XII

STATE MONOPOLY IN BANKING

_August_, 1918

Bank Fusions and the State--Their Effects on the Bank of England--Mr
Sidney Webb's Forecast--His Views of the Benefits of a Bank
Monopoly--The Contrast between German Experts and British
Amateurs--Bankers' Charges as affected by Fusions--The Effects of
Monopoly without the Fact--The "Disinterested Management" Fallacy--The
Proposal to split Banking Functions--A Picture of the State in
Control.


A few months ago, writing in this Journal on the subject of banking
amalgamations, I referred to one of the objections against them, that
they tended towards the creation of monopoly, and so encouraged hope
on the part of those who would like to see all forms of industry
managed by the State, that the banking business might sooner or later
be taken over and worked as a State monopoly. At that time this danger
of monopoly seemed to be still fairly remote, but since then the
progress of amalgamations has brought it appreciably nearer, and
so has vigorously stimulated both the hopes and fears of those who
consider that it tends to bring nearer the seizure of banking business
by the State. The fear is expressed by Sir Charles Addis, manager of
the Hongkong Bank and director of the Bank of England, in the July
number of the _Edinburgh Review_ in a very interesting article on the
"Problems of British Banking." Sir Charles observes that:

"It may even be questioned whether the gigantic size they have
already attained does not constitute a menace to the predominant
position which the Bank of England has hitherto enjoyed as the
bankers' bank. How will the Bank of England be able to maintain
its supremacy and control the money market, surrounded by banks
individually greater and more powerful than itself, especially
when the object in view is by raising the rate of interest to
prevent an internal or external drain upon our gold reserve? It is
even conceivable that the finance of the State may be threatened,
and it is probably for this reason that in Germany the Prussian
Minister is said to be considering a State monopoly of banking.
Nor can the psychological effect of these great aggrandisements of
capital in the hands of a few banks be ignored. They are virtually
Government-guaranteed institutions. The insolvency of one of
the great banks would involve such widespread disaster that no
Government could stand aside. They would be compelled to make use
of the national resources in order to guarantee the solvency of
private banks. From Government guarantee to Government control
is but a step, and but one step more to nationalisation. We are
playing into the hands of Mr Sidney Webb and the Socialists."

As it happens, in the July number of the _Contemporary Review_, Mr
Sidney Webb was developing the same theme, namely, the inevitability
of banking monopoly and the necessity, as he conceives it, of
defeating private monopoly for the sake of profit, by State monopoly
to be worked, as he hopes, in the public interest. His article is
headed by the rather misleading title, "How to Prevent Banking
Monopoly," for, as has been said, Mr Webb very much wants monopoly,
says that it cannot be helped, and sees the fulfilment of some of his
pet Socialistic dreams in the direction of it by the bureaucrat whom
he regards as the heaven-sent saviour of society. His very interesting
argument is most easily followed by means of a series of quotations.

"We are, it is said, within a measurable distance of there
being--save for unimportant exceptions--only one bank, under
one general manager, probably a Scotsman, whose power over the
nation's industry would be incalculable. Even in the crisis of the
war the matter is receiving the attention of the Government.

"In the opinion of the present writer, the amalgamation of banks
in this country, which has been going on continuously for a
century, though at varying rates, and is being paralleled in
other countries, notably in Germany, and latterly in the Canadian
Dominion, is an economically inevitable development at a certain
stage of capitalist enterprise, and one which cannot effectively
be prevented."

Mr Webb considers that there is no economic limit to this policy of
amalgamation, and that the gains it carries with it are obvious. He
dilates upon these as follows:--

"It may be worth pointing out:

"(a) That apart from the obvious economies in the cost of
administration, common to all business on a large scale, there is,
in British banking practice, a special advantage in a bank being
as extensive and all-pervasive as possible. Where distinct banks
co-exist, there can be no assurance that the periodical shifting
of business, the perpetual transformations in industrial
organisation, the rise and fall of industries, localities or
firms, the changes of fashion and the ebb and flow of demand,
and even a relative diminution of reputation may not lead to a
shrinking of the deposits and current account balances of any one
bank, or even of each bank in turn. Accordingly, every bank has to
maintain an uninvested, or, at least, a specially liquid, reserve
to meet such a possible withdrawal. The smaller, the more
numerous, the more specialised by locality or industry are the
competing banks, the larger must be this reserve. On the other
hand, if all the deposit and current accounts of the nation were
kept at one bank, even if it has innumerable branches, as the
experience of the Post Office Savings Bank shows, no such shifting
of business would affect it; no mere transfers from firm to
firm or from trade to trade would involve any shrinking of its
aggregate balances; and it would need only to have in hand,
somewhere, sufficient currency to replenish temporarily a local
drain on its 'till money.' The nearer the banks can approach to
this condition of monopoly, not only the lower will be their
percentage of working expenses, but also the greater will be the
financial stability, and the smaller the amount that they will
need to keep uninvested in order to meet possible withdrawals.

"(b) That the process of amalgamation has involved an
ever-increasing elimination, from the British banking business, of
the typical profit-maker, first as partner in a private bank, then
as a director in a Joint Stock bank, representing a large personal
holding of shares; and the gradual transfer of practically the
whole conduct of the business to what may be called 'disinterested
management'--that is to say, management by trained, professional
officers serving for salaries, whose remuneration bears no
relation to the profit made on each piece of business transacted.
The part played in the business by the directors themselves seems
to be, with every increase in the magnitude and scope of the
concern, steadily diminishing; and these directors, moreover, come
to be chosen, more and more, not because of their large holdings
of shares, or because of their ancestral or personal connection
with banking, but because of their reputation or influence,
commercial, social or political. The result is that, along with
the process of amalgamation, there has been going on a transfer
of the whole management of banking to the hierarchy of salaried
officials; whilst the supreme decisions on financial policy are in
the hands, in practice, of a very small group of salaried general
managers, only partially in consultation with an equally small
group of chairmen of boards of directors, themselves usually
drawing not inconsiderable salaries."

It seems to me that Mr Webb exaggerates in rather a dangerous degree
the reduction, through amalgamation, of the necessity which obliges
a bank to keep a considerable reserve of cash. It is quite true that
under normal circumstances cash withdrawn from one bank finds its way
in due course to another, and that with regard to these mere "till
money" transfers there might be a considerable reduction in the amount
of cash required if all the banking of the country were in the hands
of one business, so that what was withdrawn from one branch would
be paid into another. But this fact would not alter the need which
compels a bank to keep considerable reserves in cash in order to
provide against the possibility of a run. A State bank, if the public
takes it into its head that it prefers to have a larger proportion of
currency in its own pocket rather than in its bank, may find itself
pulled at for cash just as vigorously as a bank managed by private
enterprise. This was shown in August, 1914, when very large sums were
withdrawn from the Post Office Savings Bank during the crisis which
then impelled many members of the public to hoard money, or compelled
them to take it out of their banks because they did not find that the
ordinary system of payment by cheques was working with its usual ease.

Moreover, Mr Webb's point about what he calls disinterested
management--that is to say, the management of banks by officers whose
remuneration bears no relation to the profit made on each piece of
business transacted--is one of the matters in which English banking
seems likely at least to be modified. Sir Charles Addis, in the
article already referred to, calls attention in a very striking
passage to the efficiency of the administration of German and English
banks, and makes a comparison between the remuneration given to the
banking boards of the two countries. The passage is as follows:--

"Scarcely second in importance to the financial strength of a
bank is the efficiency of its administration. The German board of
direction is composed, to an extent unknown in England, of men
possessed of professional and technical knowledge. No one who has
been present at a meeting of German bank directors in Berlin, when
some foreign enterprise has been under consideration, can have
failed to be impressed by the animation with which it was
discussed, and by the expert and comparative knowledge displayed
by individual directors of the enterprise itself and of the
conditions prevailing in the foreign country in which it was
proposed to undertake it. He may have been led to reflect ruefully
upon the different reception his project met with in his own
country. He will recall the meeting of the London board; the
difficulty of withdrawing its members even temporarily from their
country pursuits and their obvious anxiety to lose no time in
returning to them; most of them old men, many of them long retired
from business; some of them ex-Government officials and the like,
who have never been in business; a few ornamental titled persons;
only one or two here and there who have no train to catch and are
willing to discuss the matter in hand with attention, and, it may
be, with understanding.

"It would be idle to pretend that a board of this kind constitutes
anything like the nexus between industry and finance which obtains
in Germany, and which is very much to be desired in this country.
It may be that we do not pay our men enough. A London director has
to be content with an honorific position, a fee of a few hundred
pounds a year, and, it must be added, a very exiguous degree of
responsibility. That is not enough to attract men in the prime of
life with expert or technical knowledge of industry and finance,
who would have to submit to a reduction in the large incomes they
are earning by the exercise of their special abilities if they
were to accept a seat on the board of a bank. There are two things
which a good man, in the business sense of the term, will not
do without--pay and responsibility. Give him sufficient of the
former, and you may saddle him with as much of the latter as you
like. You may not always get good men by offering them good pay,
but you will certainly not get them without doing so. Apparently
shareholders are content so long as their profits are not reduced
by more than nominal directors' fees. At a recent meeting of a
bank with deposits of over L200,000,000 the proposal to increase
the directors' fees to L1000 a year was met by the rejoinder from
one of the shareholders present that he did not know what the
directors would do with such a sum.

"They manage these things differently in Germany. In the three
banks to which we have already referred, after payment by the
Deutsche Bank of 5 per cent. of the net profits to reserve, and
of the ordinary dividend of 6 per cent., and by the
Disconto-Gesellschaft and the Dresdner Bank of 4 per cent., the
directors receive respectively 7 per cent., 7-1/2 per cent., and
4 per cent. (the Disconto's personally liable partners receive 16
per cent.) out of the remainder. The directors are bound by law
to supervise all the details of the bank's business, and to keep
themselves well informed as to its general policy and methods of
management. They are bound by law to exercise the caution of
a careful business man, and are liable to be sued for damages
arising out of the crime or negligence of their employees. If
cases of this kind are seldom brought to public notice, it is not
because they do not occur, but because the directors, as a rule,
prefer to pay up for the laches of their employees, as they can
well afford to do out of their profits, rather than be haled
before the Court."

When Mr Webb comes to the question of the dangers resulting from
monopoly, he finds that they lie chiefly in a restriction of
facilities, and in raising the price exacted for them, and that in
both respects the danger appears to be great. There is, he says, every
reason to expect that the banker, as the nearest approach to the
"economic man," will take the opportunity of raising his charges
either by increasing the frequency and the rate of the commission
exacted for the keeping of a small account, or by reducing the rate of
interest allowed on balances, or adopting the common London practice
of refusing it altogether. "The banker, who is not in business for his
health, may be expected, on this side of his enterprise, to pursue the
policy of 'charging all that the traffic will bear.' It would probably
pay the banker actually to refuse small accounts, and to penalise the
employment of cheques for small sums. This would be a social loss."

With regard to the other side of his business, lending to the
borrowers, Mr Webb thinks it need not be assumed that the monopolist
banker will actually lend less, because he will seek at all times to
employ all the capital or credit that he can safely dispose of, but Mr
Webb thinks that he is likely, as the result of being relieved of the
fear of competition; to feel free to be more arbitrary in his choice
of borrowers, and therefore able to indulge in discrimination against
persons or kinds of business that he may dislike; that he will raise
his charges generally for all accommodation, again, theoretically
to "all that the traffic will bear"; and, finally, that in times of
stress with regard to all applicants, and at all times with regard to
any applicant who was "in a tight place," that he will extort as the
price of indispensable help a theoretically unlimited ransom.

Such are the effects which Mr Webb fears from the process which has
already put the control of the greater part of the banking facilities
of England into the hands of five huge banks. He thinks that these
things may happen long before it is a question of an absolute monopoly
in one hand. A monopoly, he says, may be more or less complete, and
the economic effects of monopoly may be produced to a greater or less
degree at a point far below a complete monopolisation in a single
hand. There is much truth in this contention of his. Amalgamation has
now come to such a point that every new one not only brings absolute
monopoly more closely in sight, but increases the ease with which
agreements among the huge banks might suffice to produce the effects
of monopoly without further amalgamations. Mr Webb goes on to
argue that it is impossible to stop by legislative prohibition or
restriction the progress towards economic monopoly where such progress
is financially advantageous to those concerned, and that the only
remedy ultimately by which the community can be protected from the
dangers which he sees threatening it is for the community to take the
monopoly into its own hands, and so to get rid, not of the monopoly,
which, from the standpoint of national organisation, he thinks is
advantageous, but of the motives leading to extortion. If, he says,
"no shareholders are in control with their perpetual and insatiable
desire for profit, there is no inducement to take advantage of the
needs or helplessness of the customers by restricting service or
raising prices." In this sentence, of course, he begs the whole
question between the advantage of private enterprise and of
Socialistic organisation. Private enterprise works for profit, and
therefore makes as much profit as it can out of its customers. It is,
therefore, according to Mr Webb's argument, probable that if private
enterprise in banking is able to establish monopoly it will squeeze
the public to the point of restricting banking facilities and making
them dearer. No one can deny that there is some truth in this
contention, but, on the other hand, it may very fairly be argued that
modern business has perceived the great advantages of a big turnover
and small profits on each transaction. The experience of the great
insurance companies, and of great catering companies, and of enormous
private organisations such as the Imperial Tobacco Company, has shown
the enormous advantage of providing cheap facilities to the largest
possible number of customers; so that fears of natural restriction of
banking facilities, through monopoly, if they cannot be set altogether
aside, are not by any means a certain consequence even of the
establishment of monopoly in private enterprise.

Still weaker is Mr Webb's assumption that if the interests of the
shareholders with "their perpetual and insatiable desire for profit"
were eliminated, cheap and plentiful banking facilities would
inevitably result from bureaucratic management. The contrary has
been shown to be the case in the examples of the Post Office, of the
Telephone Service, and the London Water Supply. In the case of the
telegraph and the telephones, the Government took over prosperous
businesses, and has managed them at a loss. In the matter of the Post
Office it is not possible to compare the Government with individual
enterprise, but it will generally be admitted that the Telephone
Service has by no means been improved since the Government took it
over. Mr Webb points out that nationalisation, whether of banks or of
other forms of enterprise, does not necessarily mean government under
a Minister by a branch of the Civil Service. But it is impossible to
ignore the fact that as soon as nationalisation takes place those who
are responsible for the management of the enterprise are practically
certain to develop the qualities and idiosyncrasies of civil servants,
which are so unlikely to tend to elasticity, rapidity and efficiency
in business management.

In fact, Mr Webb practically grants this point by the very interesting
development he suggests by which the two chief functions of banking
should be differentiated, and one of them should be nationalised
and the other should remain in the hands of private enterprise. He
develops this truly ingenious suggestion as follows:--

"Just as we have (except for some obsolescent survivals) separated
the function of issuing paper money from that of keeping current
accounts, so we shall separate the function of keeping current
accounts from that of money-lending. The habit of the British
banker of combining in one and the same concern (_a_) the
essentially routine business of keeping current accounts or
receiving deposits; and (_b_) the much more difficult and
hazardous business of lending capital to private traders, is not
a necessary characteristic of banking organisation; and, whilst
possibly the most profitable to the profit-seeking banker, this
combination may not be the most advantageous from the standpoint
of the community.

"It may accordingly be suggested that the business of banking, as
understood in this country, is destined to be further divided into
two parts, one of which is ripe for immediate nationalisation, and
need no longer be carried on for private profit, whilst the
other should be the sphere of a number of separate and diversely
specialised organisations catering for particular needs. The whole
of the deposit and current account side of banking--with its
services in the way of keeping securities, collecting dividends,
meeting calls, making regular payments, and carrying through the
purchase and sale of securities--ought to be united with the Post
Office and Trustee Savings Banks and the money order and other
postal remittance business, and run as a national service for the
receipt and custody of cash, for the utmost possible development
of the cheque system, and for the cheapest possible organisation
of remittances. There is no longer any reason why this important
branch of social organisation should be abandoned to the
profit-maker, should be made the instrument of levying an
unnecessarily heavy toll on the customers for the benefit of
shareholders, and should now be exposed to the imminent danger of
monopoly.

"If the receipt and custody of deposits and the keeping of current
accounts were made a public service the Government might invest
the funds thus placed at its disposal in a variety of ways. A
certain proportion, perhaps corresponding to what is now held
as savings, would be invested, as at present, in Government
securities--not Consols, but such as are repayable at par at fixed
dates, including Treasury Bills and Terminable Annuities; and any
increase in this amount would, in effect, release so much capital
for other uses, by paying off part of the National Debt. But the
bulk of the amount, corresponding with the proportion of their
resources that the bankers now lend for business purposes, might
be advanced, for terms of varying duration, partly to Government
Departments and local authorities for all their great and rapidly
extending enterprises, formerly abandoned to the profit-maker; and
partly to a series of financial concerns, whose business it should
be to discount the bills and satisfy the requests for loans of
those profit-makers who now appeal to the bankers. But these
financial concerns should be organised, it is suggested, very
largely by trades and industries, specialising in particular
lines, and devoted, so far as possible, to meeting the business
needs of the different occupations. Whether they should be
financial concerns, owned and directed by shareholders, and ran
for their profit; or whether they might not, in some cases, be
owned and directed by the great industrial associations and
combinations that the Government is now promoting in the various
industries, and be run for the advantage of the industries as
wholes, may be a matter for consideration and possible experiment.
In either case, the concerns to which the Government would lend
its capital would, of course, have to be of undoubted financial
stability to be secured, it may be, by large uncalled capital,
or by the joint and several guarantees of a numerous membership;
coupled, possibly, with a charge on the assets."

At first sight this proposal to differentiate the functions of banking
is somewhat startling, and one wonders whether it could possibly
work. On consideration, however, there seems to be nothing actually
impracticable about the scheme. The Government would presumably take
over all the offices and branches of the banks of the country, and
would therein accept money on deposit and current account, making
itself liable to pay the money out on demand or at notice, as the
case may be, just as is done by the existing banks; it would hold
the necessary cash reserve, and it would apparently itself invest a
certain proportion of the money in Government securities, as the banks
do at present. The more difficult part of the banking business, the
advancing of money to borrowing customers, it would hand over to
financial institutions, created for this purpose presumably out of the
ashes of the nationalised banking business. These institutions would
make themselves responsible for the lending side of banking, and would
obviously, and naturally, be allowed to make a profit on this side of
the business. In this differentiation Mr Webb's ingenuity is seen at
its very best. He reserves for the State that part of banking which is
purely a matter of routine, and he leaves to private enterprise that
part of it which requiries the elasticity and judgment and quickness
in which the average bureaucrat is most likely to fail. A certain
amount of friction may easily arise from this differentiation. The
interest that the State would be enabled to allow to depositors would
clearly depend to a great extent on the interest which it would be
able to receive from the financial institutions engaged in lending
the money. These institutions could naturally pay the State interest
according to the rate which they were able to charge their borrowing
customers, leaving themselves a margin for profit and for protection
against the risk that their business would involve. It is obvious that
there might at times be considerable difficulty in adjusting these two
different points of view, and anybody who knows anything about the
length of time and argument involved in inducing officials to make up
their minds can only fear that occasional jarring in this connecting
link between the two sides of banking might sometimes produce effects
which would be awkward for the industry of the country.

But apart from this obvious difficulty, can we contemplate with
equanimity the prospect of the State monopoly of the ordinary banking
facilities as they present themselves to the man in the street,
namely, the provision of bank branches, the use of the cheque book,
the custody of securities and any other articles that the customer
wishes to leave with his bank? At present the ease and quickness with
which these routine matters of banking are carried out in England are
developed to a point which is the envy of foreign visitors. How would
it be if every cashier of every bank were converted by the process of
nationalisation from the kindly, businesslike human being as we know
him into the kind of person who ministers to our wants behind the
counters of the Post Office? As it is, we go into our bank, to present
a cheque in order to provide ourselves with cash for the daily
purposes of life; the cashier looks at the signature, recognises
the customer, hands him over the money. If that cashier became
a Government official how long would it take him to verify the
signature, to see whether the customer really had a balance to his
credit, and finally furnish him with what he wanted? It is obvious
that the change suggested by Mr Webb, though it might work, could
only work to the detriment of the convenience of the public, and his
hopeful view that the elimination of the profits of the shareholders
would mean that these profits would go into the pockets of the
community in the form of cheapened facilities for banking customers
is an ideal largely based on the assumption, that has so often been
proved to be incorrect, that the State can do business as well and as
cheaply as private enterprise. It is much more likely that after a
few years' time the public would find the business of paying in and
getting out its money a very much more tedious and irritating process
than it is at present, and that the expenses of the matter would
have grown to such an extent that the taxpayer might be called upon
annually to make good a considerable loss.