
pays the consideration money and lodges the deed with
the company, whose securities are transferred, or with the
agents of the Government or municipality, and his client
the transferee is then registered as their possessor.
The complication introduced by this necessity for the
preparation of a deed of transfer makes the business of
the settlement in London a lengthy process. It involves
the preparation by the buying broker of a form called a
ticket, stating the name, address, and description of the
client to whom the stock is to be transferred, and this
ticket is passed to his seller, and so on through intermediate sellers to the real seller, or the party who is prepared
to deliver the stock. In the case of most active securities
this passing-on process is effected through the clearing
house, but in others the ticket is passed on by one firm to
another in the settling room.
Hence it i ^ t h a t four days are required for the fortnightly settlements at which all bargains in London are
completed, unless specially executed for cash or for a
later settlement. The first two days are called the
contango, carry-over, or continuation days; on the first of
them the account in mining shares is carried over; on the
second, the account in other markets, except the consols
market; on them brokers who have bought or sold
securities for clients who do not intend to take them up
or deliver them, but propose to continue the bargains

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with a view to covering them at a profit, make arrangements to this end. Every bargain by the rules of the
house has to be completed at the settlement, and therefore stock which has been bought and is not meant to be
taken up has, on contango day, to be sold for cash and
simultaneously bought for the new account. These carryover bargains are all entered at the "making u p " price
which is fixed by the dealers at noon on contango day.
And since a buyer is thus released from his obligation to
find cash for his purchase he is charged a rate for the
accommodation. This rate varies according to the state
of the market in the particular stock—in cases where
there is a large bull account in a market well supplied
with stock the rate is frequently out of all proportion to
the rate ruling for money; but when a stock happens to
be oversold the rate may "run off" and a bull may
continue his stock "even," or is sometimes paid a "backwardation "—a fine paid by bears of stock that they can not
deliver. A large proportion of stock open on speculative
account is thus settled by bringing the bulls and bears
together, and any balance of stock open is arranged by
jobbers or brokers taking up the stock for the speculator
on his paying stamp and fee and a fair rate for the
accommodation.
The third day of the London settlement is devoted to
the passing of tickets described above, setting forth the
names into which stock and shares are to be transferred,
and this day is consequently called ticket day or name
day.
On the fourth day bearer securities and transfer deeds
of registered stocks are delivered to the buyers and the

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consideration money is paid; but it should be observed
that ten days' grace are allowed for the delivery of registered stock, to give time for the seller to sign the transfer
and for the deed to be certified. It often happens, of
course, that the seller is not parting with the whole of his
holding in a stock, and therefore is not prepared to give
up his certificate to be attached to the transfer deed and
delivered to the buyer. In these cases the certificate and
transfer deed are forwarded either directly to the company, or through the secretary of the share and loan department of the stock exchange, and the transfer deed is
certified as in order. And a certain amount of time is
obviously required for the execution of these formalities
and for the procuring of the signature in cases where the
transferer may happen to be abroad. On this last day of
the settlement, which is usually called pay day or account
day or settling day, all differences are paid arising out of
speculative transactions.
It should be added that if a seller of stock does not
receive a ticket by the proper time on ticket day, informing him into whose name it is to be transferred, he can
"sell it out"—that is, sell it to some other buyer, and
any consequent loss falls on the party who is responsible
for the delay in passing the ticket. Similarly, a buyer
who has passed a ticket and has not had the transfer deed
delivered after the ten days of grace allowed, can "buy it
in "—that is, buy the stock for cash from some other seller.
These details of the settlement are generally carried out
by clerks, and it must not be supposed that the business of
the "house" is seriously interfered with for three days
every fortnight; some interruption there may be, in opera-

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tions that members carry out on their own account, but
any orders that come in from clients are attended to as
usual.
There is yet another class of security in London, besides
bearer and registered, namely, inscribed stocks. These are
chiefly government and municipal stocks, and British
consols are included among them. Inscribed stocks can
only be transferred by the actual attendance of the transferrer, who is identified by his broker as the real owner of
the stock, or by a power of attorney executed by him in
favor of his broker.
Modern tendencies appear to be in favor of the growth of
bearer securities, owing to their more convenient handling,
and since the strong prejudice in their favor which exists
abroad gives them a freer market on the continental
bourses, it is becoming usual to give holders of inscribed
and registered stock the option of obtaining bearer certificates. This has long been done in the case of British consols, of which foreign investors frequently hold large
amounts. It should be mentioned that the settlements in
consols and the other securities dealt in in the consols
market are not fortnightly but monthly. A great deal of
the business in these stocks, however, is carried out for cash,
and is settled at once by immediate transfer and payment.
(E) THE OFFICIAL LIST.
A daily list is published by the managers of the stock
exchange under the authority of the committee, giving the
prices, at 3.30 p. m., of about 5,000 securities officially
quoted. It also gives the amount, authorized and outstanding, of each security, and states its face value and the

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amount paid up on it, the date at which it was last ex
dividend, and the amount of the dividend then deducted.
By the side of the quotation is a space, in which are printed
any " m a r k s " or records of business done that members
may wish to have officially reported. These marks by no
means cover all the business done, for there is no obligation
on any member to mark every bargain that he transacts;
and though some old-fashioned brokers adopt the practice
of marking all their business, as far as possible, it is the
exception rather than the rule for a bargain to be marked.
The marking is done by the insertion of a slip of paper with
the security dealt in and the price dealt at, and the name of
the firm marking it, into a box provided for the purpose.
The note is transferred by an official to the marking board,
which is thus during the day a record of actual bargains, or
some of them, and is finally printed in the Official List.
Before a security can be granted a quotation in the list
certain formalities have to be observed, which are set out
as follows in an appendix to the rules of the committee:
SPECIAL SETTLEMENTS.

The following documents and particulars should be sent
to the secretary of the share and loan department when
application is made for a special settlement:
SCRIP OR BONDS OF NEW LOANS.

A specimen of the scrip or bond.
A copy of the prospectus, circular, or advertisement
relating to the issue.
A statutory declaration stating—
i. The amount allotted (a) to the public, (b) to
others.

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2. The distinctive numbers and denomination of
each class of scrip or bond.
3. The amount paid up thereon.
4. That the scrip or bonds are ready to be delivered.
SHARES OF NEW COMPANIES.

The certificate of incorporation.
A specimen of the share certificate.
A copy of the prospectus—the statement in lieu of prospectus as filed with the registrar of joint stock companies—circular, or advertisement relating to the issue.
A specimen call letter.
Certified printed copies of contracts relating to the issue
of shares credited as fully or partly paid.
A letter from the secretary of the company stating—
1. That the share certificates are ready to be issued.
2. The distinctive numbers of the shares allotted
(a) to the public, (6) to the venders.
3. The particulars of the company's capital.
4. The nominal amount of each share, and the
amount paid in cash or credited as paid on
each share.
5. In cases where the whole of the capital has not
been issued at the time the application is
made, whether the unissued shares are venders'
shares or are held in reserve for future issue.
STOCK OR DEBENTURE STOCK OF N E W COMPANIES.

A specimen of the scrip or stock certificate.
A copy of the prospectus—the statement in lieu of prospectus as filed with the registrar of joint stock companies—circular, or advertisement relating to the issue.
A letter from the secretary of the company, stating:
1. The amount allotted (a) to the public, (b) to
others.
2. The amount paid in cash per £100 stock.
3. That the scrip or stock is ready to be issued.

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OFFICIAL QUOTATIONS.
CONDITIONS PRECEDENT TO AN APPLICATION FOR OFFICIAL
QUOTATION.

i. That the prospectus—
Shall have been publicly advertised;
Agrees substantially with the act of Parliament or
articles of association;
Provides for the issue of not less than one-half of
the authorized capital and for the payment of 10
per cent upon the amount subscribed;
If offering debentures or debenture stock, states
fully the terms of redemption.
In cases where a company has sold an issue of debentures or debenture stock which is subsequently offered for public subscription either by
the company or any subsequent purchaser, states
the authority for the issue and all conditions of
sale.
2. That two-thirds of the amount proposed to be issued
of any class of shares or securities, whether such issue be
the whole or a part of the authorized amount, shall have
been applied for by and unconditionally allotted to the
public, shares or securities granted in lieu of money payments not being considered to form a part of such public
allotment.
3. That the articles of association, and the trust deed
where such is required, contain the provisions specified
hereafter.
4. That the certificate or bond is in the form approved.
ARTICLES OF ASSOCIATION.

Articles of association should contain the following
provisions:
1. That none of the funds of the company shall be
employed in the purchase of or in loans upon the security
of its own shares.

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2. That directors must hold a share qualification.
3. That the borrowing powers of the board are limited.
4. That the nonforfeiture of dividends is secured.
5. That the common form of transfer shall be used.
6. That all share and stock certificates shall be issued
under the common seal of the company and shall bear
the signatures of one or more directors and the secretary.
7. That fully paid shares shall be free from all lien.
8. That the interest of a director in any contract shall
be disclosed before execution, and that such director shall
not vote in respect thereof.
9. That the directors shall have power at any time and
from time to time to appoint any other qualified person
as a director either to fill a casual vacancy or as an addition to the board, but so that the total number of directors
shall not at any time exceed the maximum number fixed,
but that any director so appointed shall hold office only
until the next following ordinary general meeting of the
company, and shall then be eligible for reelection.
10. That a printed copy of the report, accompanied by
the balance sheet and statement of accounts, shall, at
least seven days previous to the general meeting, be
delivered or sent by post to the registered address of every
member, and that two copies of each of these documents
shall at the same time be forwarded to the Secretary of
the Share and Loan Department, the Stock Exchange,
London.
11. That the charge for a new share certificate issued to
replace one that has been worn out, lost, or destroyed
shall not exceed 1 shilling.
TRUST DEEDS.

Trust deeds should contain the following provisions:
1. Where provision is made that the security shall be
repayable at a premium, either at a fixed date or at any

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time upon notice having been given, the trust deed must
further provide that sliould the company go into voluntary
liquidation for the purpose of amalgamation or reconstruction the security shall not be repayable at a lower
price.
2. The following clause should be inserted in all deeds:
" The statutory power of appointing new trustees hereof
shall be vested in the company, but a trustee so appointed
must in the first place be approved of by a resolution of
the debenture (or debenture stock) holders passed in the
manner specified in the
schedule hereto. A corporation or company may be appointed a trustee of these
presents."
3. In the clause regulating the convening of meetings
of the debenture (or debenture stock) holders, the following words should be inserted, "and the trustee or
trustees shall do so upon a requisition in writing signed
by holders of at least one-tenth of the nominal amount
of debentures (or debenture stock) for the time being
outstanding."
4. The clause defining an "extraordinary resolution"
must provide that "the expression 'extraordinary resolution' means a resolution passed at a meeting of the
debenture (or debenture stock) holders duly convened
and held at which a clear majority in value of the whole
of the debenture (or debenture stock) holders is present
in person or by proxy and carried by a majority consisting
of not less than three-fourths of the persons voting
thereat upon a show of hands, and if a poll is demanded
then by a majority consisting of not less than threefourths in value of the votes given on such poll."
5. Should debentures or debenture stock be entitled
" first mortgage," provision must be made for the creation
of a specific first mortgage in favor of the debenture or
debenture stock holders.

137

National

Monetary

Commission

SHARE AND STOCK CERTIFICATES.

All certificates should state on their face the authority
under which the company is constituted and the amount
of the authorized capital of the company.
The following footnote should appear on all stock and
share certificates: "The company will not transfer any
stock [shares] without the production of a certificate
relating to such stock [shares]; which certificate must be
surrendered before any deed of transfer, whether for the
whole or any portion thereof, can be registered or a new
certificate issued in exchange."
Where the capital of a company consists of more than
one class of shares of the same denomination, the distinctive numbers of the shares of each class must be
printed on the face of the share certificates.
All preference share certificates should bear on their face
a statement of the company's capital and the conditions,
both as to capital and dividends, under which the shares
are issued.
Debentures and debenture stock certificates should, in
addition to legal requirements, state on their face the
authority under which the company is constituted, the
nominal capital of the company, the dates when the interest on the debentures or debenture stock is payable, and
the authority under which the issue is made (i. e., articles
of association and resolutions), and on their back the conditions of issue, redemption, and transfer.
BONDS.

Bonds must specify the amount and conditions of the
loan, the powers under which it has been contracted, and
the numbers and denominations of the bonds issued, and
in the case of a loan issued either wholly or partly in London those issued in London must bear the autographic
signature of the London agents or contractors.

138

The

English

Banking'

System

NEW COMPANIES.

Before the application form can be issued for signature
there must be supplied—
A copy of the prospectus.
Two copies of the articles of association.
In the case of debentures or debenture stock the trust
deed [where possible before execution].
After the application form has been signed there must
also be supplied in the case of shares—
The certificate of incorporation, and the certificate that
the company is entitled to commence business.
Two certified copies of the prospectus, indorsed with the
date when first advertised.
Two certified copies of the memorandum and articles of
association.
The original letters of application.
The allotment book containing a list of applicants, the
number applied for by each, and the result of each application, with a summary signed by the chairman and
secretary.
Should the allotment have taken place at an interval of
six months or more before the date of the application, a
certified list of present shareholders will also be required.
A copy of the letter of allotment and the date when
posted.
A specimen of the share certificates.
The bankers' pass book, accompanied by a certificate on
a special form from the company's bankers, stating the
amount of deposits received by them, and the number of
shares on which such deposits (i. e., application money
only, being £
per share) were paid.
Authenticated copies of all concessions and similar documents, with notarially certified printed translations, and
certified printed copies of all contracts and agreements.

139

National

Monetary

Commission

A statutory declaration by the chairman and secretary, stating the following particulars:
i. That the prospectus complies with the provisions
of the companies acts.
2. That all documents required by the companies
acts have been duly filed with the registrar
of joint stock companies, and the dates of
filing.
3. The number of shares applied for by the public.
4. The number of shares allotted unconditionally
to the public (Nos
to
), and the
amount per share paid thereon in cash.
5. The number of shares allotted for a consideration
other than cash (being Nos
to
).
6. The amount of deposits paid, and that such deposits are absolutely free from any lien.
7. That the share certificates are ready for delivery,
that the purchase of the properties has been
completed and the purchase money paid, and
that no impediment exists to the settlement
of the account.
8. The total number of allottees and the largest
number of shares (a) applied for by and (b)
allotted to any one applicant.
After the application form has been signed there must
be supplied in the case of debentures and debenture
stock—
The certificate of incorporation, or act of Parliament,
and the certificate that the company is entitled to commence business.
A certified printed copy of the mortgage deed or other
similar document, and the official certificate of the registration of the mortgage or charge.
Certified copies of the articles of association, resolutions,
or other authority for the present issue.

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The

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Banking

System

Two certified copies of the prospectus.
The original letters of application.
The allotment book containing a list of applicants, the
amount applied for by each, and the result of each application, with a summary of the whole signed by the chairman
and secretary.
Should the allotment have taken place at an interval of
six months or more before the date of the application, a
certified list of present stockholders will also be required.
A copy of the allotment letter and the date when posted.
A specimen of the debentures or debenture stock certificate, and of the scrip where scrip is issued; certificates of
debenture stock alloted to vendors in lieu of money payments being enfaced " issued to vendors. "
A copy of the last published Report and Accounts.
The bankers' pass book, accompanied by a certificate, on
a special form, from the company's bankers, stating the
amount of deposits received by them and the amount of
debentures or debenture stock on which such deposits (i.e.,
application money only, being £
per debenture) were
paid.
A statutory declaration by the chairman and secretary,
stating:
i. That the prospectus complies with the provisions
of the companies acts, and that all documents
required by the companies acts have been
duly filed with the registrar of joint-stock
companies, and the dates of filing.
2. The amount of stock applied for by the public.
3. The amount unconditionally allotted to the public (Nos
to
).
4. The amount, viz: £
, per cent, paid thereon
in cash.

141

National

Monetary

Commission

5. The amount allotted for a consideration other
than cash (Nos
to
).
6. The total amount of deposits, and that such deposits are absolutely free from any lien.
7. That the debentures or debenture stock certificates are ready for delivery, and that there is no
impediment to the settlement of the account.
8. That a trust deed has been executed and completed, if such be the case.
9. The effect of such trust deed, and the nature of
the charge created thereby in favor of the
debenture holders.
10. The total number of allottees.
11. The largest amount of debentures or debenture
stock (a) applied for by, and (6) allotted to any
one applicant.
A statutory declaration by the chairman and secretary,
stating:
1. The total amount of the authorized capital of the
company, and how constituted.
2. The number of shares allotted unconditionally to
the public (Nos
to
), and the
amount paid on each share in cash.
3. The number of shares taken by concessionaires,
owners of property, contractors or other parties
. not included in the public allotment (being
Nos
to
).
4. That the share certificates have been delivered;
that the purchase of the properties has been
completed and the purchase money paid.
SCRIP.

In addition to the requirements made in the case of
definitive stock or bonds, a specimen of the scrip certificate
must be supplied.

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The

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Banking

System

After the application form has been signed there must be
supplied in the case of further issues—
A king's printers' copy of the act of Parliament authorizing, resolutions, etc., creating, and circular or prospectus
offering, new issue.
If shares have been issued credited as fully or partly
paid, certified printed copies of the contracts relating
thereto.
A copy of the allotment letter.
A copy of the last report and accounts.
A specimen of the share certificate.
The allotment book unless the allotment is pro rata.
A statutory declaration by the secretary stating:
i. That the prospectus or circular complies with the
provisions of the companies acts.
2. That all documents required by the companies
acts have been duly filed with the registrar of
joint stock companies, and the dates of filing.
3. That the shares (Nos
to
) have
been applied for by and unconditionally allotted
to the shareholders or the public or sold upon
the market, as the case may be.
4. The amount per share paid in cash.
5. The total number of allottees, and the largest
number of shares applied for by and allotted to
any one applicant.
6. That certificates are ready to be issued and that
there is no impediment to the settlement of the
account. It must also be stated whether or
not the shares are in all respects identical with
those already quoted in the official list.
The statement that shares are in all respects identical
means that—
They are of the same nominal value, and that the same
amount per share has been called up.
76651—10

143

National

Monetary

Commission

They carry the same rights as to unrestricted transfer,
attendance and voting at meetings, and in all other
respects.
They are entitled to dividend at the same rate and for
the same period, so that at the next ensuing distribution
the dividend payable on each share will amount to exactly
the same sum.
The statement that stock is in all respects identical
means that—
All the stock is entitled to the same rights as to unrestricted transfer, and in all other respects.
All the stock is entitled to dividend at the same rate and
for the same period, so that at the next ensuing distribution the dividend payable on each £100 of the stock will
amount to exactly the same sum.
After the application form has been signed there must
be supplied in the case of vendors' shares—
A certified list of the present holders of the vendors'
shares.
A certified copy of the last published report and accounts
of the company.
A specimen of the share certificate.
A statutory declaration by the secretary stating:
i. That the vendors' shares (Nos.
to
)
have all been issued and certificates delivered;
2. That the shares are in all respects identical with
those already quoted in the official list.
After the application form has been signed there must
be supplied in the case of old companies—
• The certificate of incorporation, or act of Parliament,
and the certificate that the company is entitled to commence business.
Authenticated copies of all concessions and similar
documents, with notarially certified printed translations.

144

The

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Banking

System

Certified copies of all prospectuses, original or otherwise,
indorsed with the date when first advertised.
Two certified copies of the memorandum and articles of
association.
A specimen of the share certificate and of the allotment
letter.
A certified copy of present register of shareholders.
Certified printed copies of contracts, agreements, etc.,
together with copies of all contracts relating to the issue of
shares credited as fully or partly paid.
A certified copy of the company's last published report
and accounts.
A short history of the company, setting forth its origin,
progress, dividends, etc., the number of transfers registered
during the last twelve months, and the number of shares
represented by such transfers.
Statutory declaration by the chairman and secretary,
stating the following particulars:
i. -That the prospectus complied with the provisions of the companies acts.
2. That all documents required by the companies
acts have been duly filed with the registrar
of joint stock companies, and the dates of
filing.
3. The number of shares applied for by the public.
4. The number of shares allotted unconditionally
to the public (Nos.
to
), and the
amount per share paid thereon in cash.
5. The number of shares allotted for a consideration
other than cash (being Nos.
to
).
6. That the share certificates have been delivered;
that the purchase of the properties has been
completed and the purchase money paid.

145

National

Monetary

Commission

After the application form has been signed there must
be supplied in the case of colonial and foreign companies—
The certificate of incorporation, or act of Parliament, or
other similar document.
Two copies of the statutes or articles of association or
notarial translations of the same.
A certified list of present shareholders.
A specimen of the share certificate.
Copies of all agreements, concessions, deeds, etc., or
notarially certified printed translations of the same.
A certified copy of last published report and accounts, or
translation of the same.
Official evidence of quotation in the country to which
they belong or where the issue has been made.
A short history of the establishment and progress of the
company from its incorporation to the present time, including particulars as to the issue of the capital.
A declaration stating—
i. The number of shares allotted.
2. The amount per share paid in cash.
3. That the shares are ready for delivery, and that
no impediment exists to the settlement of the
account.
After the application form has been signed, there must be
supplied in the case of reconstructed companies—
The certificate of incorporation, and the certificate that
the company is entitled to commence business.
A statement of the plan of reconstruction, together with
certified copies of all resolutions passed and circulars issued
in connection with the reconstruction.
The allotment book, with a summary signed by the chairman and secretary.
The allotment letter, and the date when posted.
A specimen of the share certificate.

146

The

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Banking

System

Two certified copies of the memorandum and articles of
association.
Certified printed copies of all contracts, agreements, etc.
Copies of all contracts relating to the issue of fully or
partly paid shares.
A statutory declaration by the chairman and secretary
stating—
i. That all documents required by the companies
acts have been duly filed with the registrar of
joint stock companies and dates of filing.
2. The authorized capital of the company.
3. The number of shares to which shareholders in
the old company were entitled; the number and
distinctive numbers of shares unconditionally
allotted to such shareholders; and the amount
per share (a) paid thereon in cash, and (b)
credited as paid up.
4. The number and distinctive numbers of shares
applied for by and allotted unconditionally to
the public, and the amount per share (a)
credited as paid up, and (6) paid thereon in
cash.
5. That the share certificates have been or are ready
to be delivered, and that there is no impediment to the settlement of the account.
After the application form has been signed the following
documents must be supplied in the case of loans—
Details of the creation of the loan, and the authority
under which it is issued, including authenticated copies of
concessions, etc., with notarially certified translations.
The authority to the agents or contractors to receive
subscriptions.
A certified copy of the prospectus.
Evidence that all bonds issued and payable abroad bear
the signature of some properly authorized person.

147

National

Monetary

Commission

A specimen bond together with a bond duly executed, or
scrip certificate if issued.
Statutory declaration by the agents, stating—
i. The amount allotted unconditionally to the
public.
2. That the required amount, viz., £
per cent
has been paid thereon in cash.
3. That the bonds are ready for delivery, and that
there is no impediment to the settlement of
the account.
4. The numbers and denominations of those bonds
which bear the autographic signature of the
London agents or contractors.
After the application form has been signed the following
documents must be supplied in the case of bonds quoted
abroad—
Official evidence of quotation in the country to which
they belong or where the issue has been made.
Notarially certified printed translations of all prospectuses, and of the laws creating and authorizing the loan.
A specimen bond, together with a bond duly executed.
An official certificate setting forth—
1. The authorized and issued amounts of the loan,
and the terms of issue.
2. The distinctive numbers and denominations of
the bonds.
3. Evidence that all bonds bear the signature of
some properly authorized person.

148

THE HISTORY OF THE SEPARATION OF
THE DEPARTMENTS QF THE BANK OF
ENGLAND.
By Sir R. H. INGUS PAI,GRAVEO, F. R. S.

CHAPTER I.
HISTORY OF THE SEPARATION.

The separation of the issue department from the banking
department of the Bank of England was carried into effect
so many years since (it dates from the passing of the bank
act by Sir Robert Peel, in the year 1844) that hardly anyone now living can remember the time before the change
was made, when the accounts did not appear as they do at
present. The form of statement now published weekly
appears probably to many of those who study it as the
plan on which the statement of a note-issuing bank would
naturally be drawn up, and they are hardly aware that the
Bank of England is practically the only bank that follows
or ever has followed this method of keeping its accounts.
Before the year 1844 the accounts of the Bank of England
were drawn up on the form followed at the present time
by the Bank of France, the Bank of Germany, the Bank of
the Netherlands, the Bank of Belgium, and, indeed, by all
the other great issuing banks of the world. I add, to
make this point clear, the balance sheet of the Bank of
England—both according to the ordinary weekly statement and arranged to correspond with the forms employed
by the other banks—and the balance sheets of the banks
of France, of Germany, of the Netherlands, and of Bel-

149

National

Monetary

Commission

gium. The return of the Bank of England is of January
6, 1910. The dates of the balance sheets of the other
banks are stated on ^hem. The weekly publications of
these banks do not give all the details required. Hence
I have thought it well to give the annual balance sheets of
these banks. No other statement than the weekly returns
is published by the Bank of England.
BANK OF ENGLAND.
ISSUE DEPARTMENT.
LIABILITIES.
Notes issued

£ 5 1 , 241, 210

ASSETS.
Government debt
Other securities
Gold coin and bullion

51,241,210

Proprietors' capital
—
Rest
Public deposits"
Other deposits
Seven-day and other bills

£ 1 1 , 015, 100
7, 434, 900
32, 791, 210
51, 241, 210

BANKING DEPARTMENT.
£14,553,000 Government securities
3.360,154 Other securities
9. 936, 777 Notes
49. 139. 180 Gold and silver coin
18,046

£17, 507, 945
36,211,089
22, 375, 490
912, 633

77.007,157
77.007, 157
a Including exchequer, savings banks, commissioners of national debt, and dividend
accounts.
J. G. NAIRNE, Chief Cashier.
Dated January 6, 1910.

The above is the statement as it appears in the weekly
returns.
Balance sheet, January 6, igio.
[Arranged so that it corresponds in form with the balance sheets of the other banks
given here.]
LIABILITIES.
Capital and rest
Notes in circulation
Seven-day and other bills
Public deposits
Other deposits

£17, 913, 154 Gold coin and bullion and
silver coin
£33, 703, 843
28, 865, 720
18,046 Government securities in
both departments
28, 523, 045
9. 936, 777
43. 654, 989
49. *39. 180 Other securities

105,872,877 I
105,872,877
NOTE.—All per contra entries, as those of the notes of the banks held by themselves,
etc., are omitted, so as to show the real position of the accounts.

I50

The

English

Banking

System

BANK OF FRANCE.
Balance sheet, December 31, 1908.
LIABILITIES.
C a p i t a l of t h e b a n k
R e s e r v e a n d profits in a d dition t o capital
Notes payable to bearer in
circulation
(head
office
and branches)
Drafts
Current account with the
treasuryCurrent accounts a n d deposit accounts:
Paris
£22,780,727
Branches
2.721,524
Dividends unpaid, etc.,

[ F r a n c s c o n v e r t e d a s 25 = £ 1 . ]
I
ASSETS.
£7,300,000
Coin a n d b u l l i o n a t P a r i s
and at the branches
£175,401,607
1 , 7 0 0 , 7 7 4 Bills d u e y e s t e r d a y t o be
received this d a y .
i,7S7
A m o u n t of bills:
Paris
£9,920,192
1 9 7 , 9 7 2 , 403
Branches. 18,886,626
914.397
28,806,818
7 . i 9 9 . 4 9 i A d v a n c e s on securities:
Paris
£6,332,341
Branches. 14,478,603
20,810,944
Advances to Government
(
l
a
w
s
of
J
u
n
e
9,
1857,
25,502,251
J u n e 13, 1878, N o v e m b e r
1,876,386
7,200,000
17, 1897)
Government stock reserve
fund
5i9» 230
Disposable funds, governm e n t stock
3.985,234
I m m o v a b l e funds, governm e n t s t o c k ( l a w of J u n e
4,000,000
9, 1857)
Amount
appropriated
to
336,298
special reserve
Office a n d f u r n i t u r e of t h e
b a n k and buildings a t the
branches, etc
1,403.814
242,465,702

242,465,702

N O T E . — A l l p e r c o n t r a e n t r i e s , a s t h o s e of t h e n o t e s of t h e b a n k s h e l d b y t h e m s e l v e s ,
e t c . , a r e o m i t t e d so a s t o s h o w t h e r e a l p o s i t i o n of t h e a c c o u n t s .

IMPERIAL BANK OF GERMANY.
Balance sheet, December 31, 1908.
[Marks converted as 20= £1.]
LIABILITIES.
Capital and reserve
£12,458,581
N o t e s in c i r c u l a t i o n
98,771,474
A m o u n t due on clearing a n d
current accounts
3 3 , 244, 291
Deposits (not bearing interest)
25.167
S u n d r y liabilities a n d reserve
* for d o u b t f u l d e b t s
720,072
1.537.287
N e t profits for 1907

ASSETS.
G o l d in b a r s . __ £ 1 6 , 792, 075
German
gold
coin
21,620,
• £38,412,973
Divisional money
10, 594, 046
49.007,019
N o t e s of i m p e r i a l t r e a s u r y
(Reichskassenscheinen)
N o t e s of o t h e r b a n k s

2,876,243
505,105

Bills h e l d :
D u e w i t h i n 15 d a y s
Due at later dates

22,660,590
28,939,529

Bills o n foreign p l a c e s .

51.600,119
6,457.493

Loans
Securities
V a l u e of r e a l p r o p e r t y
longing to t h e b a n k
S u n d r y assets

5 8 , 0 5 7 , 612
8, 7 9 6 , 468
19, 724, 627
be2,849,450
4. 9 4 o , 348
146,756,872

146,756,872

N O T E . — A l l p e r c o n t r a e n t r i e s , a s t h o s e o i t h e n o t e s of t h e b a n k s h e l d b y t h e m s e l v e s ,
e t c . , a r e o m i t t e d so a s t o s h o w t h e r e a l p o s i t i o n of t h e a c c o u n t s .

151

National

Monetary

Commission

BANK OF THE NETHERLANDS.
Balance sheet, March 31, 1909.
[Guilders converted as i 2 = £ i . ]
INABILITIES.
Capital
Reserve
Notes in circulation
Transfers
Current accounts
Discount on—
Inland bills
Foreign bills
Sundry liabilities
Net profit for distribution.._

ASSETS.
Coin, bullion, etc
£ 1 3 , 665, 502
Inland bills
3. 514. 247
Foreign bills
1.550,309
Loan accounts
4,144,246
Advances on current accounts
1,882,021
10,521 , Investments:
3,060!
Capital
332,662
59.598 :\
Reserve
432,708
90,360 Sundry assets, buildings
255, 721

£1,666,667
435.955
22,. .798,
, . 206
173,200
539,849 ;

25,777,416 I
25. 777,416
NOTE.—All per contra entries, as those of the notes of the banks held by themselves,
etc., are omitted so as to show the real position of the accounts.

NATIONAL BANK OF BELGIUM.
Balance sheet, December 31, 1908.
[Francs converted as 25 = £1.]
LIABILITIES.

ASSETS.
Capital paid up
£2,000,000 : Specie
.
and bullion
£ 6 , 326,_ 529,
Reservefund
1,444.899 Bills discounted a
27,159,971
Notes in circulation
32,275,122 \ Securities due for collection_
193,849
Current accounts
4, 028, 662 ; Advances on government seStamp duty, share of profits
j curities
2,056,765
due to the Government,
[ Government and reserve fund
employees superannuation,
securities
3.418,343
Securities for current acprovident funds, dividends
counts,
etc
1,
623, 002
due, etc
1, 029, 776
40, 778.459
40,778,459
a Bills in Belgium, £19,738,332; foreign bills, £7,421,639. Total, £27,159,971.
NOTE.—All per contra entries, as those of the notes of the banks held by themselves,
etc., are omitted so as to show the real position of the accounts.

I will now endeavor to explain the reasons which induced Sir Robert Peel, who was the author of the Bank
Acts of 1844-45, the acts which, as far as the issue of notes
is concerned, govern the banking system of the United
Kingdom at the present date—and incidentally the amount
of the notes held in the Banking Department, which
forms the reserve of the Bank of England—to make
this alteration and to overcome, as he had to do, all the
objections which were felt by most of the business men and
the economists of his time to the great change that he thus
introduced in the method of the statement of the accounts

152

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System

of the Bank of England, which is the very center and heart
of the banking system of Great Britain. The division of
the two departments is not only the outward sign of a
great change in the method of conducting one large portion of its business, which Sir R. Peel introduced, but it
provides the machinery by which that change is carried
into effect—a change which affects the course of business
in a very material way.
The primary reason which induced Sir Robert Peel to
adopt this arrangement is to be found in the fact that he
was a great supporter of that form of opinion respecting
the influence of the paper currency of the country on business in general, which is known under the name of the
" Currency principle." As the expressions of opinion on
this point go back to a period considerably earlier than
the introduction of the Bank Act, and many years have
hence passed since this subject was originally discussed by
business men and economists, it will be necessary to
explain the meaning of the term before proceeding further. One of the best descriptions of the theory is to be
found in the " Investigations in Currency and Finance''
of Prof. W. Stanley Jevons, published in 1884. The currency theory, he states, " attributes every fluctuation of
prices to an extension of the bank-note circulation"
(p- 33)- Jevons refers (p. 107 of the same book) to the
subject again: "It-was the mistaken notion of some few
persons that convertible Bank notes might have a peculiar
efficacy in regulating prices and sowing the seeds of fluctuations." Although those who held this opinion were
at that period comparatively few in number, they were

153

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Monetary

Commission

sufficiently powerful to cause their opinions to influence
the legislation of the time. Another description, given by
Mr. William Newmarch in his address as president of the
Section of Economic Science, at the meeting of the British
Association, Manchester, 1861, will also be of service, as
it puts the subject before us from a different point of
view. " There used to be received, with scarcely any dissentients, three principal doctrines relating to a Convertible Paper Currency. It used to be held that fluctuations in the amount of bank notes in the hands of the
public operated in some direct manner on prices—that
consequently the convertible paper currency must be
properly regulated, so that vicious fluctuations of prices
might be prevented—and thirdly, that what were called
appreciation and depreciation of the currency ,a and not
the operations of supply and demand, and capital and
credit, govern the foreign exchanges and produce overtrading and lead to financial disasters and panics.''
' ' B u t / ' Mr. Newmarch continues, " b y a persevering
and systematic application of the test of observation
and experiment, it has been proved, by evidence so extensive and various that we may well claim for it the force
of a demonstration—first, that fluctuations in the amount
of a paper circulation strictly convertible into coin does
not govern prices at all, but that prices are governed by
supply and demand, and by operations of capital and
credit. Second, that due and rigid enforcement of cash
payment is the only wholesome regulation which a paper
a In speaking thus of the "appreciation and depreciation of the currency," Mr. Newmarch obviously referred to what he had just mentioned,
" the convertible paper currency."

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circulation requires—and, thirdly, that bank notes are no
more than the mere small change of the ledger, and that
the phenomena which are really worth attention are not
infinitesimal fluctuations in the amount of bank notes,
but changes in the rate of interest." (Address of Mr.
William Newmarch, printed in the Journal of the Statistical Society of London, December, 1861, vol. xxiv, pp.
463-464.) The importance of this treatise is recognized
by foreigners as well as by our own authorities. In reference to this I have quoted further on the opinions of Dr.
N. G. Pierson, the well-known Dutch economist, who was
at one time Governor of the Bank of the Netherlands, on
the subject.
I have described above the general principles which
those who held the currency principle or theory maintained. It now remains to explain the opinions of those
who held the " banking principle." To describe this we
shall in the first place quote from the writings of Mr.
Thomas Tooke, who maintains " that the theory of the
currency principle, according to the exposition of its promulgators, involves the error of confounding convertible with inconvertible paper; as regards its issue, and its
effects in circulation up to the point of its convertibility."
Mr. Tooke continues: "By the same authorities it is
assumed, as an axiom, that a purely metallic circulation
is the type or model of a perfect currency; and that, therefore, a mixed circulation of coin and paper ought to be
made to conform in amount to the same variations as
would be incidental to a purely metallic currency. I, and
those who with me are opposed to the doctrine of the

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currency theory, as adopted by Sir Robert Peel and embodied in the act of 1844, readily admit so much of it as
relates to this assumption." With regard to the banking
system Mr. Tooke says: "We are willing to consider a
metallic currency as the type of that to which our mixed
circulation of coin and paper ought to conform; but,
further, we contend that it has so conformed, and must
so conform, while the paper is strictly convertible."
(Tooke's History of Prices, vol. iv, p. 218.)
Having thus given a rough sketch of the two theories
respecting the issue of notes which prevailed in the time
of Sir Robert Peel, of which the one which is termed
the "Currency Theory" is, as mentioned before, the basis
of the Bank Act of 1844, I w iU g° o n with the history
of the changes which he made in the management of the
Bank of England.
*
The discussions respecting the separation of the two
departments of the note issue and of banking, which
took place in the year 1844, g° back at least as far as
1832, 1836, and 1837.
The particular form according to which the restrictions of the note circulation of the Bank of England
was carried out in the Act of 1844 had been thought of
several years earlier by the directors of the Bank of
England, as is shown in the extracts from their evidence
given before committees of the House of Commons which
follow.
There had been at a somewhat earlier date much
fluctuation in money matters, partly arising from the
disturbed state of Europe toward the close of the

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eighteenth century, the wars in which England was
engaged, and the suspension of specie payments which
took place in 1797. Business gradually returned to more
normal conditions and cash payments were resumed in
1823, permission having been given to the bank to defer
doing so to 1825 had this been necessary. (Committee on
the Bank Charter in 1832.)
The advisability of a restriction on the issue of notes
was maintained by Sir Robert Peel in the debates of the
House of Commons on the Bank Act; the subject is perhaps explained more clearly in his speech of April 25,
1845. His words were: "With regard to the Bank of
England, the limitation imposed upon the issues of the
bank on securities was £14,000,000. The bank was permitted to issue promissory notes to the extent of
£14,000,000 on securities; but in regard to any additional issue, that issue could only take place on specie,
the public being entitled to demand notes in exchange for
specie, or coin in exchange for notes, and the whole of
the circulation of the Bank of England beyond £14,000,000
being determined by the free action of the public demanding either notes or gold, as they might require. With
regard to the issues of the other banking establishments
(in England and Wales), the provision made was this—
that in respect to every private bank of issue, or jointstock bank of issue, an average amount of its circulation
for the twelve weeks preceding the 27th April, 1844, was
taken; and those banks were required to confine their
future issues of their own paper within that limit. There
was no prohibition to their increase of the issue of promis-

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sory notes, provided that, beyond the prescribed limit,
the issues should be of Bank of England paper, that Bank
of England paper being founded on gold. I apprehend
that the House sanctioned these measures on the following assumptions:—That the standard value, or standard of
value, in this country is a certain quantity of gold, definite
in point of weight, and definite in point of fineness; and
that a promissory note being an undertaking to pay a
pound, the issuer is bound to deliver neither more nor
less to the holder of that note than a definite quantity of
gold of a definite degree of fineness. The House assumed, too, that the issue of that promissory paper might
fairly be subject to regulations to which other forms of
paper credit need not necessarily be subject; that the
issue of promissory notes representing gold, and acting as
substitutes for gold, differed in character and effect from
other forms of paper credit; that those who issued them
were in possession of a valuable privilege—valuable to
themselves, and important to the country; and that this
House had a perfect right at any time to subject the
issuers of that paper to such restrictions as might be
deemed expedient for the public good. There was another
assumption on which the House also acted, that with a perfectly unregulated competition in the issue of paper, there
was no necessary guarantee for the permanence of the
convertibility of that paper, or, I should rather say, that
though there might be the guarantee of permanent convertibility, yet there was no guarantee, where competition was perfectly unrestricted and unlimited, against the
occasional necessity of sudden and violent contractions of

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the circulation, leaving, indeed, the note convertible into
gold, but deranging the monetary transactions of the
country, and shaking all confidence in private, and even
in public credit."—Sir Robert Peel had already referred to
the subject on May 6, 1844. He then said: " I therefore
propose, with respect to the Bank of England, that it
should continue in possession of its present privileges of
Issue, but that there should be a complete separation of
the business of banking from that of Issue; that there
should be a department of Issue separate from the department of Banking, with separate officers and separate
accounts. I propose that to the Issue department should
be transferred the whole amount of bullion now in possession of the Bank, and that the Issue of Bank Notes should
hereafter take place on two foundations, and two foundations only—first, on a definite amount of public securities; secondly, exclusively upon bullion. The action of
the public will regulate the amount of that portion of the
note circulation which is issued upon bullion. With
respect to the banking business of the Bank, I propose that
it should be governed on precisely the same principles as
would regulate any other Body dealing with Bank of
England notes. The fixed amount of securities on which
I propose that the Bank of England should issue notes is
£14,000,000, the whole of the remainder of the circulation to be issued exclusively on the foundation of bullion."
I had better at this point recapitulate the history of what
occurred at this period. It was a favorite opinion of the
advocates of the Bank Act of 1844 that the immediate
result of the division of the business into the two depart-

76651—10

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ments, issue and banking, would be to deprive the bank at
once of the power and the responsibility of "regulating the
currency." The issue of notes being placed under the
restrictions explained in the speech of Sir Robert Peel of
May 6, 1844, from which I have just quoted, the bank was
to be, with reference to all its other business, in a position
as free as that of any other banking company.
The cause of these restrictions was, as I have said, the
belief "that by an expansion or contraction of the issues
of bank notes at pleasure, the prices of commodities can be
increased or diminished." This theory was based on the
idea that banks could issue notes to a larger amount than
the necessities of the country required, and that these
notes would remain in circulation indefinitely. This idea
had gained acceptance during the period of an inconvertible currency of Bank of England notes which lasted while
the suspension of specie payments was continued (17971823) and was associated also, without proper consideration, with the influence of a convertible currency. As a
convertible currency can be immediately exchanged for
coin it can not be supposed that any notes, not actually
required for use, would remain in circulation at all, as those
persons who held them would pay them in to their accounts
with their bankers and the bankers in their turn would
convert them into money.
To understand the question thoroughly is of very great
importance, as on it were based that change in the arrangements of the Bank of England which, as has* been mentioned above, led to the division of the two departments
of "issue" and of "banking" and also that line of argu-

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ment which maintains that the whole of the note circulation of the country ought to be centered on one single bank
of issue.
The grounds on which Sir Robert Peel acted received a
good deal of criticism at the time, particularly from Mr.
Thomas Tooke and Mr. William Newmarch. (Mr. Newmarch was for many years the secretary and manager of
Glyn's Bank.) They were summarized by the Right Hon.
James Wilson in his work on Capital, Currency, and Banking, under five heads—"Five assumptions/' Mr. Wilson
calls them, as he does not consider that any one of them
was proved.
"First, That bank notes though payable in coin, at the
option of the holder, are still liable to be issued in excess,
and are consequently subject to depreciation.
"Second, That convertibility is not alone a sufficient
guarantee that a mixed currency of bank notes and coin
shall conform, in its variations, to the same laws that
would regulate a purely metallic currency.
"Third, That issuers of bank notes have power to increase
or decrease the circulation at pleasure.
"Fourth, That, by expansion or contraction of the issues
of bank notes at pleasure, the prices of commodities can
be increased or diminished; and,
"Fifth, That, by such increase or diminution of prices,
the foreign exchanges will be corrected, and an undue
influx or efflux of bullion, as the case may be, will be
arrested.
I believe, with Mr. Wilson, that these "five propositions fairly represent the principles involved in Sir Robert

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PeeFs measure/' Having stated these opinions, I must
now go on with the history. I have endeavored to show
that the principles on which the "currency theory" is
based do not correctly represent the circumstances in the
case of a note issue carried on with absolute convertibility
at pleasure, and that they have hence no foundation
whatever on fact. I have also endeavored to trace the
reasons which apparently had led Sir Robert Peel to
adopt this line of argument. While stating this, I would
desire most carefully to guard against appearing to have
any sympathy with those who desire to weaken in any
way the immediate convertibility of the note circulation
at the option of the holder.
Having thus explained Mr. Wilson's opinions, I can now
continue the history of the circumstances under which
the separation of the two departments of "issue" and
"banking" took place. I referred on a previous page to
the fact that the origin of this idea appears to date a considerable distance further back than the Act of 1844, and
to have been connected with the arrangement spoken of
by Mr. G. W. Norman in his evidence before the Committee of the House of Commons on the Bank Charter
(1832), that the Bank desired in the regular course of
business " t o keep the general amount of securities about
on a level." (This statement occurs in answer 2452.)
Mr. Norman was asked in question 2459: "You state
that the present principle of the Bank is, that having a
certain amount of liabilities consisting of notes and of
deposits, you thought it a proper principle to maintain
one-third of that in bullion in ordinary times?" Mr.

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Norman proceeded to explain this by replying that this
principle applied " a t a period when the currency is full,"
and further went o n t o " describe the currency as being full
when the Exchanges were at par, or rather on the point
of becoming unfavorable." This idea, that of retaining
the securities at a fixed point, became rooted in the minds
of those in whose hands the direction of the bank lay. It
was expressed very clearly by Mr. J. Horsley Palmer, the
governor of the Bank of England, when he was examined,
as also was Mr. Norman, one of the directors, before the
Committee of 1832, that the principle of the proportion
of keeping the amount of one-third of the liabilities in
bullion was the proper one to follow. In reckoning the
liabilities, the deposits were included by Mr. Palmer, as
well as the circulation. This appears to have been the
first idea. But, as time went on, the notes became considered as the proper object of protection, rather than the
liabilities in the way of deposits. Thus, when Sir Robert
Peel had to consider, in 1844, the question of the renewal
of the bank charter, he found this arrangement for a
division of the two departments ready to his hand. He
found also a stout supporter in Lord Overstone (then Mr.
S. Jones Loyd), who, both in his evidence before the
Select Committee of the House of Commons on Banks of
Issue, in 1840, in several pamphlets, in letters addressed
to the Times newspaper, and by all the means in his
power, strove to influence the public mind toward the
separation of the two departments. In these pamphlets
Mr. S. Jones Loyd criticised the management of the circulation at various periods, both before 1839 and during that

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year. Nothing is more striking in reading these remarks
than the manner in which the circulation is spoken of, and
the great importance which is ascribed to the necessity of
regulating it so as to influence the foreign exchanges.
As I gave above the observations made by Mr. James
Wilson on the Act of 1844, it will be advisable to contrast
these with Mr. S. Jones Loyd's arguments in favor of the
alteration.
"The only object of the proposed separation of the
departments of the Bank of England is to obtain an
effectual security for the regulation of the amount of the
paper circulation of the country in correspondence with
the fluctuations of the bullion; such regulation being
deemed to be essential for the certain maintenance,
under all circumstances, of the convertibility of paper
issues into specie.
"The present union of banking functions with management of the circulation, not only in the same parties,
but in the same system of accounts, is deemed to be
incompatible with the accomplishment of this object,
for the following reasons:
" 1 . Because the paper circulation is thus issued upon
mercantile securities, and there is, therefore, a very
strong tendency to increase its amount with rising prices
and to diminish its amount with falling prices; which is
the reverse of what would take place with a metallic
circulation.
" 2 . Because, as the issuers also receive deposits as well
as issue notes, they are subjected to a strong temptation

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to meet the demand of depositors by an improper increase
of paper issues instead of a realization of securities.
" 3 . Because the connection of the issuers with trade
and commerce creates a strong inducement to aid and
support public and mercantile credit, during a period of
pressure, by improper increase of issues.
"4. Because the mismanagement of the circulation
seems in almost all cases to be distinctly traceable to
these causes.
" 5. Because the union of the two functions, of circulation and deposit, is found to cause inevitable confusion
both in reasoning and in action. This appears in the
measures of the Bank of England and in the defence
which has been made of them—similarly as regards the
country issues0—in the confusion of ideas prevalent
amongst the public respecting the connection between the
amount of circulation and the amount of liabilities."
With these remarks of Mr. S. Jones Loyd, it is well to
compare those of Sir Robert Peel, in his speech of the 6th
of May, 1844, on the renewal of the Bank Charter, as they
give the detail of the plan of keeping the accounts of the
bank which has been followed to the present time:
" I have stated that the issues of the Bank are to be upon
bullion and upon a fixed amount of securities. We propose that £14,000,000 should be that amount of securities.
Seeing no advantage in a change, we propose to continue upon the present terms the existing loan of
£11,000,000 made by the Bank to the Government, at 3
a The "country issues" were the notes issued by the provincial Banks of
England and Wales at that period. They amounted in 1845 to £7,700,000,
having been considerably larger in previous years.

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per cent. This debt of the Government to the Bank is to
be assigned as part of the security on which the issues
of the Bank are to take place. There will then remain
£3,000,000 of additional securities, Exchequer Bills or
other securities, over which the Bank is to have entire
control. We propose that the Bank should have a right,
in case of necessity, to limit its issues upon that portion
of the securities, viz, £3,000,000. Circumstances might
possibly arise in which the Bank might find it necessary
to restrict its issues within the amount of £14,000,000.
In that case the Bank will have full power to diminish
the £3,000,000 of securities which are to be deposited, in
addition to the £11,000,000 of debt assigned. I can
hardly conceive a case in which it would be advisable to
limit the issues to less than £11,000,000. I have said
that the Bank shall be restricted from issuing notes upon
securities to any greater extent than £14,000,000." Further in the same speech the manner in which the operation was to be carried out was described: "Two Departments of the Bank will be constituted: one for the issue of
notes, the other for the transaction of the ordinary business of banking. The bullion now in the possession of
the Bank will be transferred to the Issue Department.
The issue of notes will be restricted to an issue of
£ 14,000,000 a upon securities—the remainder being issued
upon bullion—and governed in amount by the fluctuations
in the stock of bullion."
The duty of the officials of the Bank under these circumstances is strictly limited to exchanging notes for
a Increased, at date of writing (June, 1910), to £18,450,000 by authority
given in section V of the act of 1844.

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bullion and bullion for notes. The Bank is bound by law
to purchase gold bullion from whomsoever offers it at
£3 17s. 9d. per ounce of standard quality. The issue
department may be held not to be virtually a department
of the bank. " It is a self-acting institution of the State,
working on the bank's premises, and absolutely beyond
the control of the bank directors."
In the words of Mr. Neaves, a former Governor of the
Bank: "The issue department is out of our hands altogether; we are mere trustees under the act of Parliament
to see that these securities are placed there and kept up
to that amount, and in no case can any creditor of the
Bank touch that which is reserved for a note holder."
The advisability of restriction had thus firm hold of Sir
Robert Peel's mind.
The principle that the amount of the notes in circulation
were not to exceed the coin which it displaced was also
distinctly asserted in Sir Robert Peel's speech on the Note
Circulation in Scotland and Ireland of April 25, 1845.
After describing the method according to which the average note issue was to be computed, he added: ".The
average amount of the issues of each bank, and in this I
include the Bank of Ireland, is to be that to which they are
entitled by the average from their past circulation. They
are to continue within that amount of circulation, and if
there be an excess, then that excess shall be issued on
specie." * * * "There will thus be a weekly return
of the gold held by the bank; and, in case of excess of issue,
a certificate that that excess of issue is met. The return
will be made to the Government weekly, and the publica-

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tion by the Stamp Office will be monthly. The question
may be put, in the event of an issue beyond the permitted
amount, upon what that issue shall be made ? Shall it be
made exclusively upon gold coin; or shall silver be permitted to form part of the foundation of this issue? I
think it will be of great advantage to permit silver coin to
constitute part of that foundation/'
Sir Robert Peel thus established an arrangement similar
to that which regulated the issue of Bank of England notes
with regard to the note issues then existing of the local
banks in Ireland and Scotland. The average amount of
circulation at the time when the act was passed was
regarded as the authorized limit. Specie was to be held
for any excess over the limit. The coin thus set apart does
not in any way form a security for the note circulation.
It is only held and set apart in compliance with the theory
of the currency principle that a circulating medium formed
of paper and specie should fluctuate exactly as a circulation of specie would have fluctuated.
Later on in the same speech Sir Robert Peel continued:
" I impose no limitation in the amount of the issues. I
permit to Ireland and to Scotland an unrestricted amount
of issue, provided only it take place on the deposit of
that which it professes to represent and excludes from
the circulation—the coin of the realm. But I leave to
the banks of Ireland and Scotland that privilege which
they have so long enjoyed, and to which I find they
attach so much importance—the privilege of continuing
the issue of £ i and £2 notes/'

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Corresponding directions are given in the acts regulating the issue of bank notes in Ireland and Scotland,
both of the date of the 21st July, 1845, as to the manner
in which the circulation of notes issued at that time was
to be estimated, and as to the mode of ascertaining the
average amount of bank notes of each banker in circulation and gold coin during the four weeks to which each
return extended, and further what should be taken in the
account of coin held by any banker, the silver coin included
not being allowed to exceed the proportion of one-quarter
of gold (sects, xvi, xix, and xx of the act relating £0
Ireland (8° and 9 0 Victoriae, cap. 37) and sections vi, x,
and xi of the act referring to Scotland (8° and 9 0 Victoriae,
cap. 38)). The difference between the two acts consists
in the fact that with regard to the Irish banks, the specie
was to be held at "the several head offices or principal
places of issue in Ireland of such banker, such head offices
or principal places of issue not exceeding four in number."
In the case of Scotland "the monthly average amount of
gold and silver coin held by such banker at the head office
or principal place of issue."
As practically the only unused supply of gold coin in
the United Kingdom is that held by the Bank of England
the effect of these provisions of the ba,nk acts is to transfer
every fluctuation in the note circulation of Scotland,
where the issue is always above the authorized limit,
and many of those in Ireland, where the issue as a rule
is closer to the authorized limit, directly to the reserve
of the Bank of England. Hence as a rule the specie
held against the note circulation, both in Scotland and
in Ireland, corresponds very closely in its movements
with the note circulation, fluctuating as the note circulation fluctuates.

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The specie held by the Scotch and Irish banks has
reference far more to the note circulation than to their
customer's requirements for cash. The influence of these
demands extends beyond the requirements of the Scotch
and Irish banks. It will be found on examination that as a
rule the months in which the note circulation in Scotland
and Ireland, the specie held, and the bank rate are
highest, in the majority of instances correspond.
I will continue my history of the circumstances which
led to this division of the two departments.
The evidence of Mr. James Morris, one of the Directors
of the Bank, given to the Committee of the House of
Lords on Commercial Distress in 1848 was to the effect
that the Bank had ever since 1840 carried on its business
in relation to the circulation upon the system established
by the Act of 1844.
This idea had indeed been started earlier than 1840.
Thus Mr. J. Horsley Palmer, a Director and at one time
Governor of the Bank of England, stated before the Committee of the House of Commons on the Bank Charter
in 1832 that in ordinary times the principle of the Bank
in managing its business was to keep about two-thirds of
their available resources obtained from deposits and notes
in circulation in securities bearing interest and the remainder in coin and bullion.
Mr. Horsley Palmer had made a similar statement before
the Committee of the House of Commons in 1840. (See his
evidence on pages 224-225.) This is also mentioned in
Tooke's History of Prices. (Vol. I l l , pp. 92-95.) The rule
which, according to the evidence of the Bank Directors,
was understood to be laid down " was, that their securities
should be kept at a nearly uniform amount, and their bullion at about one third of their liabilities." This rule,

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however, according to Tooke, appears not to have been
derived from any particular principle, but from the fact
that during the four years from 1828-1832 the securities
had been kept tolerably uniform in amount. The difficulties in the way of keeping the proportion uniform appear
to have been practically insuperable.
One very serious difficulty in the management of the
business as required by the Act of 1844 does not lie in the
proportion of the bullion held by the Bank to the securities,
but in the fact that the requirements of the Act of 1844
compel the supply of notes in a period of pressure to be
strictly limited in accordance with the law. It is the
fear that a further supply cannot be obtained which
has caused the greatest difficulties in a time of panic.
There have been four serious crises since the act of 1844
came into operation, those of 1847, 1857, 1866, and 1890,
the Baring crisis. During this last there was no pressure
on the bank, owing to the support given to the house
of Baring by the principal banking houses of the country
and to the precautions taken by the Bank of England
to provide a large addition to the bullion they held, but
in the three earlier crises the pressure on the Bank of
England for notes was very severe. It must be remembered in connection with this that it is expressly stated
by Section VI of the Bank Act of 1845, relating to Ireland,
that while Bank of England notes are not legal tender
in Ireland, and by Section XV of the corresponding Act
of 1845, relating to Scotland, that they are not legal
tender in Scotland, Bank of England notes have been legal
tender in England and Wales since the Act of 1833. As
notes are more convenient for transmission than specie,
there has been at times of pressure a great demand for

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them by banks, since they are, as legal tender, equal
to gold, and can be sent by post to branch offices in
remote districts of the country with far greater ease
than gold can be. This was the case in 1847. The
crisis in that year became acute on October 1, when the
Bank of England refused to make advances on public
securities. It was not, however, till the 25th of October
that an official letter was sent- to the bank allowing
it to exceed the limit of the act. The effect of the
Government letter in allaying the panic was complete.
When the anxiety as to obtaining bank notes or gold
was removed the immediate pressure shortly disappeared.
In the next crisis, that of 1857, the treasury letter, dated
November 12, 1857, permitted £2,000,000 to be added to
the securities in the issue department. As a matter of fact
the limits of the Act were only exceeded on that occasion
in the returns of 18th and 25th of November. In 1866
permission to relax the Act was given, but the reserve
of notes was never below £415,000. This figure appeared in the bank return of June 1. I have been informed, and I have every reason to believe it was the
case, that the Bank of England requested all the bankers
in Lombard street to pay in every evening all the notes
they had drawn during the day, and that this arrangement saved the bank from exceeding the limits of the
act. On these occasions the gold bullion in the bank
was never less than £6,000,000 in 1847 and 1857, or
£11,400,000 in 1866. To make this matter clear I subjoin a table showing the amount of the reserve of the
bank during the most acute points of the crises of 1847,
1857, and 1866. It will be seen by this table that the
bank reserve was reduced to a very low point in 1847,

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1857, and 1866, while the bullion in the issue department
was still of considerable amount. The figures are as
follows on the dates in question:
Bank reserve.
Nov. 1,1847.
Nov. 11, 1857
June 1, i866_

ht, 547. 000
957,000
415,000

TABLE

Bullion.
£6, 745,000
6,666,000
11, 434, 000

Amount of gold bullion held, also of the reserve of notes and the rate of discount
charged during the crises of 184.J, i$57, and 1866.
Year and month.

Gold bullion
in bank.

Sept. 1, 1847, _

£7,545,000
7,185,000

Oct. 1, 1847--Nov. 1, 1847
Dec. 1, 1847
Jan. 1, 1848 —

6, 745, 000
8, 3 i 5 , 000
10,262,000

Sept. 1, 1857-Oct. 1, 1857--Nov. 1, 1857.Nov. 11, 1857..
Nov. 18 1857°Nov. 25, 1857 a
Dec. 1, 1857
Jan. 1, i858___

10,564,000
10,681,000
8,777,000
6,666,000
6,079,000
6, 784, 000
6,895,000
10, 9 0 5 , 0 0 0

Mar. 1, i866___
Apr. 1, i866_-_
M a y 1, 1866

i 3 , n 3 , 000
i3,502,000
i3,005,000
II,434,000
14,170,000
12,893,000

June 1,1866-_ .
July 1, i866___
Aug. 1, 1866 —

Reserve of
notes.

Rate of
discount.

£4,
4,
j,
4,
7,

488, 000
112, 0 0 0
547, 000
228, 000
786,000

Per cent.
hV2
6
8
7
5

5,83o,000
6, 014, 000
3, 485,000
b
957,000
1, 148, 000
1,918,000
2,268,000
6,064,000

5^
6
8
10
10
10
10
8

V, 3 4 5 , 000
6,881,000
5,884,000
415, 000
4, 3 4 6 , 000
2, 63o, 000

7
6
7
10
10

<*10

o £2,000,000 was, under authority of treasury letter, November 12, 1857, added to
the securities in the issue department in the returns from November 18 to December
23. 1857, both inclusive. The strict limits of the act of 1844 were only exceeded in the
returns of November 18 and 25, 1857.
b Rate raised to 9 per cent November 5.
c Rate raised to 10 per cent November 9; remained at 10 per cent till December 24,
when it was lowered to 8 per cent.
d Reduced to 8 per cent August 6.

173

National

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It is of course impossible to conjecture now what alterations Sir Robert Peel might have proposed in the Act had
his life been prolonged beyond 1850, but in the following
passage of his speech, December 3, 1847, he admitted his
disappointment in the failure of one of the three purposes
of the Act of 1844, and threw the blame of its failure on
the Bank Directors:
" There seems to have been some misapprehension as to
the object contemplated by that Act; that which we contemplated was that its future effect would be to prevent the
recurrence of those convulsions which had heretofore frequently taken place. It had previously been thought, and
might afterwards have been expected, that the Bank of
England would have taken precautions against the ill-regulated issue of its treasure, and, therefore, the bill contained
no imperative regulation affecting the banking department.
We did hope that after the panic of 1826, after that of 1836,
after that also of 1839, we did hope that the Bank of England would have confined itself to those principles of banking which their own directors admitted to be just, but
from which they had admitted their own departure, though
prescribed in part by their own regulations. In that hope
I am bound to acknowledge that we have been disappointed. Seeing commercial difficulty coming, seeing the
approach of a panic, they still did not conform to those
regulations; commercial houses were swept away which
had long been insolvent; other houses, which under different circumstances might have proved perfectly solvent,
suffered from the failures of those whose inability to meet
the demands against them was previously well known.

174

The

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Banking

System

The Bill has not sufficed to prevent these results, and so far,
also, I admit that we have been disappointed; for the bill
was intended to impose, if not a legal, at least a moral
restraint on the Bank, and we hoped that it would prevent
the necessity of having recourse to measures of extreme
stringency. In that hope, likewise, I admit that we have
been disappointed; for this I must contend, that it was in
the power of the Bank, had it taken early precautions, if
not to prevent all the evils that have arisen, at least greatly
to diminish their force. If the Bank had possessed the
resolution to meet the difficulty of a contraction of its
issues by raising the rate of discount, by refusing much of
the accommodation which they granted between the years
1844 and 1846—if they had only been firm and persevering
in those precautions, the necessity for any extensive interference with their operations might have been prevented;
it might not then have been necessary for the Government
to authorize that violation of the provision, the sole end
and object of which was to constrain the Bank of England
and prevent a recurrence of the panics of 1836 and 1839.
Here I think I may be permitted to refer to what I said
on the second reading of the Bill of 1844; at the close
of the speech which I then made I thus expressed my
opinions:—
"The ministers were not wild enough to suppose that
this measure would prevent all undue speculation, or
insure an invariable paper currency; but there was a
species of speculation dependent on an undue issue of
paper which they hoped the measure would check. Speculation could not be prevented in a commercial community,

76651—10

175

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Commission

but it might be aggravated by a species of paper credit
within the control of Parliament; and though ministers
did not aim at checking legitimate speculation—though
they admitted they could not prevent illegitimate specution—which was, perhaps, necessarily incident to mercantile enterprise, particularly in a country like this, still
they asked Parliament, by assenting to this measure, not
to aggravate evils which it could not control, nor refuse to
check those which came properly within its jurisdiction."
Having now sketched out the history of the reasons
which led to the division of the two departments of the
Bank of England and of what occurred in the crises of
1847, 1857, and 1866, I will continue the statement by
some remarks on the general effect of that measure, and of
proposals which have been made to mitigate the severity
of its action.
The legislation of 1844, it will be seen, put into force,
by way of legal enactment, an arrangement which had
been made some years previously by the directors for
their own personal guidance. Such an arrangement may
be a very useful guide to a Board, a valuable reminder
to them in their deliberations of the course which they
ought to take. But when the strictness of this rigid rule
is fixed and rendered absolute by legislation, the whole
advantage of the skill and intelligence of those who have
the management is rendered powerless by the existence
of a rule, the working of which they are only allowed
to witness and not in any degree to control. Yet circumstances occasionally arise which may render the
keeping the rule impossible. Mr. Jones Loyd foresaw this

176

The

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Banking

System

clearly. In his pamphlet entitled "Thoughts on the
Separation of the Departments of the Bank of England/'
published originally in 1840, he remarks: VIII. "One
difficulty has been suggested as liable to attend the
plan of a strict regulation of the paper circulation in
accordance with the bullion, which deserves attention.
In this country an immense mass of liabilities exist which
are subject to be paid on demand, and if, in consequence
of panic or any other cause influencing a great number
of persons simultaneously, the payment of a large portion
. of these liabilities should be demanded at the same time,
either the circulation must be largely increased or the
parties liable to such demands must be seriously embarrassed/' After some other remarks, including the possibility of a demand on the Government on account of
the savings banks, which demand would be greatly
increased at the present time, he says: "The Government
has subjected itself to a simultaneous demand, to the
extent of the deposits in these banks, fifteen or sixteen
millions. What would be the effect of such a demand
should it occur?"
At the time of writing (1910) this demand on behalf of
the savings banks, it will be remembered, would be more
than twelve times the amount named above, while no
provision has been made to meet it. Mr. Jones Loyd continued: VIII. 5. " If, after all, the danger is deemed to be
of such a nature as to require an efficient provision against
it—this is to be found, not in the general abandonment
of the attempt to place the management of the circulation under some fixed principle; but in that power, which

177

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all Governments must necessarily possess, of exercising
special interference in cases of unforeseen emergency and
great state necessity/' The deliberate establishment
of a law, while foreseeing at the same time that it was
certain to be broken, seems a strange thing. Yet this was
done when the Act of 1844 was passed. It is now matter
of history that three times since Sir Robert Peel established the division of the two departments, in 1847,
1857, and 1866, permission has had to be given to suspend the law, and although the law has only been actually
infringed on one occasion, the principle was the same on
all three.
So strongly was the inconvenience felt of the existence
of a law which it periodically becomes necessary to suspend that in 1873, when Mr. R. Lowe (afterwards Lord
Sherbrooke) was Chancellor of the Exchequer, a bill was
brought by him into Parliament to " provide for authorizing in certain contingencies a temporary increase of
the amount of Bank of England Notes issued in exchange
for securities/' The provisions of this bill, however,
were so cumbrous and exacting—requiring that, among
other things, the rate of minimum interest on advances
made under it should be "not less than 12 per cent,"
and that the excess of issue was not to be allowed unless
" t h e foreign exchanges are favorable to this country"—
that it was felt to be unworkable and was allowed to drop.
To make this matter perfectly clear I will add the text
of the bill.
The text of the bill proposed by Lord Sherbrooke (then
Mr. Robert Lowe) in 1873, to allow the Bank of England

178

The

English

Banking

System

to exceed in certain contingencies the limits fixed for the
issue by the Act of 1844 is printed here in full:
"(36 Vict.) Bank of England Notes.
"A BILL To provide for authorising in certain contingencies a temporary
increase of the amount of Bank of England Notes issued
A. D . 1873.
in exchange for securities.

" Be it enacted by the Queen's most Excellent Majesty, by
and with the advice and consent of the Lords Spiritual
and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as
follows:
" 1. Whenever the First Lord of Her Majesty's Treasury
and the Chancellor of the Exchequer after
Power to authorise tempocommunication with the Governor and Dep- rary and special
r\

r i T - k i r - i - \ i i

issue of Bank of

uty Governor of the Bank or England are England notes.
satisfied—
(1) That the minimum rate of interest then being
charged by the Governor and Company of the
Bank of England on discounts and temporary
advances is not less than twelve per cent, per
annum; and
(2) That the foreign exchanges are favourable to this
country; and
(3) That a large portion of the existing amount of
Bank of England and other bank notes in
circulation is rendered ineffective for its ordinary purpose by reason of internal panic:
they may, by order under their hands, empower the issue
department of the Bank of England to make, in excess of
the authorised issue, a special and temporary issue of Bank

179

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of England notes, by delivering the same into the banking
department in exchange for and on the credit of an equal
amount of Government securities to be transferred to the
issue department, and the said Governor and Company
shall pay interest into the Exchequer on the amount of
notes so issued by them at such rate being not less than
twelve per cent, per annum, as may from time to time be
fixed by the First Lord of the Treasury and Chancellor of
the Exchequer, and in addition thereto the amount of any
further profit which they may derive from the said issue.
" 2. The First Lord of the Treasury and the Chancellor
of the Exchequer may, if they think it expeorder may be
rescinded or va-

dient, by order under their hands, rescind and ried.
vary any order made in pursuance of this Act, and make
any new order in pursuance of this Act.
" 3. There shall be paid to the said Governor and Company
such sum, not exceeding the rate of two per cent.
Remuneration
on the amount of such issue, as may be aqreed *° bankJor ex1

pense of special

upon between the said First Lord of the Treasury issueand Chancellor of the Exchequer on the one part, and the
said Governor and Deputy Governor of the Bank of England
on the other part, to be a fair allowance to the Bank for the
risk, expense, and trouble incurred by it in making such
issue.
" 4. A copy of every order made under this Act shall be
forthwith published in such manner as the
Publication
A

and return of

First Lord of the Treasury and the Chancellor £ednetr to Parlia"
of the Exchequer consider best calculated for giving public
and general notice thereof, and shall be laid before both
Houses of Parliament within fourteen days after it is made,

180

The

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Banking

System

or if Parliament be not then sitting, within fourteen days
after the then next meeting of Parliament.
" 5. This Act may be cited as the Bank of England Notes
Act, 1873, and shall be construed as one with
Construction
of Act and short

the Act of the session of the seventh and titleeighth years of the reign of Her present Majesty, chapter
thirty-two, intituled "An Act to regulate the issue^of bank
notes, and for giving to the Governor and Company of the
Bank of England certain privileges for a limited period.''
[The paragraphs in italics are thus in the original print
of the bill.]

181

CHAPTER II.
THE SEPARATION OF THE TWO DEPARTMENTS AND THE
RATE OF DISCOUNT.

To continue the history of what has occurred. Strong
apprehension was expressed before the separation of the
two departments was made that the division would le^d
to more frequent disturbance of the rate of discount
charged by the Bank. These are referred to by Tooke,
Volume V, of the History of Prices, page 555:
"The arguments a priori which, previously to the
passing of the Act of 1844, I adduced for the purpose of
showing the greater liability to frequent and violent
transitions in the state of credit, and in the rate of interest,
which would attend the management of the Bank of England in a Divided, than in an Undivided, state of the two
departments, have been abundantly confirmed and exemplified by the actual working of the measure since its
enactment to the present time."
Tooke referred to this subject in his History of Prices,
in the chapter on the anticipations respecting the Act of
1844, Volume IV, page 281, in which he says: " A careful
consideration of the various plans which have been submitted to the public for carrying out the currency principle,
has led to a confirmation of the opinion which I have before
expressed, that under a complete separation of the functions of issue and banking, the transitions would be more

182

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System

abrupt and violent than under the existing system; unless,
and upon this, in my opinion, the question hinges, the
deposit or banking department were bound to hold a much
larger reserve than seems to be contemplated by any of the
plans which I have seen."
Though the reserve has been considerably increased
since the time when Tooke wrote, yet this increase does
not appear to have reached the point which he thought
necessary, in proportion to the demands made on it.
The tables at the end of this chapter show the minimum
rates of discount charged, and the number of the changes
in the rate at the banks of England, France, Germany, the
Netherlands, from the year 1844 to 1909, and Belgium
from the year 1851. It is, of course, impossible to compare exactly the position of business in one country and
another, and the demands on the Bank of England are
very different in character from those which fall on the
banks either of France or of Germany. At the same time,
it is an interesting thing to examine this statement, which
shows how numerous and how severe the variations in the
rate in England have been.
It is also useful to compare the practice of one great bank
with that of another. The circumstances of business in
this country are, as mentioned before, so different from
those of other countries, that it is difficult to compare
them closely with each other; but no one can doubt the
great advantages which industry and commerce derive
from having, as far as is possible, a fairly even rate of discount for sound mercantile paper, nor how greatly those
periods of unhealthy excitement, which have occasionally

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developed into commercial crises, have been fostered by
long periods of very low rates of interest in the money
market.
It is also, of course, impossible to argue what might
have occurred had the separation of the two departments
of the Bank of England not taken place, but, as a matter
of history, there can be no question that the fluctuations
in the rate of interest which have occurred since have been
exceedingly numerous and severe, more so, in fact, than in
the case of any other great bank of Europe. No doubt
the demands for gold on the London money market are
more sudden and greater than on any other money market
in Europe, but the question arises whether they have not
been accentuated and rendered more severe than they
otherwise would have been through the division of the
Issue and Banking Departments at the Bank of England.
The statements which follow show—
i. The number of changes in the minimum rate of discount charged by the Banks of England, France, Germany,
and the Netherlands for the years 1844-1909, and of Belgium for the years 1851-1909.
2. The highest and lowest rate charged and the amount
of fluctuation in the rate in the course of the twelvemonth
at the same banks for the same period.
3. The number of days for which each rate was charged
by the same banks, and for the same periods arranged from
the lowest rate to the highest.
4. The number of days for which each rate was charged
by the same banks and the same periods arranged from
the largest number of days to the smallest.

184

The

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System

A study of these tables will enable us to compare in a
general way w h a t has occurred a t each of t h e five banks in
respect of t h e r a t e charged on t h e bills offered t h e m for
discount.
Table I shows t h a t t h e number of changes in t h e r a t e
of discount a t t h e Bank of England has been nearly four
times as large as a t t h e Bank of France, and more t h a n
twice as large as a t t h e Bank of Germany, t h e Bank of the
Netherlands, and t h e Bank of Belgium. T h e figures are:
Number of changes, 184.4 t° 1909.
Bank
Bank
Bank
Bank
Bank

of
of
of
of
of

England
France
Germany
the Netherlands
Belgium a

443
115
196
188
192

I t should also be noted t h a t at t h e Bank of England
there have occurred during t h e whole period only 2
years when no change in t h e rate of discount- took place,
while a t t h e Bank of France there have been 27, a t t h e
Bank of Germany 10, at t h e Bank of t h e Netherlands 15,
and a t t h e Bank of Belgium 11.
Table I I shows t h a t t h e fluctuations between t h e highest and lowest rate charged for t h e twelvemonth has been
more severe a t the Bank of England t h a n a t either t h e
Bank of France, t h e Bank of Germany, t h e Bank of t h e
Netherlands, or t h e Bank of Belgium.
T h e severest fluctuation t h a t has occurred a t t h e Bank
of England was in t h e year 1866. The lowest rate in t h a t
year was 3% per cent, t h e highest rate 10 per cent; t h e

a From 1851 to 1909.

185

National

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fluctuation accordingly was 6}4 per cent. In five
other years the fluctuation varied from 5 per cent to 6
per cent.
The fluctuations in order of severity from 6% per cent
to 5 per cent at the Bank of England were as follows:

1866
1873
1858
1847
1861

Lowest
rate.

Highest
rate.

Fluctuation.

Per cent.
3K
3

Per cent.

Per cent.
6K
6
5**
5
5
5

2 ^

3
3
3

1863

9
8
8
8
8

On looking through the table stating these fluctuations
many other occasions will be seen on which the fluctuations at the Bank of England, though not so severe,
were very sharp, as, for instance, in the year 1857,
when though the total fluctuation was only $% per
cent it was between a rate of ^H per cent and 10
per cent. Fluctuations of this description are very trying
to business.
At the Bank of France, on the other hand, no fluctuation more severe than $% per cent is recorded, and this
only on two occasions. These were:
Lowest
rate.

. Year.

Per

i863.
1864.

cent.
4XA

186

Highest
rate.

Fluctuation.

Per cent.

Per cent.
3X
3%

The

English

Banking

System

At the Bank of Germany no fluctuation more severe
than 5 per cent has occurred, and only one of that extent:
Lowest
rate.

Year.

Highest
rate.

Fluctuation.

Per cent.

i866_

At the Bank of the Netherlands no fluctuation more
severe than 4 per cent has occurred and only one of that
extent:
Lowest
rate.

Year.

Per

cent.

Highest
rate.

1 Fluctua\
tion.

Per cent,

f Per cent.

7 I

1858.

At the Bank of Belgium no fluctuation more severe than
3 X per cent has occurred. This has been the case on two
occasions.
Lowest
rate.

Year.

Per
1870.
i873_

cent.

Highest
rate.

Fluctuation.

Per

cent.
6

3TA

cent.
3%
3V*

Table I I I shows that higher rates, those from 8 per cent
and upward, were more frequently charged at the Bank
of England than by the other banks, none of those Banks
having charged 10 per cent at all, at the Bank of France
and the Bank of Germany 9 per cent and 8 per cent
having been charged only for very short periods, and at

187

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the banks of the Netherlands and of Belgium the rate
never having exceeded 7 per cent.
Table IV shows that while the number of days at low
rates at the Bank of England is large, it is not so large
as at the Bank of France. The average rate at the Bank
of England is lower than at the Bank of Germany, but the
high rates at the Bank of England have been continued
for a much longer time, as an examination of the tables
will show.
The proportion of the specie held to the liabilities on
deposits and notes in circulation as shown on the balance
sheets of the five banks given on pages 150-152 in this
memorandum differs very greatly. This is shown in
the following table:
Proportion

of specie to liabilities on deposits and notes in

circulation.
Per cent.

Bank
Bank
Bank
Bank
Bank

of
of
of
of
of

England
France
Germany
the Netherlands
Belgium

38.4
75. 3
37. 1
58
17. 4

No doubt the Bank of England is more exposed to
foreign demands on its banking reserve than any other
bank in Europe. That the business of the Bank of
England is managed with much care and skill is well
known, but it appears from the figures given in the
tables which follow that the division into the two departments exposes the bank to difficulties which the
other banks do not experience, and that the number of
changes in the rate of discount is greater and the range
of the fluctuations also distinctly wider than at any of
the other banks.

188

The

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System

TABIV^ I.—Rate of discount—Number o} changes in each year at the banks
of England, France, Germany, Holland (1844-1909), and Belgium (18511909)-

Bank of England.

Bank of Germany.

Bank of France.

Fall.

Total.

Per ct. Per ct. Per ct. Perct.\Perct.\ Per ct. Perct. Perct.
1
1
N o change.

Per ct.

Rise.

Fall.

Total.

Rise.

Fall.

Total.

N o change.
N o change.

' I

No
No
No
No

No change.

8
7
9
6
5
11
11
5
12
15
16
14
3
2
7
10
10
14
24
13
12
5
7
10
5
2
6
6
6

1
1

change.
change.
change.
change.

1
1

Rise.

N o change.
N o change.
N o change.
I
1

1
I

2
1

4
4

1 .

N o change.
N o change.
N o change.

3
'1
3
2
1
7
N o change.
N o change.

N o change.
N o change.

N o change.
I
I

I
I

3
1

189

1
1
1
2
2
2
3
1

National

Monetary

Commission

TABIVE I.—Rate of discount—Number
of changes in each year at the banks
of England, France, Germany, Holland (1844.-1909), and Belgium {1851igop)—Continued.

Bank of England.
Rise.

Fall.

Bank of France.

Total.

Fall.

Total.

Bank of Germany.
Rise.

Fall.

Per ct. Perct. Per ct. Per ct. I Per ct. J Per c*.Perct.) Per ct. Per t
7
3
No change.
No change.
4
7
No change.
5
7
No change.
3
6
No change.
4
9
5
8
4
11
7
No change.
12
7
No change.
3
4
6
12
No change.
" 2
No change.
No change.
No change.
No change.

No
No
No
No
No
No

change.
change.
change.
change.
change.
change.

No change.
o

190

115

The

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System

TABIDS I.—Rate of discount—Number of changes in each year at the banks
of England, France, Germany, Holland (1844-1000), and Belgium (1851igog)—Continued.
Bank of Holland.

Bank of Belgium.

Year.
Rise.

Total.

Fall.

Total.

Per cent. I Per cent.} Per cent. Per cent. Per cent.
No change.

1844
184s
1846

1847
1848

1
1

5 ;
2

1849
1850
18511852.
1853.

2J
1 !

3
1
1
N o change.
N o change.

4 I
1
1 ,
N o change.
N o change.
N o change.
N o change.

N o change.

185418551856.

8 !
6 _

18571858.
N o change.
N o change.

18591860.
1861.
1862.
1863.
1864.
1865.
1866.

4 J
5;

7 i
4:

18671868.
18691870.

4
6
9
11
11
6
2
2
2
6
9
3
1

1871.
1872.
1873.
187418751876.

N o change.
N o change.

1877.
1878
1879
1880

9
3
3

3
6
3
8
6

6
2
1

2
2

o Operations commenced in 1851.

191

5
6

N o change.

76651—ic

N o change.
N o change.

5
11

National

Monetary

Commission

T A B L E I .—Rate of discount—Number
of changes m each year at the banks
of England, France, Germany, Holland (1844-igog), and Belgium
{1851igog)—Continued.
Bank of Belgium.

Bank of Holland.
Year.
Rise.

1882.
i883_
18841885i886_
1887-

1890.
18911892.
1893.
1894189S1896.
18971898.
1899190019011902-

Fall.

Total.

Rise.

Fall.

Per cent. Per cent. Per cent.] Per cent. Per cent.i Per cent.
3
6 j
10
8
1 1
1
4
4
i|
2
I
6
1
3 j
4
No change.
4 j
No change.
No change.
No change.
No change.

No change.
No change.
No change.

No change.

I9O3_

19041905190619071908.
1909-

! Total.

No change.

3
3 '
2
188

192

51
1

I06 i

8
5
1
192

The

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Banking

System

T A B L E II.—Lowest and highest rates charged and extent of fluctuation during
each year, Banks of England, France, Germany, Holland (1844-1909), and
Belgium
{1851-1909).

Lowest
rate.

1844-1845-1846.1847-1848- _
1849-i8so__
1851-i852._
i853__
1854-1855^i8S6__
1857-1859i860.
I86I_

1862.
i863_
18641865i866_
1867i868_
1869i87o_
18711872.
1873.
1874187S187618771878.
1879i88o_

Highest
rate.

Bank of Germany.

Bank of France.

Bank of England.

FlueLow- ' Hightuaest
est
tion. ! rate.
rate.

Fluctuation.

Lowest
rate.

Highest
rate.

Fluctuation.

I
I Per ct. j Per ct. Per ct. Per rf. Per ct. Per c*. Per ct. Per ct. Per ct.
J
No change.
No change.
4/4
A
4
No change.
1
2^1
3 A
4
5
No change.
1
4
3
3A
5
8
1
AA
A
5
3
5
4 i
No change.
4 A
A
5
3
5
No change.
3
4/4
A
2%
4
No chang
3
No change.
2K
No change.
No change.
No change.
3
4
No change.
8 ;
3
4
s
5 j
A4
SA
5
5
5
6
8 A4
7
4K
3 A'
6
2 A
5
7
6
AA\
4M
7H
9
5
SA
hy2
3
6y 2
5
2A
2
3
4
4X2
5 ;
2A
6
3^
4^
N o change.
5
8
AA
2K
N o change.
7
1
3
N o change.
3A
\A
5
5
8
3*A
SA
4A
7
4
3
3
9
8
AA
3lA
4A
7
6
4
2
3
4
S
7
7
3
3 A

3M
3
AA
6
7
9
6
6
5 i
5

'•

2>2;

6
s
3

j
;
I

2lA\

•

\A
1
2
3^!
3
4
6
3}
4
3
3
4

3
2*A

S
3

I\o change
No change
2%
6
5
6
6
7
5
No change.

2M
3A\

193

4
3
3
3
3A\
5

3M
1
1
2
1
1
1
1
1
1
IK

9
N o change.
N o change.

4
4
4
4
A
A
A
3A

5
8

A
A
3

4
4

5
5
6
6
6
6
5
AA
SA
SA

National

Monetary

Commission

TABLE II.—Lowest and highest rates charged and extent of fluctuation during
each year, Banks of England, France, Germany, Holland (1844-1909), and
Belgium
1851-1909)—Continued.
B a n k of F r a n c e .

B a n k of E n g l a n d .
Lowest
rate.

Per ct,
3
3

Highest
rate.
Perct.
6

5
5
5
5
5
2MJ
6
3
6
5
2M
2
3M
5
2 Ml
3
No change
3

4 1

4
4
6

2 ^

3
3
3
3
3
3
2M

6
5
4
4
3M
4
6

7
6

B a n k of G e r m a n y .

Fluctuation.

Lowest
rate.

Highest
rate.

Fluctuation.

Lowest
rate.

Highest
rate.

Per ct.
3
2

Per ct.

Per ct.
6

3M
3
No
No
No
No
2 Ml

3
2K
1H
2M
1
2
2

No
No
No
No
No
No

M
1
2M
3

3 Ml

834

2M|

No change.

4 Ml
change.
change.
3 I
change.
change.
2M|
change.
change.
3

A1/
4M;
change.
change.
change.
change.
change.
change.

4 I

3M|

No change.

I94

Pert

I 4 I

No
No
2M|
No
No
2 I
No
No

1M|
8
3
2
1
1

5
3M|
change.
change.
change.
change.

Fluctuation.

1
1M]
1M

4
3
3
3
3
4
3
3
3
3
3
3
3
3
4
5
3M|
3
3M
4
3
4 Ml
SM|
4
3 M|

5
5
5
4M|
5
5 Ml
SM|
4
5
5
4
5
5
6
7
7
4

4
4
S

6
7
7 M|
6
5

The

English

Banking

System

TABUS II.—Lowest and highest rates charged and extent of fluctuation during
each year, Banks of England, France, Germany, Holland (1844-1900), and
Belgium
(1851-1900)—Continued.
B a n k of H o l l a n d .
Lowest
rate.
Per
184418451846.
184718481849185018511852.
i8s3_
i85418SSi856_
1857i858_
18591860I86I_

1862.
I863_

1864 _
i86S_
i866_
1867i868_
1869.
187018711872.
i873_
1874i87S1876.
1877187818791880-

cent.

B a n k of B e l g i u m .

Highest
rate.

Fluctua- i
tion.
i

Per

cent.

No change.

$A
1H
1 ,

4
4
3

5
5
3

2 ^

2V2

2XA\

3
2^2

4
3 A
3

Highest

P e r cew/.
(a)

Per cent.
(o)
(a)
(o)
(a)

j Fluctuation.

rate.

(«)
(«)
(a)

(«)
(«)

! Per

(a)
(a)
(a)
(a)

(•)

No change,
4
No change.
No change.
N o change,

1
1%
3
4

3 |
3H\
3

2
2K
2K
2
1
2^
3
1

3A
5 '
6
4
5

2K
1M

5
3 A
N o change.
N o change.
4 !
4 :
N o change.

j
j
|
!

3
3
3

2*A
2lA

3A
3A

2*A

195

NTo c h a n g e .
No c h a n g e .
6
2K
SA
2A
2Va
SA
3A
7
6
3A

a Operations c o m m e n c e d 1 8 5 1 .

4
5^
5
4
4
5
4
6
6
6

4
3
3
2lA

;

cent,
(a)

(«)
(«)
(«)

(o)

2^3

No change.
No change.
3
No change.
4
SH
7
7
No change.
No change.
3
4 :
3K
4
3
5
4A
7
6
3 J
*A

Lowest
rate.

National

Monetary

Commission

T A B L E II.—Lowest and highest rates charged and extent of fluctuation during
each year, Banks of England, France, Germany, Holland (1844-1900), and
Belgium
(1851-1900)—Continued.
Bank of Belgium.

Bank of Holland.
Lowest
rate.

i883_
1884.
1885 _
i886_
1887.

Per cent.
3A
3A
3A

1890.
18911892.
1893.
i894_
18951896.
18971898.
189919001901.
1902.
i9o3_
1904190S1906,
1907i9o8_
1909-

3 I
No
No
No
No

2 ^

2KI

change.
change.
change.
change.
AV»

1 Fluctua;
tion.

Per cent. >.Per cent.
2
SA\
6
2M
I

Per cent.
3}
3A
3A
3
3
2A
2A

4
4

•

i
5
3
5 I
3
4
No change.
2^1
3 '
2^1
3
No change.
2A\
3 j
2X/2

AA[

A
2K
1

3
5
3y3\

No change.
3lA
2 A
3
3

Highest
rate.

Lowest
rate.

Per cent.
Per cent.
1
AA
SA
5A
3A

Fluctuation.

Highest
rate.

5
3 A
5 I
3
3A\
No change.
3
3A
3
3A
2M|
3
3
5
5
6
3
5
2A
3

2^|

A
M.
2^
1M
A

3
3A
4
3

A
l
A\
A
2
1
2
A\

196

1
1
\A
1
2^
2
1
A
V*
A

No change.
4
5
5
4
No change.

I
3
3A\
4
3
3

*1
No change.
4 ''.
AA\

6
6
3^1

1
\A
1
1

The

English

Banking

System

T A B L K I I I . — R a t e of discount, 1844-1900—The
number of days at each rate
arranged from the lowest rate to the highest.

BANK OF ENGLAND.
[Lowest rate, 2 per cent; highest rate, 10 per cent.]
R a t e per
cent.

8,409

;

1
|

N u m b e r of
d a y s per
c e n t of t o t a l .
(Total =

J
j
1
|

1,000.)

i43

;

3,599

3
3M

5,859

ISI
246

j
1

1,921

3,772

158

608

2,195

263

975

s
;

N u m b e r of
days.

6
6H
7

633

4
26

268

9
10

95
141

4
6

23,857

1,000

i
j

BANK OF FRANCE.
[Lowest rate, 2 per cent; highest rate, 9 per cent.]
R a t e per
cent.

N u m b e r of
days.

N u m b e r of
days per
c e n t of t o t a l .
(Total1,000.)

2,735

2XA
3

2,579

108

7,828

329

2,060

4,579

192

4 Ya

353

s
sK

2,061

120

1,170

S
49

6Y2

7
7K
8

286

23,857

197

1,000

National

Monetary

Commission

T A B L E III.—Rate of discount, 1844-1909—The number of days at each rate
arranged from the lowest rate to the highest—Continued.

IMPERIAL BANK OF GERMANY.
[Lowest rate, 3 per cent; highest rate, 9 per cent,]
I
R

~ntPer
cent.

i
j

; Number of ,
N

T a v f °f
days.

centaoftPoetral.
(Total- !
1,000.)

j
3

3V2
4
4lA
5

sM
6
6H
7

iv* i
8

8,073
644
12,192
1,626
4,094
707
970
72
269
110
37
63

28,857

i, 000

129

511

68
172

3o
4i
3
11

5
1

BANK OF T H E NETHERLANDS.
[Lowest rate, 2 per cent; highest rate, 7 per cent.]

R a t e per
cent.

N u m b e r of
days.

N u m b e r of
d a y s per
cent of t o t a l .
(Total =
1,000.)

2
2 ^

3
3M
4
4^
5
5M
6
6M

1,328
5,058
8,013
3,737
2,167
811
1,823
375
260
150
135
23,857

198

56
212

336
15 7
9i
34
76
16
11

.5
I , OOO

The

English

Banking

System

TABLE III.—Rate of discount, 1S44-1000—The number of days at each rate
arranged from the lowest rate to the highest—Continued.
NATIONAL BANK OF BELGIUM.
[Lowest rate, 2 K per cent; highest rate, 7 per cent.]

Rate per
cent.

Number of
days.

Number of
days per
cent of total.
(Total =»
1,000.)

3
3K
4
AXA
5

1
i
!

sK
6
7

3,169
9,412
2,9G5
3,416

147

437
i38
159

698
944

32
44

378

540
27

21,549

1, 0 0 0

TABLE IV.—Rate of discount, 1844-igog—The number of days at each rate
arranged from the highest number of days to the lowest.

BANK OF ENGLAND.

Rate per
cent.

Number of
Number of
days.

5,859
3,772
3,559
3,409
2,195
1,921
975
633

246

158

2V2

151

143

5
3*A
6

92
80
41

268

7
4V*
8

263

608

I
i

141
95

9
6XA

23,857

1,000

i
199

•

National

Monetary

Commission

T A B L E IV.—Rate of discount, 1844-1000—The number of days at each rate
arranged from the highest number of days to the lowest—Continued.

BANK OF FRANCE.

Rate per
cent.

Number of
days.

Number of 1
days per
cent of total.
(Total1,000.)

7,828
4,579
2,735
2,579
2,061
2,060
1,170

329

192

115

2lA

108

5
3K
6

353

286
120
41
21

7
SK
8

IV,

16
8

9
634

86
49

5
2 1

23,857

IMPERIAL BANK O F GERMANY.

Number of
days.

Rate per
cent.

12,192 .
4,094
3,073 :
1,626

4
5
3

970

707
644
269

sxA

3o
27

110
72

Number of
days per
cent of total.
(Total1,000.)

63
87 i
23,857

4 XA

3M
7
iV*
6V*
9
8

Sii
172
129

5
3

The

English

Banking

System

TABLE IV.—Rate of discount, 1844-1909—The number of days at each rate
arranged from the highest number of days to the loivest—Continued.

BANK OF THE NETHERLANDS.

N u m b e r of
days.

Rate per
cent.

N u m b e r of
days per
c e n t of t o t a l .
(Total1,000.)

8,013
5,058
8,737
2,167
1,823
1,328
811
375
260
150
135

336

3
2 y»

212

157
9i
76

4
5
2

AZA
5K
6
6V2

34
16
11

6
5

23,857

i, 000

BANK OF BELGIUM.

N u m b e r of
days.

Rate per
cent.

N u m b e r of
d a y s per
c e n t of t o t a l .
(Total1,000.)

9,412
3,416
3,169
2,965
944
698
540
378
27
21,549

3
4
2K
3H
5
AlA
6
SJA
7

43 7
i59
147
i38
44
33
25
18

1, 0 0 0

CHAPTER

III.

CORRESPONDENCE BETWEEN THE GOVERNMENT AND THE
BANK OF ENGLAND DURING THE CRISES OF 1847, 1857,
AND 1866.

On each occasion when permission was given to the
Bank of England to suspend the Act of 1844 correspondence took place between the Government and the Bank
on the subject. This is given in full here to explain
what took place.
There is no complete official statement of the correspondence between the Government and the bank during
the crises of 1847, 1857, and 1866. The letters which
follow are extracted from the report of the Committee
of the House of Lords on the Commercial Distress in 1847,
from Tooke's History of Prices and from the Economist
newspaper. It must be remembered that when the suspension of the Bank Act has been allowed this has never
been at the commencement of a period of stress, but
not till the anxiety has gone on for some considerable
time. The correspondence between the Government
and the Bank which took place on the occasion of the
crises of 1847, 1857, and 1866, which I subjoin, shows
this very clearly. The periods were marked by great
commercial distress, by many failures of banks and of
business houses which might in an ordinary way have
met all their engagements, and there is no doubt that
the length of time which was occupied in the correspondence, joined to a feeling of doubt whether the suspension
of the bank act would be permitted, added greatly to the

202

The

English

Banking

System

anxiety. The high rates charged for discounts and advances also tended to increase this. I write as a man who
has lived through the crisis of 1866, with some remembrance even of earlier troubles, and I can bear witness
to the misery which has taken place at such periods,—
the distress of the working classes through want of employment,—the destruction of property,—the loss of capital,—and of the lives of friends whose constitutions were
sapped by the prolonged anxiety.
CORRESPONDENCE BETWEEN THE GOVERNMENT AND THE
BANK OF ENGLAND IN THE CRISIS OF 1847.

October 25, 1847.
GENTLEMEN : Her Majesty's Government have seen with
the deepest regret, the pressure which has existed for some
weeks upon the commercial interests of the country,
and that this pressure has been aggravated by a want of
that confidence which is mecessary for carrying on the
ordinary dealings of trade.
They have been in hopes that the check given to
transactions of a speculative character, the transfer of
capital from other countries, the influx of bullion, and
the feeling which a knowledge of these circumstances
might have been expected to produce, would have removed the prevailing distrust.
They were encouraged in this expectation by the speedy
cessation of a similar state of feeling in the month of April
last.
These hopes have, however, been disappointed, and
Her Majesty's Government have come to the conclusion
that the time has arrived when they ought to attempt,
by some extraordinary and temporary measure, to restore
confidence to the mercantile and manufacturing community.

DOWNING STREET,

203

National

Monetary

Commission

For this purpose, they recommend to the Directors of
the Bank of England, in the present emergency, to enlarge
the amount of their discounts and advances, upon approved security; but that, in order to retain this operation within reasonable limits, a high rate of interest
should be charged. In present circumstances they would
suggest that the rate of interest should not be less than
8 per cent.
If this course should lead to any infringement of the
existing law, Her Majesty's Government will be prepared
to propose to Parliament on its meeting, a Bill of Indemnity.
They will rely upon the discretion of the Directors to
reduce as soon as possible the amount of their notes,
if any extraordinary issues should take place, within the
limits prescribed by law.
Her Majesty's Government are of opinion that any
extra profit derived from this measure should be carried
to the account of the public, but the precise mode of
doing so must be left to future arrangement.
Her Majesty's Government are not insensible to the
evil of any departure from the law which has placed the
currency of this country upon a sound basis; but they
feel confident that, in the present circumstances, the
measure which they have proposed may be safely adopted;
and that, at the same time, the main provisions of that
law and the vital principle of preserving the convertibility
of the bank-note may be fairly maintained.
We have the honor to be, Gentlemen,
Your obedient humble servants,
(Signed)
JOHN RUSSEUU
CHARLES WOOD.
The GOVERNOR AND DEPUTY-GOVERNOR OF THE BANK
OF ENGLAND.

204

The

English

Banking

System

[Reply.]

October 25, 184.7.
GENTLEMEN: We have the honor to acknowledge your
letter of this day's date, which we have submitted to the
Court of Directors, and we enclose a copy of the resoluthereon; and
We have the honor to be, Sirs,
Your most obedient servants,
(Signed)
JAMES MORRIS, Governor.
H. J. PRESCOTT, Deputy-Governor\
BANK OF ENGLAND,

To the FIRST LORD OF THE TREASURY AND THE CHANCELLOR OF THE EXCHEQUER*.

Resolved, That this Court do accede to the recommendation contained in the letter from the First Lord of the
Treasury and the Chancellor of the Exchequer, dated this
day, and addressed to the Governor and Deputy-Governor
of the Bank of England, which has just been read:
That the minimum rate of discount on bills not having
more than ninety-five days to run be 8 per cent:
That advances be made on bills of exchange, on stock,
Exchequer bills, and other approved securities, in sums
of not less than £2,000 and for periods to be fixed by the
Governors, at the rate of 8 per cent per annum.
The following is the letter addressed by the First Lord of
the Treasury and the Chancellor of the Exchequer at midday on Thursday (November 12) to the Bank:
[Taken from " The Economist," November 14, 1857.]

CORRESPONDENCE BETWEEN THE GOVERNMENT AND THE
BANK OF ENGLAND IN THE CRISIS OF 1857.
DOWNING STREET, November 12.
Her Majesty's Government have observed
with great concern the serious consequences which have
ensued from the recent failure of certain joint stock banks
GENTLEMEN:

205

National

Monetary

Commission

in England and Scotland, as well as of certain large mercantile firms, chiefly connected with the American trade.
The discredit and distrust which have resulted from
these events, and the withdrawal of a large amount of the
paper circulation authorized by the existing Bank Acts,
appear to Her Majesty's Government to render it necessary
for them to inform the Bank of England that if they should
be unable in the present emergency to meet the demands
for discounts and advances upon approved securities without exceeding the limits of their circulation prescribed by
the Act of 1844, the Government will be prepared to propose to Parliament, upoti its meeting, a bill of indemnity
for any excess so issued.
In order to prevent this temporary relaxation of the
law being extended beyond the actual necessities of the
occasion, Her Majesty's Government are of opinion that
the Bank terms of discount should not be reduced below
their present rate. 0
Her Majesty's Government reserve for future consideration the appropriation of any profit which may arise upon
issues in excess of the statutory amount.
Her Majesty's Government are fully impressed with the
importance of maintaining the letter of the law, even in a
time of considerable mercantile difficulty, but they believe
that, for the removal of apprehensions which have checked
the course of monetary transactions, such a measure as is
now contemplated has become necessary, and they rely
upon the discretion and prudence of the Directors for
confining its operation within the strict limits of the
exigencies of the case.
We have, etc.,
(Signed.)
PALMERSTON.
G. C. LEWIS.
The GOVERNOR AND DEPUTY-GOVERNOR OF THE BANK
OF ENGLAND.
a The rate was 10 per cent; raised to this point November 5.

206

The

English

Banking

System

The following is a copy of a letter addressed b y t h e
Directors of the Bank of England to t h e Government in
reference to their issues since the 12th ultimo (November
12, 1857):
[Taken from "The Economist," December 5, 1857.]
B A N K OF ENGLAND, December 2,

1857,

M Y L O R D AND SIR, We have the honor to acknowledge
the receipt of your letter of the 27th instant (sic, in
Economist), requesting " such an explanation with respect
to the course which t h e Directors of the Bank of England
have pursued in regulating their issues of notes since t h e
12th instant, as they may be able to furnish for the information of Her Majesty's Government."
In complying with this wish, it may be well to allude to
the position of the Bank of England accounts anterior t o
the receipt of t h e letter of the 12th.
On the 24th October the bullion in the issue department was £8,777,000; the reserve, £4,079,000; t h e notes
in the hands of the public, £19,766,000; t h e discounts and
advances, £10,262,000; and the deposits, £16,126,000; the
rate of discount at t h e bank being 8 per cent for bills having
not more t h a n ninety-five days to run.
In t h e following week a great shock to credit and a consequent demand on the Bank of England for discounts
arose, from t h e failure of the Liverpool Borough Bank,
whose re-discounted bills were largely held b y the bill
brokers and others in London. The effects of this and
other failures, however, up to this time, had not occasioned
any alarming pressure on the resources of t h e Bank, or
great disquietude, in commercial affairs in London.
On t h e 5th of November t h e reserve was £2,944,000, t h e
bullion in t h e issue department £7,919,000, and the
deposits £17,265,000. The rate of discount was advanced
to 9 per cent and on t h e 10th of November to 10 per cent.
76651—10

207

National

Monetary

Commission

The continental drain for gold had ceased, the American
demand had become unimportant, and there was at that
time little apprehension that the Bank issues would be
inadequate to meet the necessities of commerce within the
legalized sphere of their circulation.
Upon this state of things, however, supervened the
failure of the Western Bank of Scotland, and the City of
Glasgow Bank, and the renewed discredit in Ireland, causing an increased action upon the .English circulation, by
the abstraction in four weeks of upward of £2,000,000 of
gold, to supply the wants of Scotland and Ireland; of
which amounts more than £ 1,000,000 was sent to Scotland, and £280,000 to Ireland, between the 5th and 12th
of November.
This drain was in its nature sudden and irresistible, and
acted necessarily in diminution of the reserve, which on
the n t h had decreased to £1,462,000 and the bullion to
£6,666,000.
The public became alarmed, large deposits accumulated
in the Bank of England, money dealers having vast sums
lent to them upon call were themselves obliged to resort
to the Bank of England for increased supplies, and for
some days nearly the whole of the requirements of commerce were thrown on the Bank. Thus, on the 12th, it
discounted and advanced to the amount of £2,373,000,
which still left a reserve at night of £581,000.
Such was the state of the Bank of England accounts on
the 12th, the day of the publication of the letter from the
Treasury. The demand for discounts and advances continued to increase till the 21st, when they reached their
maximum of £21,616,000.
The public have also required a much larger quantity
of notes than usual at this season, the amount in their
hands having risen on the 21st to £21,544,000.

208

The

English

Banking

System

The Bank have, since the 12th, under the authority of
the letter from the Treasury, issued £2,000,000 of notes
in excess of the limits of the circulation prescribed by the
Act of 1844, and have passed securities to the issue department to that amount.
That, however, is not the measure of the amount
actually parted with by the Bank, which has not exceeded
£928,000, the remainder of the £2,000,000 having been
retained as a reserve of notes in the banking department,
which, at the same time, also held £407,020 in coin.
We subjoin a statement of accounts from the n t h
November to the 28th, inclusive, from which it will be
apparent that the Bank continued to meet all demands for
discounts and advances on approved securities, to remedy
the commercial discredit and distress mentioned in your
letter of the 12th instant, "as occasioned by the recent
failure of certain joint stock banks in England and Scotland, as well as of certain large mercantile firms chiefly
connected with the American trade/' and aggravated by
the subsequent embarrassment of large joint stock banks.
In discounts and advances, the sum supplied to the
public between the 12th November and the ist December
amounted in the aggregate to £12,645,000. We have, etc.
(Signed)
SHEFFIELD NEAVE, Governor.
BONAMY DOBREE, Deputy Governor.
To the Right Hon. the FIRST LORD OF THE TREASURY
and the Right Hon. the CHANCELLOR OF THE
EXCHEQUER.

209

National

Monetary

Commission

Statement of accounts.
ISSUE DEPARTMENT.

DR.

Notes issued.
I857

November 11 _ _

£21,141, 000

1857
November 21 _

12..

20, 9 9 0 , 0 0 0

23 _

i3__
14-i6_.
17-i8_.
19--

23,185, 0 0 0

22,639, 0 0 0

24.
2526_

22,579, 0 0 0

27-

20_ _

22,565, 0 0 0

22, 8 0 1 , 0 0 0

22,555, 0 0 0
22,590, 0 0 0

28-

3o_
December 1 _

CR.

Government
debt.

1857.
November n _ _

£11,015,000

Other securities.

£3,460,000

Gold coin
and bullion.

£6,

666, 0 0 0

I2__

11,015,000

3,460,000

6, 524, 0 0 0

i3__
14-i6__
17-i8._
19--

11, 0 1 5 , 0 0 0

5,460,000

6,710,000

11, 0 1 5 , 0 0 0

5, 4 6 0 , 0 0 0

6,326,000

11,015,000

5,460,000

6, 164, 0 0 0

II,015,000

5,460,000

6, 104, 0 0 0

11, 0 1 5 , 0 0 0

5,460,000

6,080,000

11, 0 1 5 , 0 0 0

5,460,000

6,115,000

20__

11, 0 1 5 , 0 0 0

5,460,000

6,090,000

2I__

11,015,000

5,460,000

6,462,000

11, 0 1 5 , 0 0 0

5,460,000

6,648,000

11,015,000

5,460,000

6, 738, 0 0 0

11, 0 1 5 , 0 0 0

5,460,000

6, 784, 0 0 0

11,015,000

5,460,000

6, 83o, 0 0 0

11, 0 1 5 , 0 0 0

5,460,000

6, 732, 0 0 0

11, 0 1 5 , 0 0 0

5,460,000

6,792,000

11, 0 1 5 , 0 0 0

5,460,000

6,835,000

11,015,000

5,460,000

6,862,000

23-24__
25-26__
27-28__
3o__
December 1 _ _

4k'

Vi
Vi

VI
vi
Co

Vi
Vi

Vl
VI
CO

*
Vi

* ^ •^

Cn
Vi

CO Co

O o
T2.3.

o o o o

o
o

Go
VI

Co
VI

o
o

CO Go

4k
4k

4>>

o
o

O
O

o
o

Co
Co

4k
O
O

4k
O

o
o

()

Co G

4k
O

c
*

o o o o o o o o o o o o o o o o o o

o
o
O

O
00
00

VO
»-J
Co

vO
Vl
-J

^,
oo

o
O

ON
CO

VO
hi

v».

^.
oo H
*
O*
4k
h}

4k
00
O

00
N

•*!

Co
vO
M

4k
O

4k
00
vO

Vl
Co
VO

Vl
Co
Vl

o o o o

Vl
^1
ON

Vl
VO
CO

Vi
<J
ON

vO
NO

o
<l

Vi
(0
CO
4k

M
Co

4k4k

00
Vl

vO
Vl
VO

VJ
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ON

oo oo
Co

Co 4».

<»
^J

M
Vl
4k

VC
0
Vi

o o o o

OOOOOOGOOOOOOOOOCOOOOOOOOOOOOOOOOOOO
O O O O O w Q O O O O C o O O O O O C n

4k
Co
VO

4k
Co
4k

4k
O
M

tu9i$/Cg

VI ' ON Vl
-1
^

o o

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u
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.&. V l
00 vo

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00
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o o o o o o
o o o o o

qstjfiug

d y j^

Statement of accounts—Continued.
BANKING

CR.

DEPARTMENT—Continued.

Government
securities.

Other securities.

Notes.

Gold and
silver coin.

Assets.

1857
£9, 445.000

£26, n 3 , 000

£958,000

9. 445,000

28, 210,000

I3I,000

i3_

7. 356,000

28, 844, 000

1, 8 1 4 , 0 0 0

7, 255.000

29, 199,000

1,378, 000

204, 000

38, o36,000

7, 094, 000
6, 819,000

29, 541,000

1,140,000

202,000

37, 977,000

29, 639,000

1, 164, 0 0 0

217,000

37, 839,000

6, 407,000
6, 254, 000

3o, 299,000

1,148,000

405,000

38, 259. 000

3i, I3I,000

1, 104, 0 0 0

459,000

38, 948,000

6, o3i,000
6, 028,000

3i, 780,000

1,072,000

407,000

39, 290,000

3x, 783,000

1, 3 8 3 , 0 0 0

382,000

39. 576,000

5. 941,000
5. 852,000

3i, 747,000

1,6o3,000

388,ooo

39, 679,000

3i, 575,000

1,683,000

469.000

39, 579,000

5, 808,000
5. 808,000

3i, 350,000

1,919,000

479,000

39, 556,000

3i, 386,ooo

if 7 5 7 . o o o

436,000

39, 387, 000

November n

17
'18
19
20
21
23
24
25
26

5, 808,000
5, 808,000
5. 808,000

S, 671,000

27
28
December

£504,000
450,000

£3 7 , 020,000
38, 236,000
38, 014,000

3i, 594, 000

1, 6 5 8 , 0 0 0

449,000

39, 509,000

3i, 345,000

1,816,000

433,000

3 9 , 402,000

3i, 198,000

1.985,000

443,000

39, 434, 000

3i, 248,000

2, 0 5 7 , 0 0 0

463,000

39, 439, 000

N. B.—In the above statement it will be observed t h a t the accounts of November n and 12 are framed upon the authorized issue of
£i4.475.ooo on securities; while those of the 13th and subsequent days are framed in conformity with an issue on securities extended to
£16,475,000. The returns of the n t h , 18th, and 25th are accurate, the others are approximative only, inasmuch as special returns from the
branches affecting minor items in the account are rendered weekly.

The

English

Banking

Statement

System

accounts—Continued.

BANKING DEPARTMENT—Continued.
Notes with the
public.
1857.
November n _ _ .

Notes with the
public.
i«57
November 21 _

^ 2 0 , i83, o p o

£21,554,000
21, 520, 000

2 3_

12—

20,868,000

i3__.
14--i6__.
i7__.
i8__:

21,371,000

24-

21,529,OOO

21,423,000

21,340,OOO

21,499,000

2526_

21, 415, 0 0 0

27-

21, 549, OOO

21, 407, OOO
21,486,OOO
21,493,OOO

28_

19---

BANK OF ENGLAND,

21, 548, OOO

21, 451, OOO

3o_
December 1 _

21,325,OOO
21, 280, OOO

M. MARSHALL, Chief Cashier.
December 3, 1857.

CORRESPONDENCE BETWEEN THE GOVERNMENT AND THE
BANK OF ENGLAND IN THE CRISIS OF 1866.
[Taken from " T h e Economist," May 19, 1866.]

RELAXATION OF T H E BANK ACT.

The following is the correspondence that has taken
place between the Governor of the Bank of England and
the Ministry on the subject of the recent pressure in the
money market—
[Copy.]

BANK OF ENGLAND, May

1866.

SIR,—We consider it to be our duty to lay before the
Government the facts relating to the extraordinary demands for assistance which have been made upon the
Bank of England to-day, in consequence of the failure of
Messrs. Overend, Gurney & Co.
We have advanced to the bankers, bill brokers, and
merchants in London during the day upwards of £4,000,000
sterling upon the security of Government stock and bills
of exchange—an unprecedented sum to lend in one day.

213

National

Monetary

Commission

and which, therefore, we suppose would be sufficient to
meet all their requirements, although the proportion of
this sum which may have been sent to the country must
materially affect the question.
We commenced this morning with a reserve of £5,727,000, which has been drawn up'on so largely that we can
not calculate on having so much as £3,000,000 this
evening, making a fair allowance for what may be remaining at the branches.
We have not refused any legitimate application for
assistance, and unless the money taken from the Bank is
entirely withdrawn from circulation there is no reason to
suppose that this reserve is insufficient.
We have the honor to be, Sir, your obedient servants,
(Signed)
H. L. HOLLAND, Governor.
(Signed)
THOS. NEWMAN HUNT,
Deputy-Governor,
The Right Hon. the CHANCELLOR
OF THE EXCHEQUER, M. P., etc., etc.

To the Governor and Deputy-Governor of the Bank of England.
GENTLEMEN,—We have the honor to acknowledge the
receipt of your letter .of this day to the Chancellor of the
Exchequer, in which you state the course of action at the
Bank of England, under the circumstances of sudden
anxiety, which have arisen since the stoppage of Messrs.
Overend, Gurney & Co. (Limited) yesterday.
We learn with regret that the Bank reserve, which stood
so recently as last night at a sum of about five millions
and three quarters, has been reduced in a single day by
the liberal answer of the Bank to the demands of commerce during the hours of business and by its great
anxiety to avert disaster, to little more than half of that
amount, or a sum (actual for London and estimated for
the branches) not greatly exceeding three millions.

214

The

English

Banking

System

The, accounts and representations which have reached
Her Majesty's Government during the day exhibit the
state of things in the City as one of extraordinary distress
and apprehension. Indeed, deputations composed of persons of the greatest weight and influence, and representing
alike the private and joint stock banks of London, have
presented themselves in Downing street and urged with
unanimity and with earnestness the necessity of some
intervention on the part of the State to allay the anxiety
which prevails, and which appears to have amounted,
through great part of the day, to absolute panic.
There are some important points in which the present
crisis differs from those of 1847 and 1857. Those periods
were periods of mercantile distress, but the vital consideration of banking credit does not appear to have been
involved in them, as it is in the present crisis.
Again, the course of affairs was comparatively slow and
measured; whereas the shock has in this instance arrived
with an intense rapidity, and the opportunity for deliberation is narrowed in proportion. Lastly, the reserve of
the Bank of England has suffered a diminution without
precedent relatively to the time in which it has been
brought about, and in view especially of this circumstance
Her Majesty's Government can not doubt that it is their
duty to adopt without delay the measures which seem to
them best calculated to compose the public mind, and to
arrest the calamities which may threaten trade and industry. If, then, the Directors of the Bank of England, proceeding upon the prudent rules of action by which their
administration is usually governed, shall find that in order
to meet the wants of legitimate commerce, it be requisite
to extend their discounts and advances upon approved
securities, so as to require issues of notes beyond the limits
fixed by law, Her Majesty's Government recommend that
this necessity should be met immediately upon its occur-

215

National

Monetary

Commission

rence, and in t h a t event they will not fail t o m a k e application t o Parliament for its sanction.
No such discount or advance, however, should b e g r a n t e d
a t a r a t e of interest of less t h a n ten per cent, a n d H e r
Majesty's Government reserve it t o themselves t o recommend, if they should see fit, t h e imposition of a higher
rate. After deduction b y t h e B a n k of whatever it m a y
consider t o be a fair charge for its risk, expense, a n d
trouble, t h e profits of these advances will accrue t o t h e
public.
W e h a v e t h e honor t o be, Gentlemen, your obedient
servants,
(Signed)
RussEi.iv.
(Signed)
D O W N I N G S T R E E T , May

W . E . GLADSTONE.
1866.

B A N K O F E N G L A N D , May

12,

1866.

To the Right Hon. Earl Russell and the Right Hon. W. E.
Gladstone, M. P.
M Y L O R D AND S I R — H a v i n g laid before t h e Court of
Directors t h e letter received from you yesterday, with
respect t o a further issue of notes, if necessary, beyond t h e
limit fixed b y t h e Act of 1844, we h a v e now t h e honor t o
enclose a copy of t h e resolutions of t h e Court thereupon.—
W e have t h e honor t o be, m y Lord a n d Sir, your most
obedient servants,
(Signed)
H. L. H O L L A N D , Governor.
(Signed)

Copy of Resolutions

T H O S . N. H U N T , Deputy

Governor.

Enclosed.

A t a Court of Directors of t h e B a n k on S a t u r d a y , t h e
12th of May, 1866:—
Resolved,—That t h e governors b e requested t o inform t h e
First L o r d of t h e Treasury a n d t h e Chancellor of E x c h e q u e r
t h a t t h e Court is prepared t o act in conformity with t h e
letter addressed t o t h e m yesterday.

216

The

English

Banking

System

Resolved,—That the minimum rate of discount on bills
not having more than ninety-five days to run be raised
from 9 to 10 per cent.
HAMMOND CHUBB, Secretary.
The comments of the editor of "The Economist" at the
time were as follows. They are found in "The Economist, " May 26, 1866, and will assist the reader to understand the circumstances of the crisis.
THE PRACTICAL EFFECT OF THE ACT OF 1844.

" The main use of the law is that it compels the Bank to
act at an early stage during a foreign drain of bullion.
They must with the Act raise the rate of discount; they
ought not to raise it without the Act. It accomplishes
this end in a most effectual manner. It separates the
banking reserve on which a foreign drain always acts, and
therefore makes such a drain of more instant importance
than it would be otherwise. The Bank is cut into two
halves, and the half which feels the foreign drain has to be
kept solvent without going to the half which does not feel
it. Accordingly the Bank Directors must act early and
promptly; if they did not, the Banking Department would
be bare, as it was in 1857 and 1847, before they had
aroused themselves to act as they ought. During the
cotton drain the Act of 1844 worked in this manner. It
made the Bank directors act whether they would or no,
and so kept a large bullion reserve in the country.
" Of course the Bank directors might have been wise
enough to act as promptly and wisely without any legislation. But before the Act of 1844 they did not do so.
We have, rightly or wrongly, but by incurable custom and

217

National

Monetary

Commission

habit, committed the custody of the Bank reserve of the
country to a single establishment. Without the Act of
1844 we should have to rely on their discretion only; but
the Act of 1844 makes the danger of neglecting a drain of
bullion so tremendous and so palpable that no Bank
directors can neglect it.
" But this advantage of the Act of 1844 is purchased at
the cost of three great evils:—
" 1. That a panic is necessarily aggravated. It is absurd
to talk of the present state of the money market as having
been caused by the Act of 1844. If it had been it would
have been cured by the Treasury Letter and the suspension
of that Act. But it has not been so cured. The profound
distrust created by diffused bad business still exists. But
the Act of 1844, for a day, engendered artificial fear. As
we have shown, the auxiliary credit currency, the currency
of banking credit, having been impaired and injured,
more notes, more primary credit currency, is wanted to
supply its place. On what is called "Overend's Friday,"
the want of such currency was palpable, and it was given.
The Act of 1844 is responsible not for the present want of
credit, but for the difference between the acute agony
which preceded the relief from the Treasury and the slow
suffering which we still feel. Certainly, Peel's Act is a
legal ligament which inflames panic into frenzy.
" 2. What is of little consequence in comparison, but yet
is of some:—The Act of 1844 makes the quarterly payments
of the dividends and the salaries very serious matters,
whereas otherwise they would scarcely be felt. The
banking reserve being isolated, any considerable amount

218

The

English

Banking

System

of tfotes withdrawn from it, even for internal purposes,
makes a marked change, and unless the matter is most
delicately managed by the Bank, and most heedful preparations are made beforehand, the rate of interest is raised
unnecessarily. Whether a few more notes or not go out
to the public is immaterial if we make up the account in
the "old form," or as the accounts of the Bank of France
are made up; but the loss of those notes at critical instants,
is made most important by the Act of 1844.
" 3 . There is a danger from Sir Robert Peel's Act we now
experience for the first time; its suspension is liable to
cause foreign discredit. And this defect is most serious.
The good of the Act of 1844 is that it compels the directors
to raise the rate of interest, and so attract money from
abroad. The high value of money makes foreign nations
lend it to us. But as no similar legislation to the Act of
1844 prevails out of England, foreigners are puzzled by
the frenzy it excites, and the necessity of an extra legal
intervention to allay it. They fancy that cash payments
have been suspended,—our Foreign Office has to write a
letter to explain the matter. As England in times of dear
money is a systematic borrower, lives on international
credit, the existence of an Act which must at such times
often be suspended, and which, when suspended, creates
foreign suspicion, is a serious new difficulty. We never
felt it before, because we never acted so well before,—never
raised the rate of interest so high before.
" Such are in their barest form the defects and the merits
of the Act of 1844. We have stated them in the simplest
and shortest way of which they are capable, in order that

219

National

Monetary

Commission

the practical men of business for whom we are writing
may recognize the truth of what we say by the plain
testimony of their own experience."
Besides the remarks in the "Economist" newspaper as
to the danger of causing discredit of this country abroad,
mentioned above, it is well to refer to the fact that "The
«
circular issued at this time by the Earl of Clarendon then at
the foreign office, in which it was stated t h a t ' Her Majesty's
Government have no reason to apprehend that there is
any general want of soundness in the ordinary trade of
this country which can give reasonable ground for anxiety
or alarm either in this country or abroad,' only served to
increase the distrust felt by foreigners."
(History of the Bank of England by A. Andreadfes,
professor of political science in the University of Athens,
p. 361.)

220

CHAPTER

IV.

EXTRACTS FROM EVIDENCE AND REPORTS OF COMMITTEES
OF THE HOUSE OF COMMONS, 1832, 1840, 1848, AND HOUSE OF
LORDS, 1847-48, ON THE DIVISION OF THE DEPARTMENTS.

The extracts referred to above give an outline of the
history of the circumstances which led up to the division
of the issue department and the banking department of
the Bank of England and of the reasons which caused
permission to be given for the suspension of the Act of
1844 in the year 1847. They are taken from various
reports of Committees of the House of Commons and
House of Lords and from the evidence given before those
Committees. Among these I have particularly consulted
the Report and Minutes of Evidence taken before the
Secret Committee of the House of Commons on the Bank
of England Charter (ordered to be printed August 11,
1832), the Select Committee of the House of Commons on
Banks of Issue (ordered to be printed August 7, 1840), the
Secret Committee of the House of Commons on Commercial Distress (ordered to be printed June 8, 1848), Appendix to the last (ordered to be printed June 8, 1848, and
August 2, 1848), and the Report from the Secret Committee of the House of Lords on Commercial Distress,
session 1847-48 (ordered to be reprinted February 17,
1857). The best contemporary information as to the
history of the country at this period from a commercial
point of view is to be found in these Reports. The Enquiry
made by the Committee of the House of Lords is the most
complete. The quotations I have given are scattered

221

National

Monetary

Commission

through the Reports and Evidence given to the Committees of both Houses of Parliament. These form several large
volumes, but I have endeavored to arrange the quotations
so as to give as far as I can a connected statement of the
events which led up to the Crisis of 1847 and of the influence which the Division of the two Departments of the
Bank of England had on the business of the country at the
time. The papers I have prepared will, I hope, put before
the Members of the National Monetary Commission as
complete a history of these events, in a short compass, as
can be given. I have made a memorandum before each
separate quotation from the Evidence, of the name of
the Questioner, and of the person who gave the answers,
so as to enable any reader who desires to continue the
investigation to refer to the original documents. The
numbers appended to each question and answer are those
which occur in the original Parliamentary Paper. There
have been no similar Enquiries made by either House of
Parliament after any subsequent Crisis.
EXTRACT FROM EVIDENCE BEFORE SECRET COMMITTEE ON
BANK OF ENGLAND CHARTER, HOUSE OF COMMONS,
1832.

(Questioner, Viscount Althorp; the answers are from
Mr. John Horsley Palmer, then Governor of the Bank of
England.)
72. What is the principle by which in ordinary times
the Bank is guided in the regulation of their issues?
N O T E . — T h e advantage of keeping the Bank of England free from t h e
control of the Government is clearly expressed in the evidence of Mr. John
Horsley Palmer, a t that time governor of the bank, in his answers 551-557,
part of the evidence given before the committee of the House of Commons
in 1832, on the charter of the Bank of England.—R. H . I N G U S PALGRAVS.

222

The

English

Banking

System

The principle, with reference to the period of a full
currency, and consequently a par of exchange, by which
the bank is guided in the regulation of their issues (excepting under special circumstances) is to invest and retain
in securities, bearing interest, a given proportion of the
deposits, and the value received for the notes in circulation, the remainder being held in coin and bullion; the
proportions which seem to be desirable, under existing
circumstances, may be stated at about two-thirds in
securities and one-third in bullion; the circulation of the
country, so far as the same may depend upon the Bank,
being subsequently regulated by the action of the Foreign
Exchanges.
73. By the circulation of the country, do you mean the
whole circulation of the country, and not the country
circulation ?
The whole circulation of the country.
74. When you say that as a general principle you think
it desirable to have one-third of bullion in your coffers,
against your circulation, you mean to include in that
circulation not only your paper out, but all deposits,
whether of Government or individuals ?
Yes.
75. In short, all liabilities to pay on demand?
Yes.
76. And you hold the liability to pay on demand arising
from a deposit, to be an equivalent to a note out ?
I hold it to be that sort of liability which the Bank are
bound to provide for by a reserve of bullion.
77. Do you think the liability arising from the deposit
to be more dangerous to the Bank as to sudden calls, or
less dangerous to it than the same amount out in paper ?
Less dangerous.
(The questioner, as before, Viscount Althorp. Answers
from Mr. John Horsley Palmer.)
76651—10

223

National

Monetary

Commission

551. You stated in your evidence, that you think a
single establishment would be better for the management
of the circulation of the country, than having notes issued
by different establishments; if that be the case, do you
consider that that single establishment ought to be a commercial company, independent of the Government?
I do.
552. Will you state the reason for that opinion?
Because it has the power of giving that commercial aid
which I have alluded to in the explanation I have offered
to-day.
553. Why would it have the power of giving commercial
aid, being independent of the Government, which it would
not have if it were not independent of the Government ?
I imagine that a commercial bank, formed as the Bank
of England is, has the power, from the constitution of its
body, of offering assistance to the commercial world which
no political bank could offer.
554. Do you think that if the Bank was connected with
Government, the power of granting commercial aid, in the
way you have described, would be liable to abuse?
If the Bank is formed of commercial individuals, as the
Bank of England now is, with a capital totally unconnected with the Government, it appears to me to answer
every purpose that is desired.
555. If it was a Government bank, would it have the
same facility of giving aid in cases of commercial difficulty,
that a commercial body, like the Bank of England has?
I do not think that a bank formed of political individuals, or of commissioners, would have the same general
knowledge of the commercial transactions of the country,
as a body formed of commercial persons.
556. You think, then, that a knowledge of individuals
that apply for aid, which a commercial body possesses, is

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essential in order to enable them to give commercial aid
properly in times of difficulty ?
I think so.
557. Do you think it is also important that that aid
should be afforded by a body independent of any political
connections or considerations ?
I do.
EXTRACT FROM REPORT OF T H E COMMITTEE OF T H E SELECT
COMMITTEE OF T H E HOUSE OF COMMONS ON BANKS OF
ISSUE, 1 8 4 0 .

I need not quote in detail the evidence given before this
Committee, as the Report sums up the whole question as to
this division of the two departments with the following
words:
In the course of their inquiry into the management of
the affairs of the Bank of England the attention of your
committee has necessarily been directed to the principle
by which it was stated in the evidence taken before the
Bank Charter Committee in 1832 that the Bank was in
ordinary circumstances guided in the regulation of its
issues. The principle has been restated to Your Committee,
in Mr. Horsley Palmer's evidence, in the following questions and answers:
EXTRACT FROM EVIDENCE, COMMITTEE OF HOUSE O F COMMONS ON BANKS OF ISSUE, 1 8 4 0 .

[The questioner was Mr. Charles Wood, afterwards Lord
Halifax; the answers were from Mr. John Horsley Palmer,
a Director and sometime Governor of the Bank of
England.]
1142. As it was mainly your evidence given before the
Bank Charter Committee in 1832, which contained the

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exposition of the principle by which in ordinary times the
Bank is guided in the regulation of its issues, will you have
the goodness to restate that principle to the Committee ?
I will restate it in as nearly the same words as I can.
The principle, with reference to the period of a full currency, and consequently par of exchange, by which the
Bank has been guided in the regulation of its issues,
always excepting special circumstances, has been to retain
an investment in securities, bearing interest, to the extent
of two-thirds of their liabilities, the remaining one-third
being held in bullion and coin; the reduction of the circulation, so far as may be dependent upon the Bank being
subsequently solely affected by the foreign exchanges or
by internal extra demand.
1143. Did you not also state it as desirable, in ordinary
circumstances, that the securities should be retained at
nearly the same amount ?
Yes; the object of retaining a fixed amount of securities
by the Bank at the period alluded to and continuing it
afterwards, so far as may be practicable, is to throw the
action of the increase or decrease in the circulation upon
the public, with reference to the state of the foreign
exchanges, in the import or export of bullion.
1144. Are the answers which you have now given a fair
exposition of the principles upon which the conduct of the
Bank has been regulated since the period of the renewal
of its charter ?
I should say certainly, always taking into consideration
the extraordinary circumstances that have intervened.
Your committee would upon this point wish to call the
attention of The House to the evidence of the two Bank
Directors who have been examined, Mr. Horsley Palmer
and Mr. Norman, from which it appears that in several
instances since 1832 the rule then laid down has not been

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Banking

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adhered to; and doubts have been expressed as to the
soundness of its principle, as applicable to the Bank of
England, from its mixing up deposits and circulation. It
appears, however, at the same time, from the following
questions and answers in Mr. Norman's evidence, that the
Bank Directors conceive that this rule has received some
sort of legislative sanction, in consequence of which they
feel bound to adhere to it, as nearly as circumstances will
permit, and that on a particular occasion they were fettered by this impression:
1890. Referring to the accounts of the Bank, does it not
appear that the drain, in the first quarter of 1839, fell
almost entirely on the deposits of the Bank, and in no
degree upon the circulation ?
I believe that it fell almost wholly upon the deposits.
1891. The effect, then, which you anticipated in a former
part of your evidence, from any reduction of circulation
during a drain, did not take place during that quarter ?
No, not to any considerable extent.
1892. Would it not have been expedient that the Bank
should in that quarter have taken some further measures
for the reduction of the circulation, looking to the rapid
drain which was going on ?
The Bank considered itself at that time bound to adhere
as nearly as it could to the principle of holding a fixed
amount of securities, that principle having been to a certain extent recognized by the legislature and the public;
but, if I am asked now, with my present experience,
whether it would not have been wise in the Bank to have
taken earlier measures, I must say that I think it would
have been wise so to do.
Without entering into the question either of the soundness of the rule, or of the degree of sanction which it may

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be supposed to have received from the Legislature, your
Committee are clearly of opinion that such an impression
on the part of the Directors of the Bank of England ought
not to prevent them from adopting any other principle of
management which, after their further experience, and
upon mature consideration, they may consider to be
better adapted for the primary object of preserving, under
all circumstances, the convertibility of their notes.''
AUGUST 7,

1840.

EXTRACT FROM EVIDENCE, SECRET COMMITTEE ON COMMERCIAL DISTRESS, HOUSE OF COMMONS, 1 8 4 8 .

[The next occasion when these questions came under
notice was after the crisis of 1847. The quotations which
follow are from the evidence given before the above-named
committee. The questioner was Mr. James Wilson, the
founder of the Economist newspaper; the answers by
Mr. S. Jones Loyd, a leading Banker in London.]
5206. Seeing that formerly the Bank was obliged to pay
its notes in bullion, if the Bank had paid proper attention
to the obligation that it had to pay those notes, and not to
stop payment, would not the Bank's holding at all times a
sufficient reserve of gold practically have had the same
operation upon the action of the Bank as the operation of
the Act of 1844?
The gist of the question turns entirely upon the supposition involved in it, viz, that the Bank paid proper attention to the obligation which it had to pay its notes, and
under that supposition it is perfectly true that the operation would be the same as under the Act of 1844; a n d that
at once brings out the distinction between the Act of 1844
and the previous system. The Act of 1819 ordained specie
payments, but it took no measures toward securing or
carrying out that ordinance. Then the Act of 1844

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Banking

System

rendered compulsory the measures which were necessary
for securing the convertibility of the notes; if, therefore,
you put a case which involves the supposition that the
Bank previously did all that it was right for them to do
to carry out the Act of 1819, then upon that supposition
the course of things preceding the Act of 1844 will be
identical with the course of things under the Act of 1844;
but we had repeated experience that that could not be
relied upon, and that the Bank repeatedly failed in doing
what was wise and necessary, and that caused the passing
of the Act of 1844. The Act of 1844 is based upon the
assumption that repeated experience had proved that that
which it was wise and necessary to do in order to secure
specie payments had not been done, and it was passed to
secure that henceforth it should be done,
5207. Then the Act was passed with a view to make the
Bank of England do, under the Act of Parliament, that
which they had not formerly done, in the exercise of a
wise discretion ?
It was passed for the purpose of securing by law the
proper course being taken for protecting the convertibility of the note, which we had found, by previous
experience, could not be safely intrusted to any discretionary action.
EXTRACT FROM EVIDENCE, SECRET COMMITTEE OF THE
HOUSE OF LORDS, COMMERCIAL DISTRESS, 1 8 4 7 - 4 8 .

[The Questioner was the Lord President, Henry, Marquess
of Lansdowne; the answers by Mr. John Horsley Palmer,
a Director of the Bank of England, and formerly Governor.]
730. The Act of 1844 prescribes the same Rule of Action
to the Bank whether the Foreign Exchanges are in favor
or whether the Foreign Exchanges are against the
Country ?
Certainly.

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Commission

731. Do you, from your Experience connected with this
Subject, conceive that it is defensible in reasoning or
maintainable in Practice that in managing the Bank the
same Rule should be applied to the Case whether the
Foreign Exchanges be favorable to the Country or
adverse to the Country ?
I think it is always in the Power of the Bank to protect
itself against a Foreign Demand, but it is totally impossible
to protect itself against an internal Demand.
732. The Question is with respect to the Restriction
imposed upon your Issues for the Accommodation of the
Public, whether you think that it is defensible in Theory
or maintainable in Practice that you should have the
same Rule in managing the Bank when the Exchanges
are adverse and when the Exchanges are favorable ?
Certainly not.
733. Then in that respect you consider the Act of 1844
to be defective ?
Manifestly defective.
EXTRACT FROM EVIDENCE, SECRET COMMITTEE OF THE
HOUSE OF IvORDS ON COMMERCIAL DISTRESS, 1 8 4 7 - 4 8 .

[The Questioner was the Lord President, Henry, Marquess of Lansdowne; answer by Mr. James Morris, Governor of the Bank of England.]
32. Do you think that the Act began to have any Operation upon the practical working of the Bank when the
Distress of 1847 began ?
Mr. J. MORRIS. I think we worked the Bank upon the
System established by the Act of 1844 ever since 1840,
though the Accounts were mixed up, because there was no
Act of Parliament obliging us to separate them; but, for
our own Guidance, there was a Separation. But I maintain that it was not necessary for the Bank of England in
the Management of its Affairs to have this Act of Parlia-

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Banking

System

ment. I maintain that the Bank was bound to act upon
the Principle laid down in the Act even though the Act had
not existed. I stated so at the time the Act was passed.
But I have no doubt that the Government was right in
passing it, as a Security for the Public; but it did not
establish any new Principle.
EXTRACT FROM EVIDENCE, SECRET COMMITTEE OF THE
HOUSE OF LORDS ON COMMERCIAL DISTRESS, 1 8 4 7 - 4 8 .

[The Questioner was the Lord President, Henry, Marquess of Lansdowne; answers by Mr. John Horsley Palmer,
a Director of the Bank of England, and formerly Governor.]
740. Then does it not follow from the Evidence that you
have given that a totally different and opposite Mode of
Treatment ought to be observed in the Management of
the Currency in those Two cases, comprising a Foreign
Efflux and a Home Demand?
I consider that against Foreign Demand there is, as I
have already said, no Remedy so effective as an Advance
of the Rate of Interest. In the Case of a Home Demand,
there would be no just Cause for raising the Rate while
the Circulation might be maintained, and even increased,
by Accommodation given upon substantial and good Security. In case of a Home Demand, in a Time of Distress
of the Nature which occurred in October last, there is a
general Abstraction of the circulating Medium, and it is
to meet a Demand arising from that Abstraction that the
Bank necessarily is applied to, when it can, with perfect
Safety to itself, give the Assistance without increasing its
Rate of Interest.
741. Is not the Effect of the Act of 1844, under those
Circumstances, to deprive the Bank altogether of its free
Agency in giving that Accommodation which you think it
could under such Circumstances give with Safety to itself ?
Certainly.

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Commission

742. When you say "with Safety to itself," it is hardly
necessary to ask whether you imply by that the full
Maintenance of the Convertibility of the Notes ?
Certainty, always, excepting an internal Discredit of
Paper Money, against which nothing can protect the Bank.
QUOTATIONS FROM THE REPORT, SECRET COMMITTEE OF THE
HOUSE OF LORDS ON COMMERCIAL DISTRESS, 1 8 4 7 - 4 8 ,

pp. xxxii-xxxiii:
The Conclusion to be drawn from the Authorities and
Evidence cited in this and the preceding Sections is that
it is an Error to deal solely with the positive Amount of
Bank Notes in Circulation, excluding the disturbing Causes
-which may augment or diminish the Efficiency of those
Notes; that to apply one identical Rule to Cases where the
Exchanges are adverse, or are favorable, is an Error likewise ; that in both these respects the Act of 1844 is defective,
and that in consequence of these Defects it aggravated the
Distress of 1847, more especially in the Months of September and October, and that it must have a Tendency to
lead to the same Results hereafter whenever similar Circumstances shall arise. The Committee will conclude
this Branch of the Subject by the following Question and
Answer from the Evidence of the Governor of the Bank
(Mr. James Morris); questioner, the Lord President, Henry,
Marquess of Lansdowne.
148. In those Cases where the Demand for Gold arises
from an internal Panic, the Bank of England is restrained
in its Banking Operations by the Act of 1844 precisely in
the same Manner as it would be restrained if there was a
Demand upon the Bank for the Foreign Exchanges. Is not
that likely to cause an Aggravation of the Evil in the Case
of an "internal Drain?"
That was the Case in October. It is impossible to
legislate for a Panic. We all know that a Panic is so

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Banking

System

devoid of all Reason t h a t you cannot legislate beforehand
to meet it. I t was for t h a t Purpose t h a t the Government
issued the Letter as a Corrective at t h a t particular Moment.
E X T R A C T FROM

EVIDENCE, SECRET

COMMITTEE OF T H E

H O U S E O F L O R D S ON COMMERCIAL D I S T R E S S ,

1847-48.

[The Questioner was t h e Lord President, Henry, Marquess of Lansdowne; answers b y Mr. James Morris, Governor of t h e Bank of England].
293 (to Mr. Morris). On general Principles, w h a t are t h e
Causes of an Internal Drain for Gold ? Does it arise from
Money being in excess and Interest being low, or does it
arise from Money being deficient for t h e Purposes of the
Country, and Interest being high?
An internal Drain m a y arise from Distrust in t h e Country, or from an increased Demand caused b y an increased
W a n t for t h e larger Transactions of t h e Country.
294. Then, in these respects, an internal Drain and a
foreign Efflux depend upon directly opposite Principles ?
Yes.
295. Does not t h e Act of 1844 deal with these Two
Things precisely in t h e same manner ?
Yes.
EXTRACT

FROM

E V I D E N C E , SECRET

COMMITTEE

H O U S E O F LORDS ON COMMERCIAL DISTRESS,

THE

1847-48.

[The Questioner was t h e Lord President, Henry, Marquess of Landsdowne; answers b y Mr. Samuel Gurney, a ]
Mr. Samuel Gurney was asked whether he had formed
any opinion on t h e causes which led to t h e monetary difficulties of the spring and a u t u m n of 1847. H e answered
t h a t he h a d done so, and was then asked.)
o Mr. Samuel Gurney was a leading bill broker in the city of London at
that time.

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Commission

1098. Will you be so good as to state that Opinion,
accompanying it by any Explanation which you may think
proper to give to the Committee ?
I was hardly prepared for so very general a Question,
but perhaps it will not be unsuitable for me to read a Document which I have prepared, not for this Committee, but
to concentrate my Ideas with reference to the Subject of
the Question. The Crisis in April, 1847, arose from several
Causes. The Failure of the Potato Crop and harvest in
1846, leading to an enormous Importation of Food coming
upon an excited State of Price and Transaction, aided by
the Bank canvassing for Discount and fomenting Transactions under the new Principle that in the Banking Department they are to act on the same Principle as private
Bankers, may be considered as the Causes of that Crisis.
These led to an Extent of Demand upon the Bank for
Discount and otherwise, the yielding to which led them
beyond the Bounds of Prudence, seeing the early Payment of the Dividends was at hand. Under the Currency
Act they found themselves under the Necessity suddenly
of not only withdrawing their usual Accommodation by
way of Discount, but of calling in with a severe and unrelenting Hand the Loans they had made upon the Security
of Bills, Exchequer Bills, etc. The Suddenness and Severity of this Change was forced upon the Bank by the Currency Act. Had it not been for that, they would have
spread over Months what they felt themselves compelled
to do in a few Days, to the serious Derangement of the
Money Market and to much alarming Disaster. It is
queried, Was this Crisis owing to the Currency Act ? I
think it cannot be fairly laid to the Act only, but to the
Causes before specified. It may, however, with Truth be
asserted, that the Force of it and the Evils of it were
much aggravated by the Effect of this Act in the Course
of Action it forced upon the Bank.

234

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System

EXTRACT FROM EVIDP^NCE, SECRET COMMITTEE OF THE
H O U S E O F L O R D S ON COMMERCIAL D I S T R E S S , 1847-48.

[The Questioner was The Lord President, Henry, Marquess of Lansdowne; answers by Mr. George Carr Glyn,
M. P., a leading Banker in t h e city of London a t t h a t time.]
1648. Will you be so good as to state what, according
to your Opinion, those Causes were, distinguishing those
which more particularly affected the Pressure which
occurred in April, and those which affected the Pressure
which occurred to a still greater E x t e n t , later in the Year?
I consider t h a t the Pressure which occurred in April,
1847, arose principally from the large Importation of Corn
and other necessary Articles of Food, and I consider also
t h a t the Foreign Exchanges have been affected by the
Operation of those Causes, the Pressure in point of fact
was necessary, and was carried only to the E x t e n t which
was required for t h e proper Readjustment of t h e Foreign
Exchanges. The Foreign Exchanges were readjusted, and
in t h e course of t h e A u t u m n set strongly in favor of this
Country. The harvest turning out very good in the
months of August and September, large Failures occurred
amongst the Speculators in Corn. Those were the first
Occurrences of t h a t Description t h a t took place in this
Country; subsequently they were followed b y large Failures of other mercantile Houses. T h a t went on down to
t h e E n d of September, the Pressure gradually increasing,
b u t not to t h e Degree which it arrived at in t h e Course of
t h e following Month, when there was superadded to all
those Causes which had been operating before a great
Degree of Discredit and W a n t of Confidence throughout
t h e Country, which was very much increased by t h e
Failure of Banks in Liverpool and in other P a r t s of the
Country, and during t h e Week ending the 23d of October
b y a general Distrust t h a t seemed to operate amongst
nearly all Mercantile Classes, and was rapidly extending

235

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Commission

itself to the Banking Establishments throughout the Country, very much resembling, in point of fact, at that Time,
what occurred in the Year 1825. The other Symptoms of
1847 had been entirely dissimilar up to the Middle of
October, 1847; but in the last Week before the Issue of
the Government Letter the Symptoms of Want of Confidence which presented themselves were very much like those
which occurred at the End of 1825. There appeared a
Want of Confidence in the Country generally, which caused
Country Bankers to look for the assistance of their London
Correspondents, and which apparently, if it had not been
for the Letter of the Government, would have gone to a
very great Extent. In point of fact, the Difference between
the Two Periods of April and of October was extremely
striking. The Pressure of April was very soon over, and
the Bank did every thing within its power for the mercantile Body at the Time. Although they had been
obliged to restrict their Operations very much, yet they
attended to the Applications made to them, particularly
those from Liverpool and some other places. But the
Pressure that occurred in October last arose apparently
from entirely different Causes. It proceeded from an
apprehension on the Part of all mercantile Men that the
Want of Confidence was becoming so great that at last the
Reserves of the Bank would be driven down so very low,
that, in point of fact, Persons who were possessed of
property would not be able to convert that Property into
Bank of England Notes.
EXTRACT FROM REPORT, SECRET COMMITTEE OF THE HOUSE
OF LORDS ON COMMERCIAL DISTRESS, 1 8 4 7 - 4 8 .

[The Questioner was the Lord President, Henry, Marquess
of L,ansdowne; answers by Mr. Samuel Gurney.]
1164. What do you consider to have been the Purpose
of the Act of 1844?

236

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Banking

System

The Purpose of the Act of 1844 was to have our Currency on a sound Basis. Such is its Theory.
1165. Do you consider t h a t t h a t Purpose has been
effected ?
I t is m y J u d g m e n t t h a t t h e Act has failed in securing
Safety.
1166. Was t h a t the Purpose of the Act; was it ever
stated as such by high Authority ?
I think so, by t h e Promoters of the Bill, very strongly.
My Opinion at the Time was, t h a t it would have t h a t Effect.
I thought it was based on a right and sound Theory, and
t h a t it would p u t People so on their Guard t h a t it would
prevent Panic. But, though I am not prepared to
abandon the Act altogether, I am quite satisfied t h a t it
has very much aggravated Panic in Time of Difficulty, and
t h a t a relaxing Power must be had; t h a t Occasions will
occur when it must be relaxed.
1167. Can you define the Circumstances under which
such a relaxing Power could be safely confided to any
Authority ?
I do not think I can answer t h a t Question better t h a n
by giving a few general Explanations of the Panic of last
Autumn.
1168. Will you have the goodness to do so?
The Panic of April very soon passed away. I t was,
however, attended with great temporary Inconvenience,
yet it was not so prolonged as to produce Failures. As I
stated before, in the Beginning of August t h e Panic, which
spread through t h e A u t u m n and lasted till near the E n d of
the Year, commenced by t h e Failure of many Houses in t h e
Corn Trade. There was a sufficient Cause for these Failures, which were not owing to this Act at all. Alarm increased to the Pressure of other Houses; it shook Credit; and
other Houses which were in dubious Condition failed. Alarm
increased; great Depreciation in the Value of mercantile

237

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Monetary

Commission

Property followed, and also of funded Property. Afterwards the Pressure reached Houses that ought not to have
failed, Houses that had been fairly conducted, and were
solvent. Now, so far as this, I think the Act had not
much to do with it. The Amount of Bullion in the Bank
remained large, not less than eight millions Sterling.
About the End of September Alarm spread to a Fear of
getting Circulating Medium, in consequence of the Restriction of the Act. The Bank raised their Rate of Interest very
high; that increased the Alarm, and a State of extreme
Panic was the Consequence. Had it not been for the Alarm
the Notes in the Hands of the Public would have been
superabundant. We should have had a great Number of
Failures and a great Amount of mercantile Calamity at all
events, but we should not have had the same degree of
Calamity or Panic, neither would the Rate of Interest have
been so high. There was no real Cause that the Rate of
Interest should have got up to what it did. The Extent
of the Calamity was the Effect of the Act and the Act
only.
This evidence, given by Mr. Samuel Gurney, is quoted
in the Report,which continues: "Manyother Statements,
Authorities, and Illustrations might be given, exemplifying
the same Principles, and proving the evil Consequences of
disregarding them; but enough has been stated to prove,
in the Judgment of the Committee, that the Inflexibility
of the Rule prescribed by the restrictive Clauses of the Act
of 1844 is indefensible, when equally applied to a State of
varying Circulation; and that its Enforcement in 1847 was
an Aggravation of the Commercial Distress, and was therefore wisely set aside by the Authority of the Government
on the 23d and 25th of October." [1847.]

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Banking

stem

EXTRACT FROM REPORT AND EVIDENCE, SECRET COMMITTEE
OF T H E

HOUSE

OF IvORDS ON COMMERCIAL

DISTRESS,

1847-48, page xlviii.
[The Questioner was the Lord President, Henry, Marquess
of Lansdowne; extract from answer by Mr. G. C. Glyn,
M. P.]
1782. If I were to offer any Suggestion (which I should
not have ventured to offer if it had not been asked from
me by your Lordships) I should prefer leaving the whole
Responsibility of t h e Circulation in the H a n d s of the Bank
of England. I do not think there is much Advantage in a
double Responsibility divided between the Bank of England
and the Government. B u t I consider it would be well t h a t
the Bank Court should have in it certain Persons not
elected by t h e Proprietors, who should be appointed under
Act of Parliament for a limited Time, or in any other W a y
which m a y be deemed advisable, not immediately by the
Government or Proprietors, and not removable by the
Government, and t h a t they should have, not an absolute
Veto upon the Proceedings of the Bank Court, b u t t h a t if
they dissented from the Majority, their Reasons for t h a t
Dissent should always be submitted in Writing, and t h a t
they should be laid before Parliament, if Parliament saw
fit, from Time to Time. I think t h a t the Introduction of
these Commissioners and their Protests and Influence
would exercise a very wholesome Control upon the Body
of Governors, and at the same Time would not deprive them
of t h a t Power of which as representing the Proprietors
it would not be right t h a t they should be deprived.
1783. Would you add to those Alterations any Regulations with respect to the Management of the Currency with
a view to the Exchanges, or to any other Circumstances?
I should leave t h a t to the Court and to those Commissioners to determine as they saw fit from Time to Time.

76651—10

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Commission

1784. Do you consider t h a t those Commissioners should
be Persons not engaged in trade ?
I would rather they were not engaged in Trade. I t h i n k
you might find People of Experience enough not engaged
in Trade who were fit for the D u t y , b u t would not m a k e it
an absolute Condition of Eligibility.
1785. Do you mean t h a t they should be appointed for
Life?
Not for Life. I t is impossible to know beforehand how
far a Man may be fit for a Position of t h a t Sort, and therefore I would make the Appointment for Three Years, or for
some Period, and renewable.
EXTRACT FROM EVIDENCE, SECRET COMMITTEE OF THE
H O U S E O F L O R D S ON COMMERCIAL D I S T R E S S , 1847-48.

[The Questioner was The Lord President, Henry, Marquess of Lansdowne; answers by Mr. G. C. Glyn, M. P.]
1899. You have stated t h a t the Loss of P r o p e r t y a n d
the Diminution of Capital to the commercial Body in t h e
City of London in the last Year, even where there have
been no Failures, has been very considerable?
Very considerable indeed.
1900. Be;^ond anything you have witnessed in the
Course of your Life ?
Beyond anything in my Experience, certainly.
1901. l i a s not the commercial Credit of the City of
London also in Foreign Countries been very much injured?
Very much more t h a n I ever recollect it before.
1902. Which you consider a very unfortunate circumstance ?
Very detrimental.
1903. Supposing the Bank should consider t h a t it is
wise for themselves to act upon the Restrictions imposed
b y the Act of 1844, a n ( i t h a t they were not compelled b y

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Banking

System

Law to do so, would you impose upon t h e m a Restriction
to prevent t h e m from so acting ?
Certainly not. If they choose to take £14,000,000 as a
settled Point, and to act upon that, I have no Objection
whatever to their regulating their Transactions with t h a t
View; b u t if they should find, from an extraordinary
internal Panic, t h a t the £14,000,000 ought to be £15,000,000, I would give t h e m the Power of extending their
Issues, provided the Exchanges are in favor of this
Country.
1904. You would not deprive them of the Power of
rigidly acting upon the Principle established b y t h e Law
of 1844?
Certainly not. I have no Objection to their taking
£14,000,000 as the S t a n d a r d for their general System.
1905. If you think the Law as it now stands is liable to
so much objection, would it not be advisable to prevent
the Bank establishing such an objectionable System?
The Objection to the £14,000,000 Clause is, t h a t it is not
to be passed a t all under any Circumstances. If you leave
in the H a n d s of t h e Bank of England the Power of passing
that, the whole Cause of t h e Panic in October is removed,
according to m y View of its Causes.
1906. Will you state what you consider exactly to have
been t h e Cause of the Panic ?
The Cause of t h e Panic, in my opinion, was t h e Restriction to £14,000,000.
1907. The Public knowing t h a t the Bank could not
issue, even if they wished it, beyond £14,000,000?
Yes.

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EXTRACT FROM REPORT AND EVIDENCE, SECRET COMMITTEE OF THE HOUSE OF LORDS ON COMMERCIAL D I S TRESS, 1847-48, page 1. (Quotation from the report.)

In Conclusion, the Committee think it right to add, that,
whilst they feel deeply the Necessity of a sound System
of Legislation for the Bank of England, and for all other
Establishments entrusted with the Privilege of issuing
Notes used as Substitutes and Representatives of the current Coin of the Realm, they are far from suggesting that
it is upon Laws, however wisely framed they may be, that
Reliance can or ought exclusively to be placed. The best
Banking System may be defeated by imperfect Manage^
ment; and, on the other hand, the Evils of an imperfect
Banking System may be greatly mitigated, if not overcome,
by Prudence, Caution, and Resolution. In the Confidence
universally and justly placed in the Bank of England the
fullest Testimony is borne to the Integrity and good Faith
with which its great Transactions have been conducted;
and the Opinion of the Committee in this respect is best
shown in their Desire to see vested in the Bank a wider
Discretion than they possess under the Act of 1844,—a ^ls~
cretion which the increased Knowledge produced by Experience and Discussion, and in which the Bank of England
can hardly fail to participate, will enable them to exercise
to the Advantage of their own Corporation, and to their
own Honor, and to the permanent Benefit of the Public,
and more especially of the Commercial Classes of England.

242

CHAPTER

REMARKS ON THE BANK ACT OF 1844 BY THE LATE DR. N. G.
PIERSON, SOMETIME PRESIDENT OF THE BANK OF THE
NETHERLANDS.

After considering this evidence we m a y t u r n to Doctor
N. G. Pierson's history and criticism of t h e currency
theory and t h e banking principle and his remarks on t h e
Bank Act of 1844. These give so clear a statement of the
questions involved in t h a t Act t h a t I subjoin t h e m here.
Doctor N. G. Pierson was for some time President of t h e
Bank of t h e Netherlands. His practical knowledge of
banking renders his opinions t h e more valuable. H e says,—
" O n t h e one side stood the school of the Currency
Theory, on t h e other t h a t of t h e Banking Principle.
The former numbered among its adherents J O N E S LOYD,
better known as Lord O V E R S T O N E ; also N O R M A N and
TORRENS.
The latter school numbered T O O K E , W I L S O N ,
and F U I X A R T O N . The victory rested entirely with t h e
adherents of the Currency Theory, and it is on this theory
t h a t t h e English Bank Law of 1844 is based.
" T h e authorship of the currency theory is wrongly
ascribed to D A V I D R I C A R D O , although it is to him t h a t we
are indebted for t h e grain of t r u t h which it contains. T h e
nature of this theory will appear from w h a t follows.
"If, asks Lord OVERSTONE—who was t h e first to proclaim t h e currency theory—there be no bank notes in circulation in a country, can there ever be scarcity of metallic
money in t h a t country? Would it be possible, for instance, for the balance of payments of such a country t o
[N. G. Pierson: Principles of Economics, pp. 454-467.]

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become so unfavorable as to cause all t h e metallic money
and bullion to be exported ? The answer is, t h a t it would
n o t be possible; for, when money is scarce, its value rises,
and prices fall. And when prices fall, exports increase and
imports diminish, until there is sufficient money and bullion
in t h e country once more. A nation which does n o t use
b a n k notes can never, in t h e long-run, have too little
metallic money in relation t o other things. I t m a y be a
poor nation, certainly, b u t its capital will always include
such a proportion of coined money as shall be needful.
" I t is different with a country which uses b a n k notes as
well as coined money; for, in such a country, exportation
of t h e latter does not necessarily cause scarcity of money.
The balance of p a y m e n t s becomes unfavorable; considerable exports of gold t a k e place; b u t a t t h e same time,
b y granting credit, t h e banks greatly increase their
uncovered circulation. Will prices fall in this case too?
Will t h e balance of p a y m e n t s change and cause t h e
exported gold to return to t h e country? There is no
reason to expect t h a t it will, because no deficiency will
have arisen in t h e monetary circulation. I n t h e first of
t h e two cases described, t h e evil cures itself; in t h e second,
it grows more acute. W i t h a mixed circulation—that is,
with a circulation consisting partly of metal and p a r t l y of
paper—the whole of t h e metal m a y disappear without
causing any reduction in prices.
" W h a t then are t h e means which a country using b a n k
notes should adopt in order to prevent t h e whole of its
gold from being exported? T h e law should prevent t h e
banks from substituting paper for t h e exported m e t a l ; or,

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better still, it should compel them to reduce their uncovered
circulation in proportion to the exports of metal. Suppose t h e stock of money required in a country to be
represented b y the figure ioo, and to consist entirely of
gold; if a q u a n t i t y of this money corresponding to t h e
figure 10 were to leave t h e country, there would remain
90, consequently not enough to meet t h e demand, and this
of itself would cause prices to fall. B u t suppose t h e
needful stock of 100 to consist of 50 parts gold and 50
parts paper. In this case, if, while 10 parts of t h e metallic
money left t h e country, t h e paper circulation were
increased to 60, t h e total stock of money would still
remain a t 100, and therefore suffice to meet t h e demand.
And if a second 10 parts of t h e metallic money were to
leave t h e country and to be followed by a third and fourth
10 parts, while t h e paper circulation was increased, at
first from 60 to 70, then from 70 to 80, and then from 80
to 90, there would always be a sufficient stock of money
in t h e country, and the exported gold would not return.
This m u s t be prevented. A deficiency in t h e monetary
circulation m u s t not be met with paper. Measures must
be adopted t o prevent t h e possibility of t h e whole of the
specie and bullion being drained from a country, and t h e
bank notes of t h a t country thus becoming inconvertible.
" S u c h is t h e currency theory; now let us examine its
defects. First of all, it is not true t h a t a bank invariably
does wrong when it supplies a deficiency in the monetary
circulation by issuing notes. We forfeit one of the greatest advantages of a well-regulated banking system when
we conform strictly to t h e currency theory. Suppose, for

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instance, that a crisis has occurred, and that the demand
for money has greatly increased in consequence. Will it
not have a salutary effect if the bank of issue is able to
meet this demand, and would it not be the height of folly
to interfere with such action on the part of the bank?
Or, suppose that the corn crop has failed, so that it has
become necessary to import large quantities of grain for
home consumption. Is it not an advantage in such a
case not to have to part at a given moment with large
quantities of interest-bearing bonds, or cattle, or machinery, or other necessaries, in order to pay for the imports
of grain and to be able to pay for them in the meantime
by exporting precious metal, for which paper can be temporarily substituted ? Steps must be taken to ensure the
return of the exported metal; but this need not be done
immediately. A well-managed bank always has a larger
metallic reserve than it needs in ordinary times, and of
which it will therefore be able to spare a part in times of
emergency. When the time of stress has passed, the
bank will gradually restrict its credits, thus enabling its
metallic reserve to accumulate once more. In the meantime it will have rendered a great service to the community, for it will have mitigated the adverse effects of the
crop failure by enabling them to be spread over a more
extended period of time.
"There is a second mistake in the currency theory. It
is not true that, in a country where no bank notes are in
circulation, exportation of specie results in an immediate
fall in prices and consequently in an alteration in the
balance of payments. It would be so if bank notes were

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t h e only possible substitutes for specie; b u t bank deposits
also serve as substitutes for specie. I t has already been
shown, in the chapter on prices, t h a t bank notes and
bank deposits differ only in form, since both take the
place of specie when they are not covered b y a metallic
reserve. Let t h e needful stock of media of p a y m e n t be
represented by the figure ioo, and suppose it to be made
up of specie and b a n k deposits each to t h e extent of 50.
If specie be now exported to the value of 10, b u t the
banks at t h e same time grant credits to their depositors
to the same amount, how is the fall in prices to take
place, which the supporters of the currency theory declare
to be t h e inevitable result of the exportation of precious
metal from a country where no bank notes are in circulation? A bank of circulation issues notes payable to
bearer, with which people pay each other. A deposit
b a n k credits its depositors' accounts and the balances
produced in this way also constitute a medium of payment. Wherein does t h e difference lie? The difference,
we repeat, is one of form only.
" T h e exponents of t h e currency theory (with t h e exception, perhaps, of T O R R E N S ) never discerned this. Bank
notes are money, said they, and bank deposits are book
entries. B u t we are not concerned here with calling notes
and bank deposits by their right names: the question
is, w h a t functions they perform; whether both do not
supply t h e place of specie; whether both are not capable
of supplying a deficiency in the specie circulation of a
country where t h e cheque is a very common medium of
payment. T h e cliief error of Lord OvKRSTONB and his

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followers certainly lay in their not having understood
this clearly. Their doctrine was not founded on a true
conception of the bank deposit. Between the latter and
the bank note they sought to establish a fundamental
distinction which does not exist."
" T o the credit of their opponents, the "Banking Principle " men, it must be recorded that they did not fall into
this error. To them the closeness of the relationship between the bank note and the bank deposit was perfectly
clear, and they may be regarded as having rendered a
service in making it more widely known. If the controversy between the two schools had been waged round this
point alone, we should not have a moment's hesitation in
siding absolutely with the latter. But the adherents of the
"Banking Principle" have erred so egregiously on another point in the controversy that we find it difficult to
determine toward which of the two sides we feel most attracted.
"The point to which we allude relates to the question as
to how far a bank can bring itself and the community into
danger by an excessive issue of notes. The adherents of
the "Banking Principle" hold that no danger can be incurred by either, so long as the notes remain convertible.*
a

We ought not, however, to neglect to mention what GEORGE CLARE says
in his Money-Market Primer (London, 1893), page 14: " T o understand
how differently the note was then regarded, it must be borne in mind
that in those days a banker's circulation was his principal liability, and t h a t
deposits were, in comparison, but a very small item. In February 1820,
to give an instance, the circulation of the Bank of England amounted to
£23,000,000 and the total deposits to £4,000,000; while in February 1890,
the figures are: Circulation, £23,000,000; deposits, £35,000,000."
b The error stands out most clearly in FULLARTON, On the Regulation of
Currencies (London, 1844), more especially pages 63-65.

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"Should they cease to be so, then indeed too large a
quantity of them may get into circulation, just as may happen in the case of notes issued by the Government, and
declared legal tender by enactment. But if the bank
paper be convertible, how can it ever become redundant?
What the public has no use for it returns to the bank, whose
offices are always ready to accept the paper in exchange
for specie. A bank can only put a definite quantity of
notes into circulation; any notes which it issues in excess
of that quantity get returned to it under an iron law, as it
were. This is proved by statistics. When we consult them
we are surprised to find how little variation there usually
is in the amount of notes in circulation. It was by TOOKE
more especially that a clear light was brought to bear upon
this, and his conclusions have been fully verified by later
investigations. There is, indeed, a remarkable degree of
regularity in the demand for bank notes. We do not dispute the contention of the adherents of the "Banking
Principle/' that, so long as bank paper is convertible,
any quantity of it issued in excess of a certain sum gets
returned to the bank at once.
" I t is strange, however, that people should ever have
imagined that this constituted a safeguard against the
consequences of imprudent bank management. It is precisely in the return of the notes to the bank that the danger
lies. If the notes did not return, the bank that issued them
could never get into difficulties, The fact is, however,
that these institutions give rise to a very serious condition
of things if they issue notes to excess.

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'' For how do the notes return ? By repayment of advances? Do we learn from the statistics, which TOOKE
and others have compiled with so much care, that when a
bank, by granting credit too freely, issues paper in excess
of the requirements of trade, the public repays its outstanding loans, maturing bills are met and no fresh ones
are discounted, so that in this way the circulation is once
more reduced? Quite the contrary: the statistics show
that the redundant notes are offered in exchange for
Specie, or used in purchasing bullion from the bank, the
specie or bullion being then exported. In this way the
amount of the circulation continues the same, it is true,
but its components are no longer the same; "uncovered"
is substituted for ''covered" circulation, and the ratio
between metallic reserve and note circulation becomes less
favorable. This matter has already been explained,
but it is so important that we propose to discuss it here
once more.
" Besides loans out of its own capital, let us suppose that
the bank has granted advances to the amount of
£10,000,000; in addition, it has circulated £8,000,000 in
notes in return for bullion and specie. The bank has
now—
A covered circulation of
An uncovered circulation of

£10,000,000
8,000,000

Thus, its note circulation amounts to £18,000,000, against
which it holds a metallic reserve of £8,000,000. It grants
loans for a further £2,000,000, but the public does not
require more than £18,000,000 in notes; the extra
£2,000,000 put into circulation will therefore cause a
redundancy of money. It now becomes advantageous to

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export coin or bullion, and that coin or bullion is obtainable at the bank in exchange for notes. Certainly the
£2,000,000 in notes will now return to the bank in accordance with the "Banking Principle." But will this have
no effect upon the position of the bank ? Its circulation
will, before long, be made up as follows:
Uncovered
Covered

£12, 000, 000
6, 000, 000

"The note circulation will remain, as before, £18,000,000,
but instead of £8,000,000, only £6,000,000 in metal will
be held as a reserve against it. The bank may pursue
this course for a long time. It may increase its loans up
to £18,000,000, the amount of its note circulation remaining all the while at the old figure. But how will matters
then stand as regards metallic reserve; that is to say, as
regards the convertibility of the notes ? The whole of the
reserve will have been exhausted.
" TOOKB'S statistics plead against him instead of for him.
It is just because of there being a limit to the amount of
notes which a bank can keep in circulation that an
excessive paper issue becomes possible. For the paper
issue becomes excesswe from the moment that a disproportion exists between the amount of notes in circulation
and the amount of metal held in reserve against them.
" ' The question of banks of issue will always be misunderstood, and all discussions on the subject mere fencing
with big words, so long as people fail to realize that a
bank, when issuing paper, is simply an instrument in
the hands of the public' Thus wrote a Dutch adherent
of the "Banking Principle" several years ago.a So far as

a Die G I D S (1863), vol. iii, p. 39.

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concerns the amount of its circulation, a bank is undoubtedly an instrument in the hands of the public; but it is
not the instrument of the public in the matter of the items
which go to make up that amount, and it is these, more
especially, that one has to consider when judging whether
a note issue is excessive or not.
" We should not care to give our undivided sympathy to
either of the two schools referred to, but that of the
"Banking Principle" erred in a more dangerous manner
than its rival. If it had got the upper hand in England,
the regulation of the banking system in that country
would certainly have been far less minute in its character
than we now find it; the Bank of England would have
been allowed greater freedom of action, and it must be
admitted that this would have been productive of a certain
advantage in times of crisis. But would this freedom of
action never have been abused? Would the events of
1826 and 1839 never have repeated themselves? WALTER
BAGEHOT 0 was no adherent of the " Currency Theory," and
consequently no admirer of the Bank Act passed in 1844
under the influence of that theory; and yet he has frequently said in his journal, The Economist, when he was
its editor, that although the Act of 1844 had not prescribed
any excellent rules, still it had not left it to the discretion
of the Bank Directors to determine what rules should be
observed in the management of the Bank, and that this
was one of its good features.
a
Note by Sir R. H. Inglis Palgrave. The expression of Bagehot's opinion
on the working of the Bank Act in the crisis of 1866 will be found in the
quotations from " T h e E c o n o m i s t " on page 217.

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3.—The Bank Act of 1844.

" L e t us now examine t h e main features of t h e Act of
1844—the " Peel Act," as it is usually called. At first its
provisions related t o t h e Bank of England alone, b u t in
1845 clauses were added having reference to the other
banks of issue. We will begin with those relating to the
Bank of England. As a justification of t h e detailed treatment accorded to this p a r t of our subject, it is to be
observed tlmt t h e London money market is of great
importance and t h a t its condition is, as a rule, reflected in
the Weekly R e t u r n of the Bank of England. The Return
owes its very peculiar form to t h e provisions of t h e Act of
1844.
" T h e principle accepted is as follows. The Bank issues
notes, and it does other banking business as well. In
respect to t h e former it has no freedom of action whatever; in respect to t h e latter its freedom of action is complete. In other words, t h e Bank is a b a n k of issue and
also a bank of deposit. In t h e former capacity it is bound
b y strict rules; in t h e latter it m a y do as it pleases.
" The B a n k consists of two departments, an Issue Departm e n t and a Banking Department. The Issue Department
is a b a n k of issue pure and simple; a b a n k of issue, however, which m u s t not allow its paper issue to exceed a certain figure. This department m a y issue notes u p to any
figure it pleases, so long as t h e issue is effected in exchange
for gold; b u t it m u s t not grant credit beyond a certain
m a x i m u m figure. This maximum, originally fixed at
£14,000,000, is increased whenever any other bank of
issue in England or Wales abandons or forfeits its right
to issue notes. The increase amounts to two-thirds of
the a m o u n t of the uncovered notes which such bank was

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authorized to have in circulation. In this way the maximum has by now (February, 1896) grown to £ 16,800,000.a
Thus the sum of £16,800,000 may be invested in interestbearing securities by the Issue Department. The Act contains no provisions restricting the Department in its choice
of investments. It may buy bonds and shares, discount
bills, or grant loans, according to its discretion.
" But the sum standing at the disposal of the Issue Department for all these purposes is smailer than it appears.
There is an inalienable Government Debt amounting to
£11,015,000, in which the bulk of the £16,800,000 is
invested. The balance amounts to £5,785,000 b only.
Let us see what becomes of that balance. The artificial
character of the whole system will thus reveal itself to us.
"The Issue Department gives this sum to its sister
branch, the Banking Department, in exchange for
£5,785,000 6 in various securities. These securities appear
in the Bank Return under the heading of "Other Securities,' ' immediately below the item "Government Debt."
Both Departments benefit by this exchange: the one, inasmuch as it secures an investment for the balance of its
£16,800,000; the other, inasmuch as it obtains the disposal
of bank notes to the amount of £5,785,000^ It can employ
these in its own business, like any other deposit bank that
has borrowed money from another institution. c The transaction might also be described by saying that the Banking
Department re-discounts a part of its bills of exchange with
the other Department, transfers to the other Department a
part (viz, £5,785,000)b of its loan business.
a

T h e amount July, 1910, is £18,450,000.
b This figure refers to the issue in February, 1896.
c
Dr. Pierson does not appear to have been aware that the profit on the
amount of the Fixed Issue in excess of that authorized by the Act of 1844
is, in accordance with Sec. I X of the Act, allowed to the public.

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" B u t the Banking Department receives other notes as
well. It acts as banker for the Government, to whom it
generally owes from £4,000,000 to £9,000,000 ("Public
deposits"), and for many private individuals and corporations, to whom it owes variable amounts ("Other Deposits ") .a Of all these sums it invests just as much or as
little as it deems most prudent, and it does so in all kinds
of ways. It buys Government securities, it discounts bills,
and grants loans (the amount due to it in respect of such
discounts and loans appears in the Return under "Other
Securities"), but, like a prudent banker, it always takes
care that a part of the notes which it receives are kept
and not invested. For, apart from the comparatively
small quantity of specie always kept on hand in the
Banking Department, the liabilities of that branch are not
secured by any metallic reserve. If the Government or
any private depositor draws on the Bank for a portion of
what it owes them, the Banking Department can only
make use of its stock of notes to meet the demand. It
would apply in vain for assistance to the Issue Department.
That branch has already given it all the paper which it is
authorized to circulate otherwise than in exchange for
a The "Other Deposits," also called " P r i v a t e Deposits," amounted to
£25,000,000 sterling a t the end of 1885, and to £48,500,000 sterling at the
end of 1895. They consist to a very large extent of moneys belonging to
private banks, it being the custom of such banks to deposit with the Bank
of England such moneys as they are neither obliged to retain for immediate
use a t their own offices, nor disposed to put out at interest. How far the
item " P r i v a t e deposits" is made up of the deposits of private banks it is
impossible to say, for since 1877 it has not been the practice of the Bank
of England to publish this figure; the amount must be very large, however.
In 1877 all except £11,000,000 of the " P r i v a t e Deposits" consisted of deposits of private banks.

76651—10

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gold, and must not issue a single pound sterling beyond
that sum. The foregoing shows the principle adopted—
Lord OvERSTONE'S theory put into practices
« " F o r the convenience of the reader we subjoin a balance-sheet of the
Bank of England, with a few explanatory observations. This is the weekly
Return for December 24, 1894. When comparing it with corresponding
weekly returns issued by foreign banks we must bear in mind t h a t assets
always appear on the right and liabilities on the left-hand side of an English
balance-sheet. In foreign balance-sheets the reverse order is adopted.
ISSUE DEPARTMENT.
Notes Issued

£58,367,000 Government Debt
£11,015, 000
Other Securities (the
securities
taken
over by the Bank in
exchange for notes).
5, 785, 0 0 0
Gold coin and bullion. 41,567, 0 0 0
58, 367, 000

58,367, 0 0 0

BANKING DEPARTMENT.
Securities
Proprietors' capital
£14, 553, 000 Government
(to be carefully disRest (undivided proftinguished from the
it)
3,090,000
Government Debt of
Public deposits
9,45!, ° ° °
the Issue DepartOther deposits
48, 498, 000
ment)
£14,936,000
Seven-day
and other
Securites
Bills
118, 000 Other
(chiefly discounted
paper)
26,616,000
Notes
32,093,000
Gold and silver coin _ _
2, 065, 000
75, 710, 000

75, 710,000

[DECEMBER 24, 1894.]

'' The expression Notes Issued would be quite wrong if it had reference to
the Bank as a whole, for, as t h e above s t a t e m e n t shows, no less t h a n
£32,093,000 of t h e total sum of £58,367,000 were in stock a t t h e Bank,
so t h a t the real amount of t h e Notes Issued was only £26,274,000. But
t h e expression is used only with reference to t h e Issue Department, which
is regarded as having as little concern with t h e affairs of t h e Banking
Department as if the latter were a separate corporation."

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"The stock of money in the Banking Department is
called the " Reserve/' a and probably no other banking
figure excites the interest of so wide a circle of persons.
Scarcely has the Bank issued its weekly Return, when the
amount of the "Reserve"—together, in most cases, with
the ratio between that amount and the deposits—is
telegraphed to nearly every part of the civilized world.
No paper, whose practice it is to report on the state of
the money market, fails to supply this item of information to its readers, and no wonder, considering how
important it is. Imagine the condition of the London
market if the "Reserve" were to give out! The notes of
the Bank of England might still remain convertible,6 but
the Bank would be unable to meet any demand for the
withdrawal of deposits, nor would it be free to increase
its credit business in the very slightest degree. This
would spell embarrassment for all those who had counted
upon receiving assistance from it. In ordinary times
sound bills of exchange are regarded almost in the light
of money, because money can always be obtained for
them. When people find themselves disappointed in
this respect, they are apt to become involved in serious
difficulties.
" The Peel Act had scarcely been in operation three years
when such a state of things very nearly came about. In
the autumn of the year 1847 a commercial crisis occurred
a The expression "Stock of Notes" is also used, it is true, but in that
case "Gold and Silver Coin" is not included.
& That is, assuming t h a t it would be permissible for the Issue Department
to cash the notes, even when the banking department was no longer able
to discharge its obligations, which, from the legal point of view, seems
doubtful.

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in England. The peculiar feature of a commercial crisis
is the strong demand for money which invariably accompanies it. Many people then dispose of their goods, and
prefer to do so for ready money. Having sold their goods,
they keep their money, as they have no inclination for
investing it. Owing to this, the demand for money is
increased in a special degree. At such a time a central
bank can render signal service, for, by reason of the unshaken confidence which it usually continues to enjoy even
in a crisis, it can easily satisfy the demand for money by
issuing notes. Under ordinary circumstances a bank,
when it increases its uncovered note circulation, diminishes
its stock of gold—that is to say, the metallic reserve which
it holds against those notes. But in a time of commercial
crisis the notes are simply kept and stored; at such a time
they serve more as an investment than as a medium of
exchange. By issuing notes extensively at such a time,
the bank causes no danger; on the contrary, it allays much
anxiety. As a rule, a crisis is nowhere so acute as in a
place where a central bank either does not exist, or is
hampered by too stringent rules in the matter of increasing its note circulation.
"The latter was the case in England in October, 1847,
and it then became evident how greatly the Peel Act had
hampered the action of the Bank; or rather, what a wonderful mixture of liberty and restraint the provisions of
that Act embodied. With regard to deposits the law
prescribes no rules whatever; the Bank is free to grant
loans on an extensive scale during the time preceding a
crisis, provided they be effected by crediting the bor-

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rowers' accounts in the books of the Bank, and not by
giving them bank notes. But when the crisis has set in,
and those who have accounts with the Bank apply for
notes to the amount standing to their credit, or ask for
new loans—this time in the form of notes,—loans which
the Bank could grant more confidently at such a time than
at any other, in steps the law and says that no single
uncovered bank note shall be circulated over and above
so and so many millions of pounds sterling.
" Needless to say, such a rule could not be strictly maintained when its harmful effects were felt. On October 25,
1847, the Government allowed the Bank, subject to certain
conditions, to increase, temporarily, its uncovered note
circulation beyond the statutory amount. Similar permission was again accorded on November 13, 1857, on
the occasion of another crisis; and once again, on May 12,
1866, after the failure of OVEREND, GURNEY & Co. Thus,
on three different occasions has the Peel Act been suspended, and on each occasion has its suspension put an
end to the crisis. What a curious law, one is tempted to
exclaim, which can only remain on the Statute Book
because the Government allows it to remain inoperative
at the most critical moments!
" B u t we judge the Peel Act too unfavorably when we
confine ourselves to observing how it operates in times of
commercial crisis. One good feature of the law is, that it
obliges the Bank to make proper provision for a metallic
reserve. Moreover, things which the Act should have
prescribed have been gradually brought about by custom.
Thus, although the Act lays down no rule concerning the

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Reserve of the Banking Department—that is to say, concerning the ratio to be maintained between that Reserve
and Deposits—-yet it is universally looked upon as the duty
of the Bank to see that that ratio does not, under ordinary
circumstances, fall below two-fifths. It is usually much
higher than this. a If the Reserve threatens to become
too low, the financial papers raise an alarm and remind the
Bank of its duty. The effect is salutary. The Act says
that the Banking Department shall not receive notes from
the Issue Department beyond a fixed sum, now £5,785,000 ;&
custom says that out of this sum and out of the notes which
the Banking Department receives from the public, that
department shall always keep in reserve an amount corresponding approximately to two-fifths of the deposits.
Thus law and custom together bring about a condition of
things which may be regarded as fairly satisfactory.
Since May, 1866, the Government has not had occasion to
sanction any suspension of the operation of the Peel Act."
The quotation from Dr. N. G. Pierson's " Principles of
Economics/' Vol. I, pp. 464-467, is instructive to us as
showing the opinion of a man who was both an economist
and a practical Banker on the working of the Bank Act of
1844. Doctor Pierson was for several years the President
of the Bank of the Netherlands, and must have known from
" o From 1844 to 1878 it averaged 39.4, but in recent times it has been
much larger. I t amounted to 44 per cent of deposits a t the end of 1892,
45 per cent at the end of 1893, 63 per cent at the end of 1894, and 58 per
cent a t the end of 1895
" F r o m 1881 to 1890 it was never less than £9,200,000, and amounted
on the average to £13,100,000.
• " & Amount stated as t h a t of the Other securities referred to in the figures
of the Issue Department given by Dr. N. G. Pierson, p. 252.

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experience that a Bank "when issuing paper is simply an
instrument in the hands of the public." Bank notes are
now no longer in England the means by which the ordinary
business of the country is carried on. They are valued as
the representatives of gold, and London being the principal
and practically the only free market for gold in Europe, is
naturally more exposed to demands for specie than any
other monetary center in the world. It is true that for
more than forty years " t h e Government has not had occasion to sanction any suspension of the Peel Act," but
the price which has had to be paid for this has been an
extremely high one, and the adoption of the arrangements
of the Act of 1844 cannot be recommended to any other
country.
That a suspension of the Bank Act has not taken place
since 1866 is due to the general forethought and care with
which the Directors of the Bank of England have conducted their business in times of pressure.

261

ENGLISH BANKING ORGANIZATIONS.
By ERNEST SYKBS.

(A) THE INSTITUTE OF BANKERS.

The Institute of Bankers, founded in 1879, is an association of individuals, not of banks, as in the case of the
Central Association of Bankers.
Its members consist of
1. Fellows: Elected by the council of the institute.
2. Associates: Who must have been not less than
ten years in the service of a bank, or being in
a bank are graduates of a university.
3. Certificated associates: Members who have gained
the certificate of the institute.
4. Ordinary members: Who must be on the staff
of a bank.
The number of members of all grades at the present
time (January, 1909) exceeds 7,250.
The primary object of the institute is " t o facilitate the
consideration and discussion of matters of interest to the*
profession, and, where advisable, to take measures to
further the decisions arrived at."
One of the earliest efforts of the institute in this direction was the codification of the laws of bills of exchange.
In 1881 the bills of exchange bill was drafted by Mr. (now
Sir Mackenzie) Chalmers on the instructions of the council,

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introduced in Parliament by Lord Avebury (then Sir
John Lubbock), and became law as the bills of exchange
act 1882. The act has been adopted in most British
colonies and to some extent forms the basis of the New
York negotiable instruments law.
In 1889 the factors act was similarly passed, mainly on
the initiative of the institute.
Among other matters which have been thoroughly
ventilated by the council of the institute may be mentioned the bankruptcy law previous to the act of 1883,
the condition of the gold coinage previous to the coinage
acts of 1889 and 1891, the bimetallic controversy, and
the gold reserve question.
At the present time the council, at the invitation of the
Board of Trade, has under consideration the question of
an international conference to consider the possibility of
a greater unification of the laws of bills of exchange in
different countries.
The institute has on many occasions acted as the representative of banking interests in facilitating arrangements with the board of inland revenue, the post-office,
and other government departments.
The means by which the consideration and discussion
of matters of interest are provided are chiefly by papers
read before the members at meetings held usually at
monthly intervals during the winter session, October to
May, and by the Journal of the Institute, published
monthly from October to June, inclusive.
The secondary object of the institute is " t o give
opportunities for the acquisition of a knowledge of the
theory of banking.''

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With this object lectures on technical subjects are
delivered in London and the chief towns of England and
Wales, followed by examinations, as a result of which
prizes are awarded to the most successful candidates.
Annual examinations for the certificate of the institute
are held, the subjects of examination being economics,
practical banking, commercial law, commercial arithmetic, English composition and banking correspondence, and bookkeeping. In 1908, 3,180 candidates
were examined in London and 379 other centers throughout the United Kingdom and the colonies. Prizes are
offered both in connection with the annual examinations
and also for the best essays received on certain subjects
announced yearly by the council.
In nearly all the leading banks the junior members of
the staff are encouraged to study the theory of banking,
not only by the offer of monetary grants, but also by the
increased chances of promotion to more responsible
positions which ensue from success in this direction.
There is a reference and circulating library on banking
and kindred subjects for the use of members.
The council invite questions dealing with the practical
working of a bank, which are answered through the
medium of the Journal of the Institute. These questions
with the council^ replies have been collected in a volume
the sixth edition of which will shortly be published. The
book has been very serviceable not only to individual
members, but also as a means of unifying and assimilating
banking practice throughout the country, and of formu-

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lating and expressing the custom of bankers as a part of
the "law merchant."
The government of the institute is vested in a president,
vice-presidents, treasurer, and council, the latter not to
exceed twenty-four in number, and meetings are held
monthly, or oftener if necessary. Elections for these
offices take place at each annual general meeting, at which
fellows, associates, and certificated associates are alone
entitled to vote.
The president is now (January, 1909) Sir Felix Schuster,
Bart., the governor of the Union of London and Smiths
Bank (Limited). The other officers are either directors,
partners, or high officials of banks, and are all fellows of
the institute.
(B) THE CENTRAL ASSOCIATION OF BANKERS.

The Central Association of Bankers was formed in
February, 1895, to unite the committees of the London
Clearing Bankers, the London West End Bankers, and
the English Country Bankers.
It consists at the present of 18 members, representing
the London clearing banks, 2 members representing the
West End banks, and 10 representatives of the English
country banks.
The scope of its work embraces all questions directly or
indirectly affecting the banking community, whether
arising from legislative proposals or practical working.
The association does not, however, attempt to intervene
in the internal management of the individual banks represented upon its committee, nor is it. in any sense a disciplinary body.

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The association is in close touch with the parliamentary
committee of bankers with the object of defending and
maintaining the interests of bankers in Parliament, but
it avoids any intervention in political matters except
where the interests of banks and bankers, as such, are
involved.
Among the legislative measures in which the association has recently interested itself are the bills of exchange
(crossed cheques) act (1906), drafted and introduced at
the instance of the association; the debenture and debenture stock bill (1907), drafted at the instance of the
association and introduced in the House of Lords by the
chairman, Lord Avebury. The bill was afterwards incorporated in the companies act (1907), section 15.
Other acts upon which the influence of the association
has been brought to bear in various directions are the
companies acts (1900 and 1907), the public trustee act,
the limited partnership act, and the prevention of corruption act.
Other questions which engaged the attention of the
association have been gold reserves, irregular forms of
cheques, municipal borrowing, the custody of valuables,
and stamp duties, more especially in 1902, when an extra
stamp duty on cheques was proposed and a deputation
of the association attended on the Chancellor of the
Exchequer.
The association has no regular times of meeting nor
any archives. Memoranda are issued from time to time
to the members only, dealing with current topics, and a
yearly report.

266

THE LONDON BANKERS CLEARING
HOUSE.
By R O B E R T MARTIN HOLLAND,

Honorable Secretary of the London Bankers Clearing House.

The exact origin of the London Bankers Clearing House
will probably never be determined, for, like other institutions whose purpose has been to save time and trouble, its
system appears to have been gradually evolved.
The Goldsmith Bankers at the end of the seventeenth
century, who combined the care of their customers, money
with the manufacture of silver plate, apparently gave each
of their depositors a deposit note acknowledging the whole
amount deposited.
When the customer wished to draw some of his money,
this note was returned and again issued to the customer
with an indorsement noting the amount drawn and the
balance left; or if desired, a depositor could transfer the
whole by indorsement.
The next improvement in method was for the depositor
to take several receipts of convenient amounts instead of
only one; and this was shortly followed by each banker
issuing his own notes payable on demand.
The first printed bank notes were probably those of
Messrs. Child & Co., which were issued in 1729.
They bore a vignette of Temple Bar in the left-hand
corner and were worded much in the same manner as the
notes of the Bank of England are to-day.

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A few years later, in order to suit their customers' convenience some of the bankers began to issue printed
checks to be filled in by the customer himself. The name
of the drawee, the amount that they were drawn for, and
the drawer's signature being all that was necessary to
render them valid instruments. Such checks for the year
1762 are in the possession of Messrs. Child.
With the growth of the check system, each banker would
daily find himself in possession of a number of drafts for
the credit of his customers that needed collection at the
offices of other bankers. This would necessitate each
bank sending out one or more clerks on what became
known as " walks " to obtain cash or notes for these drafts
from the houses on which they were drawn.
As in London alone there were some fifty or more private
firms carrying on a banking business this necessitated a
considerable amount of work and was attended with grave
risk of robbery.
It is probable,' therefore, that arrangements were made
by some of the bankers, as it is still done in some country
towns, to meet at one bank one week and at another the
next for the purpose of exchanging checks.
But in consequence of the number of the London bankers
this method would prove awkward, and about the year
1770 we find that the walk clerks from the city and West
End banks had made a practice of meeting at lunch time
at a public house called the Five Bells in Dove court, Lombard street, close to St. Mary Woolnoth Church, and not so
very far from the site of the Bankers Clearing House of
to-day. Here in the public room, or according to tradition

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on the posts in the court outside, each day after lunch a
rough system of exchange of checks was carried on between
the clerks from each bank, the balances being settled in
notes and cash. This rough system of clearing grew to
such an extent that the bankers became alarmed at the
large amount of notes involved and rented a room for their
clerks to meet and exchange drafts.
The first reference to this room, which is believed to
have been a private room at the Five Bells, is found in the
books of Martins Bank, where " Quarterly charge for use
of clearing room, 19s. 6d.," is a charge in 1773. A little
later this room was found too small and a larger room
was taken at Mrs. Irving's, a private house next door to
the Five Bells.
About this time, according to a clearing book dated 1777
in the possession of Messrs. Smith, Payne & Smith's
successors, "The Union of London and Smith's Bank"
there seem to have been 33 banks in the Clearing House.
This book contains Smith, Payne & Smith's clearing for
several days in March, 1777, and the daily clearing would
seem to have amounted to about £105,000, the amounts
due to the various bankers varying from £4 to £8,680.
The settlement seems to have been very complicated;
an exchange of checks was made between bank and bank
as far as possible, then further amounts were settled by
the handing over of surplus checks on other banks in
satisfaction of another bank's deficiency, and finally the
ultimate settlement was made in notes and gold.
Mrs. Irving's room in turn proved too small—there were
43 banks in the Clearing House in 1800—despite the

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bankers having had the first floor taken out and, in order
to give more light, a lamp hung from the ceiling, " it being
a dismal, dark room."
So in or about 1805, at the instigation of Mr. Snaith, of
the firm of Sikes, Snaith & Snaith, who failed in the panic
of 1825, Mrs. Irving was pensioned off, and a ground-floor
room taken in premises belonging to Messrs. Smith, Payne
& Smith, which adjoined their bank in Lombard street.
Two inspectors were appointed, Mr. William Thomas
and Mr. White, the wine merchant of Lime street, for at
that time and for many years to come the inspectors carried on businesses of their own.
The next authentic account of the Clearing House is
contained in the " report of the committee on the high price
of gold bullion, 1810," when Mr. William Thomas, the
inspector of the Clearing House, and Mr. Richardson, a
bill broker, were among the witnesses examined.
Mr. Thomas gave the number of clearing bankers at this
time as 46, while Mr. Richardson stated that they were 45
and remarked that they had only increased by 3 in the
last ten years.
In reply to a question as to the amount of the drafts
brought into the house daily, with the exception of
those on settling days and India prompts, Mr. Thomas
stated that they amounted to about £4,700,000, each
individual banker making a mutual exchange of drafts
with his neighbor, the difference being paid up in bank
notes.
About £220,000 in bank notes was apparently required
daily, but on stock exchange settling days the amount

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required was much greater, for the whole amount paid on
these days sometimes reached £14,000,000.
Mr. Thomas further stated that the business at the
Clearing House had considerably increased of late years,
and that the system had been in existence for some thirtyfive years.
Great improyements had, he said, been made in the last
fourteen months, but these improvements had not altered
the amount of bank notes that passed.
From Mr. Richardson's evidence we learn that there
had in the last four or five years been an alteration in the
hour at which the Bank of England took from the bankers
the sum daily due to them "on the ground of bank
charge." The hour had formerly been "as soon after 9
as they could agree upon the sum," whereas now it was
at 4 o'clock.
The result of this alteration was a very great saving in
the use of notes, for the banker was able to pay the bank
charge by the medium of drafts upon the bank which had
been paid in to him during the day by his customers for
bills discounted by them at the Bank of England that
same day. From this we ascertain that it was not the
practice for each banker to have, as now, an account with
the Bank of England, nor did the Bank of England then
or for many years later have anything to do with the
Clearing House.
We further learn from Mr. Richardson that the West
End bankers had not any system of clearing with the city
bankers, but brought, as they did for many years to come,
their demands mutually upon each other, which were
always discharged on both sides mutually by bank notes.
76651—10

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That the work did not always go quite smoothly at the
Clearing House at this time is evident from an account
we have of Mr. Barnett, the chairman of the bankers'
committee, going into the Clearing House at midnight
and ordering the bell to be rung to silence the clerks.
Such protracted sittings are absolutely unknown in our
time.
After this the arrangements were modified, and all
checks were allowed to be delivered at the House up to 4
o'clock, though the bankers might continue to pay over
the counter up to 5 o'clock.
One-pound notes were withdrawn from the Clearing
House at this time.
Mr. White left the Clearing House in 1813, being succeeded by Mr. Lawson, and Mr. Thomas left in 1821.
In 1821, at a meeting of bankers held at the City of
London Tavern in Bishopsgate street on February 14,
Mr. John Smith being in the chair, it was resolved " T h a t
great advantage would arise to the bankers of London
from the appointment of a permanent committee chosen
out of their own body for the purpose of suggesting or
carrying into effect any rules or regulations tending to
increase the facility or security of their mutual transactions," and, after passing a vote of thanks to the gentlemen
who constituted the temporary committee for regulating
the Clearing House, 13 members were elected, 2 of whom
apparently represented the West End bankers.
On February 28 this committee met at the Clearing
House, and Mr. John Smith was appointed chairman and
Mr. John Martin deputy chairman.

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The affairs of the Clearing House were closely gone into.
It seems to have been carried on in a very haphazard
manner, for the inspector, Mr. Thomas, had to confess that
"very few of the regulations intended to have been
adopted for the management of the Clearing House were
strictly complied with."
After several meetings the following regulations were
agreed to:
i. That each banking house be requested to send to the
inspector upon a slip of paper as soon after 5 o'clock as
possible the amount of their balance with the Clearing
House according to their own books.
2. That such part of the eighth regulation (as agreed
to in 1809) which directs that no payments be made until
the general balance is correct be suspended, and that in
future each clerk report himself to the inspector as soon
as he is prepared to pay or to receive, and if the balance
upon his sheet be found to agree or nearly so with the
statement furnished by the banking house, the inspector
will then direct the creditor who is first ready to receive
the balance to be paid by the debtor or debtors first prepared to pay, and such party so continuing to settle in
regular succession as they may report themselves to the
inspector, but no creditor to receive more than the amount
of his balance.
3. In order to prevent the inconvenience which might
arise from the introduction of small notes or money into
the Clearing House for the settlement of balances, it was
resolved that each clerk be allowed to give a memorandum
for any fractional amount due from him under £10, such

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memorandum, however, to be received the following day
at the banking house owing the money, but on no account
to be reproduced at the Clearing House.
Shortly after the passing of these rules Mr. Thomas's
resignation was accepted, and he was succeeded by Mr.
Hennah, of the firm of Hennah & Lawes, bill brokers.
The next records of the Clearing House are those of a
meeting on June 12, 1827, when the inspector was instructed to communicate to the clerks at the Clearing
House that no memorandum given for the settlement of
balances is for the future to be presented at the Clearing
House for payment, but is to be sent the following morning
to the different banking houses owing the money. Such
memorandums in no case to exceed £50, and that no
banking house will be considered liable for any memorandum if not presented to them the following morning, nor
for any balances, however small, for which a memorandum
is not given.
It was also resolved that it be recommended to each
banking house to require the production of the signed
ticket, upon which authority the clearing clerk has paid
away any money.
On February 20, 1832, the committee of bankers constituted in 1821 held their second meeting, when the subcommittee reported that—
"The Clearing House had occupied much of the committee's time, from the complex manner in which the
accounts were formerly kept, and from the difficulties
presented by old prejudices against altering the improper
mode of paying balances, by which a clerk entitled to

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receive only a small balance was frequently made the distributer of very large sums.
11
The committee believe that on examination the present
system will be found to be regulated upon such clear principles that nothing is wanted to insure regularity in that
important department, but a determination on the part
of each banking house to enforce obedience on the part of
their clerks to the instructions of the inspectors.''
In 1833 Sir John Key built a new Clearing House upon
part of the ground where the old general post-office stood;
that is, upon the present site of the Clearing House, and
subsequently, in 1834, sold it to the clearing bankers for
£7,000, twenty out of 39 clearing bankers paying £350
each toward the purchase. From the date of this purchase up to 1900 the ownership of the building of the
Clearing House was in the hands of a few of the clearing
bankers and not of all. This arose from the tontine purchase system instituted by the 20 bankers above, by which
any share belonging to the original holders which came
into the market by death or amalgamation had by the
agreement to be bought by one of the survivors, with the
result that in 1900 nine individuals, representing three
banks and one recently defunct clearing bank, owned the
Clearing House. But we will revert to the ownership of
the Clearing House later.
In 1834 the first of the joint stock banks, the London
and Westminster Bank, was established, and on February
24 at a meeting of the committee of clearing bankers a
letter was read from Mr. J. W. Gilbart, the manager of the
London and Westminster Bank, requesting permission on

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the part of the directors " t o send a clerk to the Clearing
House in the ordinary way." It was unanimously
resolved that this request be not complied with, and a reply
was sent, to the following effect:
"To J. W. GILBART, Esq.

" S I R : I have laid before the committee of bankers your
letter of the 18th instant requesting permission on the part
of the directors of the London and Westminster Bank to
send a clerk to the Clearing House in the ordinary way,
and in reply I am desired to acquaint you that the committee decline complying with such request under the consideration that the Clearing House is intended exclusively
for the accommodation of private bankers. "
In 1839 there were 29 banks in the Clearing House, the
total of the clearing for the year being £954,401,600, to settle which bank notes aggregating £66,275,000 or 6.9 per
cent were required.
From 1824 to 1834 there are no records available, but it
is known that the joint-stock banks were constantly applying for admission and as constantly snubbed and refused.
In 1841 Mr. Hannah resigned the inspectorship, and Mr.
John Pocock, from Messrs. Stevenson Salt & Co., was appointed in his place. Shortly after his appointment he
made great alterations in the method of transfer. The
clerks had previously been allowed to draw for their money
separately, so that ten or fifteen transfers would be put into
the inspector's box for one clearer instead of one transfer
for the whole payment by the payee, as was arranged by
Mr. Pocock. He also did away with the candles, 50 of

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which were used each night, and introduced gas in their
place, thus creating a great saving.
On January 31, 1853, Mr. Derbishire was appointed
assistant inspector.
In 1854 the Clearing House was enlarged and preparations were made for the admission of the joint-stock banks,
who had long threatened to make a clearing house of their
own.
On May 4 the committee of clearing bankers met the
deputy governor of the Bank of England at the bank, and
after much discussion the following plan was agreed upon
to come into force on Thursday, May 11.
1. That the bank shall appoint a clerk to attend after
the usual hours for the purposes of the clearing.
2. That his business shall be to receive orders signed by
the banker empowering the bank to debit the accounts of
the said bankers and credit the clearing account.
3. That he shall also sign vouchers presented by other
bankers who have claims on the clearing, as certified by
the clearing-house inspector, so long as there shall be a
sufficient balance upon the clearing account; but that if
there be not money enough for the last claimant the
voucher shall be given for the balance and the deficiency
stated thereon. If there be more money than claimed
the balance shall remain over for the next day. .
4. That should it happen that the banker has not sufficient money on his account to meet his own transfer draft
he may be allowed to pay in bank notes to meet the
deficiency till 4.30 o'clock, but he may not draw for notes
after 4 o'clock.

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In consequence of the opening of this clearing account
at the Bank of England, the use of bank notes in the Clearing House was entirely done away with—a great step in
advance, for instead of numerous individual transactions
concluded between bank and bank, each bank when it had
agreed the totals with every other bank, either paid unto
the clearing account a transfer draft for the total amount
it was out on the day's clearing, or received from that
account a transfer draft for the amount due to it as the
result of the day's clearing.
In May, 1854, the Clearing House was closed for alterations and enlargement, and the business was temporarily
carried on at the Hall of Commerce. Here, on June 6,
1854, applications for admission to the Clearing House
were received from the following joint-stock banks: The
London and Westminster, the London Joint Stock, the
Union Bank of London, the Commercial Bank of London,
and the London and County Bank; and it was resolved
" t h a t the secretary be authorized to comply with such
applications, subject to the payment of an annual sum to
be fixed by the committee to reimburse them for the outlay that has been found necessary to afford accommodation for their admission." There were at this time
25 private banks in the Clearing House.
Following on the admission of the 5 premier jointstock banks in 1854 there were frequent applications from
other joint-stock banks—many from the moment of their
foundation. But the wise reply of the committee was
invariably that they did not "deem it expedient to take
into consideration such applications from any banking

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establishment that has not been in operation at least for a
period of twelve months." On some slight alterations
being made in the rules in 1856 the inspectors appealed to
the committee for support to quell disturbance, "as
many of the clerks have been persuaded that only two or
three of the bankers are anxious to impose a new system."
The inspectors stated that the Clearing House was
"overhanded," and recommended a shortening of the
hours as the best remedy. "The hour of 11," they said,
" would be sufficiently early in the morning, and, excepting
on certain days, a quarter to 3 in the afternoon."
They named certain clerks as ringleaders in the disturbance (tradition says that they introduced a donkey
into the Clearing House one day), and said that if one
gentleman had been enabled to carry out his intention he
would have prevented the inspectors from even stepping
into the clearing room. The old clearers were evidently
the originators of the disturbance, for they are reported
to find " the present state of the house one of intense quiet
in comparison to what they have known it," " so that any
attempt of mine," adds the inspector, " t o encourage reading among those less occupied has been exposed to
ridicule." The committee intervened as requested, and
all disturbance ceased, but they insisted that for the
future the inspectors should give their entire attention to
the Clearing House, to the exclusion of any private business that they had previously carried on.
Though the joint-stock banks had been admitted to
the Clearing House yet they were only allowed to rent
seats there and had no share in the management, so for

279

National

Mo n e tary

Commission

t h e support of their m u t u a l interests t h e y h a d a committee of their own which settled t h e rate to be given b y
t h e joint-stock banks in t h e London district for deposit
money at seven days' notice.
I n 1858 the country bankers submitted a plan for establishing a country bankers' clearing house in London a n d
proposed t h a t the clearing house committee should
appoint two or three of their number to unite with t h e m
as a working committee.
The establishment of a separate country bankers' clearing house would have led to m a n y inconveniences, and
Mr. John Lubbock, now Lord Avebury, submitted a plan
for carrying out a separate country clearing at t h e Clearing House. The committee approved t h e plan and submitted it to the country bankers' committee, who also
gave their approval.
On Monday, November 15, 1858, the clearing house
committee reported the result of their conference with
the country bankers and resolved t h a t " Each house sends
a clerk t o the Clearing House on Monday, 22d instant, at
12 o'clock to clear the country checks." At the same
time they instructed their secretary t o write t o Mr.
Gillett, the secretary of the country bankers' committee,
and inform him t h a t " t h e London bankers finding t h a t a
large number of their country friends are anxious t h a t
they should establish a clearing for country checks h a v e
agreed upon a plan for t h a t purpose."
Thus was instituted the country clearing, which more
t h a n all else has brought about the almost universal use
of checks in England, to t h e exclusion of notes and coin.

280

The

English

Banking

System

Mr. Lubbock's scheme was so well thought out that
from its initiation to the present time the rules have had
to be only very slightly modified.
The balances kept by the clearing bankers with the
Bank of England have increased so much in recent years
that any necessity for some arrangement between the
clearing banks and the Bank of England as to overdrafts being permissible has ceased to exist, but in i860
we find the following correspondence taking place between Mr. Bevan, the chairman of the committee of
clearing banks, and the Bank of England: "Referring
to our recent communications on the subject of the settlement of the bankers' clearing, I beg to say, to prevent
mistake, that I understand that the cashiers of the Bank
of England will have the authority of the court in case of
any banker's account appearing overdrawn in the clearing to overpay the same, to an extent previously agreed
upon, on the deposit of any of the undermentioned securities, viz, exchequer bills, India bonds or debentures,
Turkish guaranteed 4 per cent stock, and commercial
bills. The advance to be repaid by such bankers in the
course of the next day."
To this the governor replied: "You have rightly
interpreted what passed at our interview yesterday, and
I and my deputy will be prepared to issue our instructions
to the chief cashiers to act in the sense mentioned."
In 1864 the Bank of England entered the Clearing House
to clear on one side only, the outside, for though the Bank
presents to the clearing bankers at the Clearing House
all checks payable by them, all checks and bills drawn

281

National

Monetary

Commission

on the Bank are presented by the clearing bankers at the
Bank itself, and the proceeds placed to the credit of each
bank's account. At the same time the governor of the
Bank of England was made ex officio a member of the
committee of clearing bankers. After 1864 few changes
were made in the working of the Clearing House, the
volume of the country and town clearings increased
greatly, but the house proved capable of meeting any
increase.
The friction between the old private bankers and the
joint-stock banks grew less as amalgamations and absorptions increased, and before many years the committee of
London clearing bankers and joint-stock banks committee amalgamated, it being agreed, as a condition of the
joint-stock banks committee ceasing to exist, that all the
banks would abide by the ruling of the committee as to
the rate of deposit at seven days' notice. Henceforth,
every bank in the Clearing House was entitled to have
one representative on the committee. Such representatives have hitherto been chosen solely from the board
or the partners and are nominated by their banks and
formally elected by the committee. The committee elects
its own chairman, vice-chairman, and honorary secretary.
This committee meets regularly on the first Thursday in
each month, Thursday being the day on which the Bank
of England in normal times makes any alteration in the
bank rate of discount, but it may be summoned by requisition at any time and meets automatically should the
bank rate be altered, since this governs the rate of deposit
allowed by the bankers.

282

The

English

Banking

System

The committee has full power over all Clearing House
matters, and from the importance of the banks who compose the Clearing House its opinion carries very great
weight on all matters in the banking World. It is, however, controlled only by the mutual agreement of its
members; and the decision of the majority of its members,
though followed loyally, is never used with any ultimate
power of compulsion in matters affecting banking in general. It is further weakened by the existence of a certain
amount of rivalry and trade jealousy between the bankers
and the Bank of England, the bankers complaining
that the Bank of England is apt to use the huge balances
kept by the clearing bankers, which are out of all proportion to the amounts required by the necessities of the
clearing, to compete unfairly with the bankers. There is
doubtless some justice in this complaint, but the strained
relations are due in great measure to the traditional
rivalry between the Bank of England and the bankers,
and much good might ensue in critical times if the governor of the Bank of England or even some member of
the court nominated by him were to commence in normal
times to attend the monthly meetings of the committee
of the clearing bankers, of which the governor, as has been
said, is a member ex officio, though he has never attended
any meeting other than a complimentary one to an outgoing secretary.
In 1907 a third clearing, the Metropolitan, was established. Hitherto, with the exception of one or two city
offices which were included in the town clearing, the
collection of drafts on London branches of the clearing

283

National

Monetary

Commission

banks had been effected by the post and by the sending out
of walk clerks by each bank; but in 1907 it was determined to do away with such means of collection as far as
possible and to collect the branch checks through the
Clearing House. This proved so successful that the West
End banks were approached the following year, and with
one exception readily consented to come into the new
plan by which their clearing agents had delivered to them
at the Metropolitan clearing all checks drawn upon them.
This clearing is the first clearing made each morning and
is handled so expeditiously that even the most distant
London branches get their checks almost earlier than
under the old system. They have, therefore, plenty of
time to go through them and to make returns of any
checks that can not be paid in time for such return checks
to reach the Clearing House early in the afternoon.
There are now over 330 banks and branches using this
clearing. The system has worked so well that it is
hoped that the government pay offices will allow its being
adopted with their pay warrants which have still to be
presented by hand.
For the better defining of the three clearing areas—
town, metropolitan, and country—the letters T M C have
been placed in the corner of all Bank checks. From
February 19, 1907, the date of the initiation of the Metropolitan Clearing, up to December 31 of that year £482,227,000 was paid in this clearing, while for the year 1908
the total was £647,842,000, as compared with the town
clearing total for that year of £10,408,254,000 and the
country total of £1,064,266,000, making in all a grand

284

The

English

Banking

System

total of £12,120,362,000, which figures, vast as they are,
were a decrease of £610,031,000 on the total £12,730,393,000 for t h e previous year 1907. The work entailed
by such vast figures as these could scarcely have been
dealt with by hand alone, b u t by the installation of adding
machines t h e work is easily and quickly done.
Statistics are appended showing t h e working of the
Bankers Clearing House from 1868 to 1906 and the proportion of amount in each year as compared with 1868, the
first year in which proper records were kept. I t must not
be thought t h a t all checks on London are presented
through the Clearing House, for checks on t h e London
branches of t h e Scotch banks and of t h e colonial and
foreign banks are still presented over the counter.
Moreover, though it is mutually understood between the
clearing banks t h a t checks on each other will only be presented through the Clearing House this agreement has no
legal binding.
Two exceptions are continually made; documents or
goods have to be taken up against cash, and t h e owner
before parting wishes to be certain of his money. I n this
case the presenting banker either presents his check for
m a r k i n g — t h a t is to say, the paying banker having ascertained from his customer's account t h a t there is sufficient
money thereon marks t h e check for payment, which has
the same effect as if t h e banker had accepted it; or, as is
becoming more usual, the paying banker gives one of his
own drafts on the Bank of England in exchange for t h e
check.
Besides t h e London Clearing House there are eight provincial clearing houses in England—Birmingham, Bristol,

285

National

Monetary

Commission

Leeds, Leicester, Liverpool, Manchester, Newcastle, and
Sheffield.
Two only of these clear over £100,000,000 in the year.
Manchester cleared £320,296,332 in 1907, with an average
weekly total of £6,159,545 and an average daily total of
£i>°39>923> and Liverpool £196,3^5,829. The others
cleared in the same year from £12,000,000 to £61,000,000.
Small figures, indeed, compared with London, where the
highest total paid on any one day was, in 1907, £106,703,000. In 1908 the highest total paid in one day in the
London clearing was £85,833,000 and the lowest £24,903,000.
The highest weekly total was £302,520,000, the smallest
for a complete week £176,902,000. The highest monthly
total was £1,120,786,000, the lowest £907,176,000.
The turnover is always large on the fourth of each
month—since many trade bills mature at that date—on
consol settling days, and on stock-exchange settling days,
but fluctuations are easily caused by other incidents,
such as new issues, so that comparison for statistical
purposes is dangerous without careful investigation.
It will be seen that from 1901 to 1906 a considerable
increase was shown each year. Nineteen hundred and
seven was almost stationary and in 1908 the total receded,
as was only natural from the general trade and stockexchange depression. The totals for 1909 are, however,
likely to again produce a record.
The provincial clearing-house returns similarly give
some indication of the trade round those centers, but
there, as in London, the object of the Clearing House is

286

The

English

Banking

System

primarily the convenience of exchange of checks, not the
regulation of banking, and little is regulated save, perhaps, the rate of interest to be paid on deposits at seven
days' notice.
In these days, too, when the tendency is strong for
amalgamation, the local banks are dwarfed by their gigantic competitors, with their branches in many counties and
head offices in London, with the result that London each
year controls more of the banking in England and the
provincial clearings cease more to be under local control,
but are controlled by their London head offices.
This may, if the present tendency of amalgamation
continues, result in the committee of London clearing
bankers becoming an important controlling body, but
that time is not yet at hand, and though, as we have said,
an expression of opinion on the part of the committee
carries very great weight, yet anything like dictation
would very properly be resented by the important and
old-established banks in both London and the provinces
that are outside the Clearing House.
At the present time there are in the writer's opinion
too many associations of bankers, so that their functions
overlap. Besides the committee of London clearing
bankers there is the association of English country banks,
which was reconstituted in 1874; the Institute of
Bankers, founded in 1879; a n d the Central Association of
Bankers, founded in 1895 to unite the committees of the
London Bankers' Clearing House, the West End banks,
and the provincial banks of the United Kingdom.
Each of these bodies watches over all matters of interest
to the profession, having special regard to any legislation
76651—10

287

National

Monetary

Commission

that may be brought forward, but none exercise any
compulsory power over the banks as a whole.
The English system has always been for each bank to
stand on its own merits and to keep what reserves it considers necessary for the nature of its business, and on the
whole this has worked most satisfactorily. Even in the
matter of the publication of balance sheets no compulsion
is exercised. For a long time none of the private banks
published any balance sheet. Gradually they thought it
better to do so, but at least one well-known bank has
never yet done so.
All the 18 clearing banks publish half-yearly balance
sheets, and most of them issue monthly statements in
addition, showing the proportion their cash in hand
and at the Bank of England bears to their deposits; but
as to the advisability of these monthly statements opinions differ. They were originally issued after the Baring
crisis on the advice of Lord Goschen, the then chancellor
of the exchecquer, but the stiffening of the market rates for
a few days at the end of each month and the subsequent
ease at the commencement of the next month is usually
attributed to the calling in and release of money by those
banks that issue monthly statements; and those banks
that never have issued monthly statements urge with
some truth that their rivals who do so clamor for them
to come into line in this matter on the same principle
that the fox who lost his brush declared that it was much
more comfortable, and tried to persuade the others to do
so, too.
There can be no doubt, however, that even if money
does have to be called at the end of the month for window-

288

The

English

Banking

System

dressing purposes, it tends to keep money liquid, for the
brokers to whom the money is lent have to keep this fact
in mind when they in turn lend it to their customers.
Much, too, has been written of late as to the necessity of a
larger gold reserve in England, and numerous suggestions
have been made as to how this should be carried out,
whether at the expense of the Bank of England or of the
bankers.
In the meantime most of the banks have been increasing
their own stocks of gold, and though their action is likely
to be individual rather than concerted much will doubtless have been gained from the discussions, but it would
be an enormous mistake to insist on any government compulsion in the matter as is so freely discussed in some quarters.
Before closing this short history of the London Bankers
Clearing House it may be of interest to describe the procedure of clearing a check. Let us suppose that Mr. Smith,
who banks at the London and County Bank (head office),
draws a check for £100 and pays it to Mr. Jones, who pays
it into his account with his bankers, Messrs Glyn & Co.,
together with other checks, bank notes, and cash.
There, after the necessary entries have been made by
the receiving cashier, the checks are handed to the clerks,
who sort them up under the heading of each bank. The
various parcels of checks for each bank are then entered at
the bank in the out-clearing books, and if, as is probable,
the number of them necessitates several casts being
made the last check of each cast is turned over and the
amount of the cast written on it to facilitate agreement
at the Clearing House.

289

National

Monetary

Commission

The checks sorted up for their respective banks are
then taken over to the Clearing House—which is an irregular building of no architectural features whatever,
where each of the clearing banks has seats for clerks in
accordance with its requirements—and are there distributed to the clerks of the various banks that they
happen to be drawn on. These in their turn enter them
in their in-clearing books, verifying each cast, as shown
above.
At the close of the clearing each bank sends down its
out-clearing books for comparison with the in-clearing
books of the other banks at the Clearing House, with
which they should agree if the work has been done correctly. If the totals do not agree, the books are compared and mistakes rectified. If the mistake is in the
cast, the bank making the mistake corrects it; if the figures differ, the out clearers alter their figures to agree
with those of the in clearers, and should it ultimately
prove that the mistake was the other way the draft is
produced and the difference claimed. When the totals
of out and in clearing books are agreed, a sheet is drawn
up by the head clearer of each bank showing the balance
due from or payable to each other bank. The two sides
are then cast up and the balance receivable or to pay
entered on a green ticket if the former, on a white ticket
if the latter.
This ticket, which is signed by the inspector of the
Clearing House, is an order to the Bank of England
either to transfer from the money at the credit of the
account of the clearing bankers to the receiving bankers'

290

The

English

Banking

System

account, or from the money at the credit of the paying
bankers' account to the account of the clearing bankers
the amount it bears on its face. It will be obvious that
all checks can not pass through the clearing so rapidly;
some will be unable to be paid for various reasons. These
have to be returned to the presenting bankers by a given
time and are deducted from the totals. Returned checks
in the country clearing have to be adjusted two days
later.

291

The

TABLE

I.—BILLS,

English

Banking

CHECKS, ETC., P A I D AT T H E B A N K E R S '

System

CLEARING

H O U S E I N IVONDON,

1899

1908.

1906.

1S99.

January
February
March
April
May
June

1908.

£800,573,000

£ 8 0 7 , 760, 0 0 0

£869,239,000

£904,554,000

£928,048,000

£887,983,000

£ 1 , 0 2 7 , 431, 0 0 0

£1,180,401,000

£ 1 , 2 0 5 , 248, 0 0 0

764,404,000

692,360,000

774,065,000

832,200,000

813,199,000

843,310,000

964,247,000

r,007,233,000

1,026,559,000

982,704,000

786,728,000

790,498,000

789,366,000

781,223,000

836,690,000

870,971,000

r,112,206,000

1,078,153,000

1,103,112,000

L 005,779,000

754,473,000

707,025,000

797, 176, 0 0 0

880,573,000

820,030,000

846,142,000

999,656,000

1,047,828,000

1,092,635,000

1,or6,674,000

784,235,000

734, 534,ooo

866,221,000

843,469,000

884,561, 000

887,626,000

1,025,275,000

1,102,264,coo

1,069,305,000

970,957,ooo

853,138,000

875,904,000

952, 834, 000

989,264,000

1,002,605,000

975.657,000

£ r , 120,786,000

779,SS5,ooo

730,845,000

773,092,000

814,881,000

4,669,968,000

4,463,022,000

4,869,159,000

5,056,900,000

5, 1 3 5 , 6 6 6 , 0 0 0

5,211,936,000

6,081,649,000

6,405,143,000

6,499,464,000

6,078,557,000

824,938,000

787,927,000

875,728,000

920,255,000

926,381,000

906,725,000

1,068,885,000

1, 0 7 0 , 134, 0 0 0

1,163,201,000

1,ior,273,000

721,704,000

711,921,000

735.436,ooo

761,817,000

790,609,000

823,500,000

984,429,000

1,047,697,000

1,014,087,000

907,176,000

686,823,000

659,306,000

692,576,000

777,040,000

772,325.000

774,209,000

970,248,000

968,673,000

934,5i9,ooo

741,391,000

777, 533,ooo

814,225,000

871,579,000

877,027,000

949,725,000

1,067,810,000

1,120,213,000

1,128,810,000

746,396,000

782,314,000

787,628,000

790,604,000

771, 536,000

933>6o5,ooo

1,041,854,000

1,040,222,000

1, 0 2 5 , 139, 0 0 0

759,049,ooo

778,147,000

786,417,000

850,547,000

846,281,000

964,497,000

1,073,060,000

i»059,252,000

965,173,000

1,084,398,000

Total for second six months

4,480,301,000

4,497,148,000

4,692,010,000

4,971,842,000

5,352,261,000

6,206,286,000

6,306,191,000

6,230,929,000

6,041,805,000

Total for year

9,150,269,000

8,960,170,000

9, 5 6 1 , 169, 0 0 0

10,564,197, 000

12,287,935,000

12,730,393,ooo

1 2 , 120, 3 6 2 , 0 0 0

Total for first six months- _
July
August
September
October
November
December

10,028,742,000

292

4, 9 8 4 , 159, 0 0 0
io,119,825,000

12, 7 1 1 , 3 3 4 , 0 0 0

918,635,000
1, 0 3 9 , 231.. 0 0 0
991,092,000

The

English

Banking

System

T A B L E I I . — T H E AVERAGE DAILY CLEARINGS I N LONDON FROM 1868 TO 1908.

Year.

Daily average.

Ordinary days,
exclusive of fourths
of the month, consols settling days,
stock exchange settling days, and
days following
stock exchange
settlings.

Fourths of the
month.

£i2,922,300

Consols settling
days.

Year.

Daily average.

Town clearing.

Metropolitan
clearing.

Country check
clearing.

Fourths of the
month.

Consols settling
days.

Stock exchange
settling days.

£11,212,600

£21,806,200

£24, 8 1 6 , 800

£21,333,000

£ 2 4 , 176, 000

£29, 3 0 7 , 000

12, 4 9 4 , 3 0 0

23.538,900

1890

25,410,600

21,819,400

24, 092, 200

29,883,100

13,602,500

26,454,700

1891--.

22,304,600

19,771,600

22,04I,700

26,233,900

44.475.100

i7.553,9oo

33,598,100

i892___

20,975,900

18,349,000

2 1 , 7OI, 80O

24,950,000

42,615,000

20,576,800

42,331,600

1893---

21,170,000

18,656,300

22, 34O, 3OO

25.039.900

41,777,600

20,812,900

43,260,700

1894---

20,642,400

18,264,000

21,794,700

25,120,600

40,185,600

4 2 , 102, 300

1895---

24,732,500

21,3OI,400

2 3 , 6 3 4 , 100

28,787,100

5 4 , 3 6 1 , 600

^ i o , 9 7 8 , 200

£9,637,800

1869--

11,660,400

10,121,300

14, 144, 000

1870-.-

12, 5 4 5 , 6 0 0

10,784,6co

14,678,000

1871-.-

15,720,000

1 3 , 4 3 0 , 200

17,591,200

i872__

19,271,800

16,476,000

21,408,200

1873--

19,775.100

16,994,600

22,679,600

1874--

i9.338,ooo

16,554,100

22,118,900

21,687,000

1868

Stock exchange
settling days.

Ordinary days,
exclusive of fourths
of the month, consols settling days,
stock exchange settling days, and
days following
stock exchange
settlings.

1889---

£55.785.000
59,022,60O

1875--

18,520,500

15,589,200

20,484,100

20,964,400

43.477.6oo

i896___

24,593,700

21,633.OOO

24,223,400

3 1 , 6 9 6 , 100

48,452,700

1876.-

16,167,700

14,162,600

18,828,000

18,829,000

31,712,100

1897---

24,481,300

2 1 , 750, 30O

25,176,900

3 0 , 217, 500

46, 403,400

r877--

16,424,700

14, 574, 100

19.385,800

19,021,IOO

31,003,500

i898___

26,289,900

23.173.800

27,605,600

33,571,7oo

5 1 . 3 2 6 , 900

1878-.

16,261,900

14,198,500

18,146,000

18,936,700

33,143.400

1899---

29,902,800

25,888,500

29,924,000

33,586,800

64,345.600

1879--

15,915,100

13,648,400

17.779,000

18,781,700

35,122,300

1900

29,186,200

25,923,800

3 1 , 0 3 8 , 600

36,510,400

55,815,500

i88o__

18,812,500

15,513.400

19. 7 3 4 , o o o

21,268,60O

47.994.400

1901

31,245,600

27,119,800

3 2 , 689, 900

4 0 , 3 3 7 , 200

65,942,700

I88I__

20,639,800

16,624,500

21,094,400

23,238,60O

5 7 , 6 4 2 , 900

1902

33,098,100

29,I70,700

£ 3 0 , 226, 200

32,096,700

47,528,100

65,281,500

i882__

20,330,700

16,996,800

19,845,800

23.198,900

51,204,800

1903---

32,963,600

29, 3 2 4 , 000

30,081,300

2,882,300

3 1 , 8 5 7 , 100

49,467,000

60,699,000

1883--

16,597,700

19,923,300

21,2l8,3OO

44,112,600

1904---

34,188,300

30,102,000

31,320,300

2,868,000

3 7 , 106, 700

49,763.300

64, 0 2 4 , 400

1884--

19. 3 1 4 . OOO
18,826,500

16, 3 7 9 , 100

20,221,500

22,362,60O

40,025,900

1905---

40,156,600

34,613,800

3 7 , 108, 700

3,048,000

41,422,500

53.231,900

86,275,900

1885--

1 7 , 9 5 1 . 400

i5,559,6oo

18,489,400

20,777,200

38,961,800

1906

41,405,000

36,479,000

38,172,700

3, 232,300

43.734.7oo

53,711,200

84,649,200

i886__

19,224,500

15,869,800

i7.959,9oo

21,958,OOO

49,939,800

1907---

41,467,100

37, 193,000

37. 970,500

3, 496,600

45,209,400

5 2 , 6 5 7 , 700

75,928,000

1887--

19,795,100

16,419,200

21,372,400

24,766,000

47,743.ooo

1908

39,35i.8oo

35,666,400

3,455.400

38,055,600

53.753.8oo

69,687,400

i888_.

22,612,900

19,189,000

22,674,200

27.705,80O

52,186,000

a
6

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33, 793.ooo

From February 19 to December 31, included in town clearing, £1,819,700.
Metropolitan clearing not included.

293

£2, 8 7 1 , 900

£2,

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Full text of The English Banking System

FRASER