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Home -> E. Hilton Young -> The System Of National Finance -> XII

The System Of National Finance - XII

1. Preface

2. I

3. Ia

4. II

5. IIa

6. III

7. IIIa

8. IIIb

9. IV

10. IVa

11. V

12. Va

13. VI

14. VIa

15. VIb

16. VII

17. VIII

18. VIIIa

19. VIIIb

20. IX

21. IXa

22. X

23. Xa

24. Xb

25. XI

26. XIa

27. XII



THE Bank of England is not a Government office.
It is established by Acts of Parliament, but so is
the Great Western Railway. It does work for the
Government, but so do Messrs. Armstrong, Whit-
worth & Co., the manufacturers of armaments.
Neither of those things make it in any sense an
official body. It is not even a state bank under
the direct supervision of the Government, like the
Bank of France. It is a private banking company,
governed by a court of merchants of the City of
London which is elected by the shareholders. Its
capital has been privately subscribed in the past,
and is held now by private persons: its share-
holders are thus a private body, and the court
which they elect is their private committee, and
legally responsible to themselves alone. It is on
their behalf alone that the business of the bank is
conducted, earning for them a comfortable dividend
on their stock.

It is true that the Bank of England cannot and
does not behave quite as if it had no interests to
consider other than those of its shareholders. A
monopoly has been conferred upon it by Act of
Parliament, to be the only bank in London that
may issue paper notes. The effect of that is to


make it, not indeed a state bank, but the central
bank of the country. As Walter Bagehot proved
in his classical work Lombard Street, a central bank
with sole power to issue notes has duties towards
the banking and commercial communities, and
through them towards the country at large, which it
is bound to perform in return for the privileges given
to it. In banking matters it must look upon itself
as a public body with public work to do. But
those obligations of the Bank of England concern
banking matters only ; they have no direct relation
with the organisation of the finances of the govern-
ment, and that is the only subject with which we
need deal here. As far as that organisation is con-
cerned, there is only one thing in connection with
the Bank of England which requires our attention ;
it happens to be the bank which has the govern-
ment for customer.


As the private person banks with Lloyd's or
Barclay's, so the British government banks with
the Bank of England. Private persons may and
do bank there too, if they are rich and respectable
enough ; the British government is only the richest
and most respectable of the Bank's numerous cus-
tomers. The services which the Bank performs
for the government are not much different in
nature from those which any bank performs for
any private customer. What our banker does for
us is to take care of our money when we are lucky
enough to have any. What money we receive
we hand over to him, and when we want some


of it back, we get it from him by a cheque. He
keeps an account for us, showing how much we
have paid in and how much we have drawn out
and what we have left. That is in substance what
the Bank of England does for the government. It
receives the government's revenue, pays out money
for it under the direction of the Paymaster
General, keeps its balance for it, and records all
these transactions in books of account.

Besides such regular banking work, it does
another piece of work for the government which
is not that of a regular banker ; it manages the
government's Debt. It keeps the registers of its
stocks, arranging for their transfer from one name
to another as they are bought and sold; and it
pays their dividends to the stockholders.

Good arrangements for transferring stocks are
a very necessary thing, and the services which the
Bank performs for the government in that matter
are not the least important which it renders. The
more easily and promptly a stock is transferable,
the more desirable it is to investors: one thinks
twice before buying a stock if one has any doubt
about being able to sell it readily to somebody else
when one wants the money. So on the excellence
of the government's and the Bank's arrangements
for their transfer depends, to some extent, the
market price of Consols, which is a measure of the
rate at which the government can borrow.

These are the Bank's chief works in connection
with the Debt ; in addition it manages fresh issues
of stock, including the issue and repayment of
Treasury Bills and Exchequer Bonds. With these
matters we have dealt in past chapters, and with


the manner in which the Bank grants temporary
advances to the Treasury. If we add that the
Bank is the medium for the issue of coin and for the
withdrawal of light coin, that completes the cata-
logue of the work which it does for the govern-
ment. For doing it it receives remuneration at a
rate which is fixed by various statutes. Part of
its reward is that it pays no interest to the govern-
ment on the balances of public money which it
holds from time to time. In this matter the govern-
ment is on an equal footing with the Bank's other
big clients, a class which include all the big joint-
stock banks of the country. To none of them
does it pay any interest on their deposits. The
government, moreover, gets from the Bank no
security for its deposits, as a depositor would get
in less exalted regions of finance.

As depository of the public funds the Bank
keeps the banking accounts of the departments,
receives their revenue for them as it is paid in,
pays their drafts, and holds their securities for
them, including the two hundred millions' worth
odd held by the National Debt Commissioners.
We have dealt in past chapters with some of the
principal departmental accounts at the Bank, espe-
cially those of the Boards of Customs and Excise
and of Inland Revenue, and those of the Paymaster
General. But no full or detailed information is
available for the public as to the number and nature
of the accounts kept by the Bank for the public
departments. That is treated as a private matter
which concerns only the departments and the
Bank. No very great curiosity, it may be, has
ever been expressed upon the subject by the


public. But it is a matter about which the public
ought to have the means of information. The
Bank does now what the Exchequer used to do.
It keeps the nation's money chest, and the way in
which it keeps it and its system of accounts in
recording transactions in connection therewith are
matters of public interest. Knowledge about them
is necessary for a perfect understanding of the
way in which the financial business of the depart-
ments is being conducted. That the Bank is a
private and not a public institution makes it all
the more necessary that the public should be in-
structed in the matter. The Bank, of course, is
not at liberty to give information on the subject
without the consent of the government : to do so
would be to violate the confidence of its customers.
But a government return on the subject could and
should be made, and a member of Parliament would
do a public service who would obtain a periodic
return of the sort from the Treasury, showing the
accounts kept by all the departments at the Bank of
England with a statement of the balance on each

As it is, all that we know about the state of the
balances of public money at the Bank is told us in
the Bank's statutory return of its assets and liabili-
ties which is published every Thursday. That
shows amongst the items of the Bank's liabilities
one called "Public Deposits." It varies widely,
falling sometimes in an ordinary year nearly as
low as 5,000,000, and rising nearly as high as
30,000,000. It is usually at its lowest about
October, after the quarterly payment of interest on
the debt, and rises during the last quarter of the


government's financial year, when the revenue is
flowing in freely, to reach its maximum in the
last week in March.

"Public Deposits" are the money which the
Government has at the Bank. They include all the
balances at the credit of any department of the
British Government, and none other. In particular
they do not include, as is sometimes supposed, the
balances held by the Bank for the Government of
India or for the Agents General of the Colonies, or
for any Colonial Government, or for the London
County Council, or for any other municipality or
local authority. Public Deposits, the total of which
is stated in the Bank Return, are the money of the
Government departments only. First in import-
ance is the balance on the Exchequer Account,
which is under the control of the Treasury and of
the Comptroller and Auditor General. That is
government money in a state of equilibrium, safe
under the thumb of the Treasury and Parliament.
Next in importance and at times greater in size is
the balance of the Paymaster General on those
accounts of his which have been described in an
earlier chapter. That is government money on its
way out from the Exchequer Account to the govern-
ment's creditors. Then there are the balances in
the hands of the Board of Customs and Excise,
on accounts also described in an earlier chapter,
and those in the hands of the Board of Inland
Revenue. They are government money on its way
into the Exchequer Account from the pockets of
the taxpayers. Substantial in amount also are the
balances in the hands of the National Debt Com-
missioners, for the most part awaiting investment.



The Post Office, the Supreme Court of Judicature,
and others also have at most times substantial
balances of public money standing to their credit at
the Bank of England. All these together make up
the Public Deposits in the Bank Return.

For reasons which we will go into a little later
the financial community is interested week by week
carefully to observe the amount of the Public
Deposits. In the course of its observations it
sometimes allows itself not clearly to distinguish
between Public Deposits and Exchequer Balances.
Exchequer Balances are shown by the Treasury's
Return of National Income and Expenditure, which
records the state of the Exchequer Account on
Saturday, and is published in the London Gazette
every Tuesday. Public Deposits are shown by the
Return of the Bank of England, which records the
state of its assets and liabilities on Wednesday,
and is issued every Thursday. To one, faint but
pursuing, who has read so far as this it will be clear
that there is little or no direct relation between the
two. Some public monies appear as Public De-
posits and disappear again without ever entering
the Exchequer Account at all. We have seen how
some slips on to the accounts of the Revenue depart-
ments and on to the cash account of the Paymaster
General at the Bank and slips off again, dodging
the Exchequer Account altogether. Credit again
issued from the Exchequer Account to the Pay-
master General may remain on his accounts at the
Bank for some time before it is finally transferred
to the Government's creditors. By the issue of that
credit from the Exchequer Account to the Pay-
master General Exchequer Balances are depleted,


but as long as it remains in the hands of the
Paymaster General, Public Deposits are undimin-
ished. There is therefore no necessary correspon-
dence between minor increases and decreases in
Exchequer Balances and Public Deposits. When
big issues are being made from the Exchequer
Account and are being rapidly disbursed by the
Paymaster General on account of the departments,
as at the end of a quarter, the two visibly decrease
together, and when the revenue is being rapidly
collected and credited to the Exchequer Account
the two visibly increase together: but at other
times their movements up or down are not neces-
sarily simultaneous.

There is thus little complexity in the relations
between the Bank of England and the government.
The Bank looks after the government's balances for
it, and keeps a record of payments in and payments
out. It makes those payments as it is directed by
the Treasury or by the other department on whose
account they are made. In all its work for the
government and for the departments its duties are
purely ministerial. It does the work which any
other banker might do, and no more. Nor has it
any duty towards the public in these matters. Its
only duty is towards the officers of the government,
who are its customers. Neither the public nor
Parliament can take the Bank to task for anything
which is found amiss. They must take to task
their own ministers and servants in the government
and the departments.

Bank and government have always pulled well
together, nor is there record of any grave differences


between them. The nation has had no com-
plaints to make. Were it to be otherwise, in the
last resort the state could change its banker.
It would take an Act of Parliament to do it, but
it could be done. Things however are excellently
well as they are, and so subversive an idea is only
mentioned here in order to lay stress upon the
purely private position of the Bank in our scheme
of state finance. Theoretically another and a more
obviously private bank could do the work which
the Bank of England does for the government
without any fundamental change in our system.


Through the Bank of England the process of
getting and spending the government's revenue is
of intimate concern to the great financial community
which has its being in the City of London, and
through that community it concerns the country as
a whole. Of course the collection of taxes makes
itself felt upon the individual taxpayer ; he feels it
because he has to draw a cheque. That is a direct
and obvious effect of the ingathering of the revenue.
But there is another effect of it, less direct and less
obvious, which nevertheless makes itself felt year
by year in a very decided way upon the country and
its trade. Since this is a point at which a large
class of private citizens feels directly the working of
the state's financial machinery it is worth while to
trace the matter out with some particularity.

Our public revenue amounts now to something
under two hundred million pounds a year, and in
addition to that there is an annual turnover of
about fifty million pounds on account of capital.


Anybody might guess that this big sum could not
be taken out of the nation's pocket without the
process having some marked effect on the nation's
private business. Nor can it. Money is the life
blood of trade and industry, and the more of it that
the government collects and keeps by it, the less
active can trade and industry be. It is true that
the two hundred million for revenue and the fifty
million for capital are not destroyed. They are all
paid back to somebody or other in the course of
the year, and since getting and spending go on
simultaneously it is only a small part of the total
that is in the hands of the government at any
given time. But that part is great enough to
make a good deal of difference to the trade of the
country, and even of the world, in the manner
which has now to be described.

In a previous chapter an account was given of
the way in which the revenue is collected. Little
cash changes hands. By means of cheques tax-
payers transfer a part of the balances which stand
to their credit at their banks to the credit of the
government at the Bank of England. Now it so
happens that the banks of this country, like the
government, themselves bank with the Bank of
England. That has nothing to say to the Bank of
England's position as the government's banker. It
is due to its position as the central bank of the
country, which keeps the country's gold reserve.
Just as one of us keeps a little of his money in his
pocket for daily needs and deposits the rest with
the Westminster Bank, it may be, so the West-
minster Bank keeps a little cash in its till, and
deposits the rest of its money with the Bank of


England. If we look at the weekly Bank Return,
we shall see upon the "liabilities" side an item
called Other Deposits. It varies nowadays be-
tween extreme limits of about 3 5,000,000 and
50,000,000, and usually stands between 40,000,000
and 45,000,000. Of this the greater part consists
of the balances of the banks of the country, de-
posited by them with the Bank of England.

When we pay our taxes, we transfer to the
government by means of a cheque a part of the
balance which we have at our bank. Our bank
makes the transfer for us by transferring an
equivalent part of its balance at the Bank of
England to one or other of the government
accounts there. The credit transferred then dis-
appears from the Other Deposits, and being set
to the account of one of the departments of the
government, and ultimately to the Exchequer
Account, appears on the Public Deposits.

Now Public Deposits at the Bank lie idle.
Neither the Treasury nor any other government
department nor the Bank on its behalf makes any
use of them. They are credit which is not available
for trade or any other purpose until it is paid out
again and released.

On the other hand the bankers' balances at the
Bank of England, making up the greater part of
Other Deposits, are the chief constituent of the
fund out of which are provided the daily needs for
money of the trade of this country and of a great
part of the civilised world. Every day in the year
the merchants and financiers of the world borrow
a lot of money in the London money market.
They borrow the money by discounting bills, a


financial process which has already been described
in these pages, for the benefit of the happy few
unfamiliar with it, in describing the operations on
account of the Treasury Chest Fund. It amounts
to selling a promise to repay 100, say, on a certain
future day for 100 - x pounds paid to-day to the
seller of the promise, x, called the discount rate,
is a rate of interest on the money paid for the
promise for the period between the present date of
its payment and the future date at which it will be

Every day as these bills mature the merchants
and financiers of the world pay back a lot of the
money which they have borrowed.

It is from the bankers of the country that the
money is borrowed, and to them that it is repaid.
There are intermediate steps in the process; but
ultimately it is the bankers that find the money for
the merchants and financiers of the world in their
daily loan transactions. And those balances of
theirs which the banks keep at the Bank of England,
and are called Other Deposits, make up the bulk of
the fund out of which at one end flow the daily
borrowings, and into which at the other end flow
the daily repayments. The higher then that Other
Deposits are at the Bank, the more credit there is
available as loans for the merchants and financiers
of the world, and the less they have to pay as
interest on their loans ; in other words, the lower
is the rate of discount. Conversely the lower that
Other Deposits are, the less credit there is available
as loans for borrowers, and the higher is the rate of
discount. Now Public Deposits, as we have seen,
grow at the expense of Other Deposits ; the higher


the first, the lower the second. Public Deposits
and the Discount rate ought therefore to rise and
fall together : and that is in fact their tendency.
The more money that the government keeps locked
up and idle in the Bank as Public Deposits the less
there is available in the money market to lend to
the merchants, traders, and financiers, and the
more they have to pay for what is left : all of which
is a roundabout way of saying that the more money
that there is lying idle in the pocket of the govern-
ment the less there is in the pocket of the nation
for it to carry on its business with.

It has just the same effect in kind if anybody
else keeps money or credit locked up. But it
matters more in the case of the Government,
because the sums of the use of which it deprives
the country are at times so very big. In the first
three quarters of the year, the bankers who lend
and the merchants and others who borrow are
little affected by the state of Public Deposits.
From week to week their amount does not change
enough to make much practical difference. But in
the last quarter of the financial year it is quite
another matter. It is then that the tax collector
comes amongst us, having great wrath because he
knows that his time is short. Taxes in general,
and the income tax in particular, are being collected
speedily and without mercy. Public deposits
mount up by leaps and bounds. It is not uncommon
for them to grow by as much as between fifteen
and twenty millions between the- beginning of
January and the end of March. The withdrawal
of so large a sum as that from the fund out of
which daily borrowings and lendings are made for


commercial purposes makes a very practical differ-
ence to lenders and borrowers. Commonly it has
the result of making borrowers decidedly hard up
for funds, particularly when Public Deposits are
approaching their maximum in March, and of raising
in consequence the discount rate. Then when
March 3ist comes, big disbursements are made by
the government, Public Deposits fall back to a
more normal level, Other Deposits rise in propor-
tion, the fund for loans is replenished, and the
discount rate tends to fall.

To finish our account of the relations between
the government's financial proceedings and the
money market, we may recall that the issue and
repayment of Treasury Bills, that frequent opera-
tion, has a similar effect on borrowers and lenders.
Paying for them on issue decreases the funds avail-
able in the market, and tends to raise the discount
rate. When they are repaid the funds available
for use in the market are increased, and that tends
to the reduction of the discount rate.

The accumulation of credit on Public Deposits
in the last quarter of the financial year is of a good
deal of advantage to the Bank of England, and in
several ways. In the first place it enables the
Bank to earn bigger profits. By depleting the
funds available for use in the money market, it
enables the Bank to charge more for what it has to
lend. It also brings custom to the Bank. When
supplies of credit are running short, and other
lenders, banks and so on, have got nothing left to
lend, it is to the Bank of England, as the central
bank and the keeper of the nation's gold reserve,
that borrowers have to come in the last resort. In


February and March, when Public Deposits mount
high, it is common to find borrowers flocking to
the Bank for loans, and the Bank makes a very
nice profit out of lending to them. There is another
way in which the annual depletion of the supply of
credit helps the Bank. It helps it to renew its
stock of gold from abroad. When the accumula-
tion of credit on Public Deposits is reducing the
amount available for loans in the market, and the
rate of interest and the discount rate are rising
with the diminishing supply, the advances made
by London lenders to foreign borrowers are re-
stricted. The foreign borrowers have in conse-
quence to repay their debts to London. To do that
they have to transfer credit hither from abroad,
and when they have used up all the other ways of
sending it which are known to merchants in ex-
change (and need not trouble us here), then they
send gold. As it comes, the gold is deposited in
the cellars of the Bank of England, refreshing the
reserve of metal on which the whole credit of the
country is based. There are, of course, other con-
ditions of annual recurrence that help the Bank to
attract gold into its net, some of them more effec-
tive than the ingathering of the Revenue at the
year's end. But the scarcity of credit in the London
money market which that ingathering often pro-
duces for a month or so is a very useful little
help to the Bank in one of its chief preoccupations
the maintenance of its stock of gold.

Such temporary and artificial reductions in the
supply of credit are on the other hand bad for
borrowers who, because of them, have for a time
to pay a higher rate of interest. On the whole


they are a positive evil. Capital is the raw material
of every industry ; the more and the cheaper it is
the greater the industrial activity of the country.
It is then a part of good government to avoid
making credit scarcer and dearer by such tem-
porary accumulations of money in the hands of the
state. We return here in our last pages to a prin-
ciple which was stated in our first, that a Govern-
ment has no business to take out of the pocket of
the taxpayers and keep lying idle more of their
money than is absolutely necessary for its imme-
diate purposes. All possible measures should be
taken to keep Public Deposits at all times as low
as possible. Care in that is more needed every
year. The business of government and the number
of the state's activities steadily grow, and with
them grows the size of the revenue and of the
various funds with which the government has to
deal. Under these conditions, without constant
vigilance to prevent it, there is some danger that
an increasing burden may be cast upon the in-
dustries of the country by the accumulation of an
increasingly large balance on the government's
accounts. To take an instance, many millions, as
we have seen, are now paid into the National
Insurance Fund in the course of the year as con-
tributions from insured persons. Were they left
lying idle they would raise permanently the total
of Public Deposits, and reduce the amount of money
available for fruitful employment in trade and in-
dustry. In fact they are invested: being paid
out to those who sell the investments to the
National Debt Commissioners, they are thus re-
turned into use. They are, it seems, invested with


much promptitude ; but a very slight degree of
sloth in that business would result in locking up
funds to an amount which would make a very
appreciable difference to the industrial community.

The acceleration in the collection of revenue in
February and March, the abnormal increase then
in Public Deposits, the rising discount rate and
disturbance to trade, all these evils might be miti-
gated in several ways. It might be made easier
to pay income tax in instalments, quarterly for
instance ; and the Board of Inland Revenue might
exert itself to collect more of it in the first three
quarters of the year. That would tend to reduce
the abnormal increase of Public Deposits in the
last quarter. By providing the Treasury with more
revenue in the leaner quarters it would also reduce
the expense of borrowing on Deficiency and Ways
and Means Advances and on Treasury Bills. Such
remedies indeed would be so much the most sen-
sible and most effective that none other is much
worth thinking about until they have been tried.

We may conclude with a summary of this
matter. Public Deposits are an evil because they
make the country poorer. If they are no bigger
than the government needs, then they are a ne-
cessary evil; but if the government's needs are
exceeded, then they are an evil that is unnecessary.
Variations in Public Deposits are an evil because
they disturb trade. Small variations are inevitable,
but a big and violent variation, such as that which
comes at the end of the financial year, can and
ought to be made much less.

And, by way of a final winding up, we may


stretch that to a wider generalisation. All the
financial operations of the state are an unmitigated
evil, which is, unluckily, necessary. It is an evil,
although a necessary one, that the state should
have to collect and spend a revenue. A tax is a
bad thing and not a good thing. It reduces the
incentive to work and save ; it diverts money from
its natural channels; and it wastes a part of it
in the expenses of administration. Could we do
without taxes altogether, we should all be better
off. But we cannot ; and since taxes we must
have, we must have also a system of financial
administration. We should be better without one,
but we have got to have it. Since we have got
to have it, it is a good thing to understand how it
works and to keep a close watch upon it to see that
it works well : for it is rather an elaborate engine,
and very apt to leak.

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