VI

OUR BANKING MACHINERY

_February_, 1918

The Recent Amalgamations--Will the Provinces suffer?--Consolidation
not a New Movement--The Figures of the Past Three Decades--Reduction
of Competition not yet a Danger--The Alleged Neglect of Local
Interests--Shall we ultimately have One Huge Banking Monopoly?--The
Suggested Repeal of the Bank Act--Sir E. Holden's Proposal.


Banking problems have lately loomed large in the financial landscape.
It will be remembered that about a year and a half ago a Committee
was appointed to consider the creation of a new institution specially
adapted for financing overseas trade and for the encouragement of
industrial and other ventures through their years of infancy, and
that the charter which was finally granted to the British Trade
Corporation, as this institution was ultimately called, roused a
great deal of opposition both on the part of banks and of traders who
thought that a Government institution with a monopoly character
was going to cut into their business with the help of a Government
subsidy. In fact, there was no subsidy at all in question, and the
fears of the trading world of competition on the part of the new
chartered institution only arose owing to its unfortunate name, which
was given to it in order to allay the apprehensions of the banks which
had been provoked by the title originally designed for it, namely, the
British Trade Bank. There seems no reason why this Company should
not do good work for British trade without treading on the toes of
anybody. Although naturally its activities cannot be developed on any
substantial scale until the war is over, its Chairman assured the
shareholders at the end of January that its preliminary spadework was
being carefully attended to.

After this small storm in a teacup had died down those interested in
our banking efficiency were again excited by the rapid progress made
by the process of amalgamation among our great banks, which began to
show acute activity again in the last months of 1917. The suddenly
announced amalgamation of the London and South-Western and London
and Provincial Banks led to a whole host of rumours as to other
amalgamations which were to follow; and though most of these proved to
be untrue a fresh sensation was aroused when the union was announced
of the National Provincial Bank of England and the Union of London and
Smith's Bank. All the old arguments were heard again on the subject of
the objections, from the point of view of industry in the provinces,
to the formation of great banking institutions, with enormous figures
on both sides of the balance-sheet, working from London, often, it was
alleged, with no consideration for the needs of the provincial users
of credit. These latest amalgamations, which have united banks which
already had head offices in London, gave less cause than usual for
these provincial apprehensions, which had far more solid reason behind
them when purely provincial banks were amalgamated with institutions
whose head office was in London. Nevertheless, the argument was heard
that the great size and scale on which these amalgamated banks were
bound to work would necessarily make them more monopolistic and
bureaucratic in their outlook, and less elastic and adaptable in their
dealings with their local customers.

It seems to me that there is so far very little solid ground for any
apprehension on the part of the business community that the recent
development of banking evolution will tend to any damage to their
interests. The banks have grown in size with the growth of industry.
As industry has tended more and more to be worked by big battalions,
it became necessary to have banking institutions with sufficiently
large resources at their command to meet the great requirements of the
huge industrial organisations that they had to serve. Nevertheless,
the tendency towards fewer banks and bigger figures has grown with
extraordinary celerity, as the following table shows:--

MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC.,
SINCE 1886.

December No. of Number of Capital Deposit and Total
31st Banks Branches Paid up Current Liabilities
Accounts
1886 109 1,547 L38,468,000 L299,195,000 L376,808,000
1891 106 2,245 43,406,000 391,842,000 486,632,000
1896 94 3,051 45,203,000 495,233,000 599,518,000
1901 74 3,935 46,631,000 584,841,000 698,150,000
1906 55 4,840 48,122,000 647,889,000 782,353,000
1911 44 5,417 47,265,000 748,641,000 885,069,000
1916 35 5,993 48,237,000 1,154,877,000 1,316,220,000

This table is taken from the annual banking numbers of the
_Economist_. It will be noticed that in 1886 there were in England 109
joint-stock banks with 1547 offices, whose accounts were tabulated
in the _Economist's_ annual review. Their total paid-up capital was
38-1/2 millions, their deposit and current accounts were just under
300 millions, and their total liabilities were 377 millions. In the
course of thirty years the 109 banks had shrunk by the process of
amalgamation and absorption to thirty-five, that is to say, they had
been divided by three; the number of their offices, however, had been
multiplied by nearly four, while their deposit accounts had grown from
300 millions to 1155, and their total liabilities from 377 to 1316
millions. By the amalgamations announced at the end of 1917, and that
of the County of Westminster with Parr's announced on February 1st,
the number of joint stock banks will be reduced to 32. The picture
would be still more striking if the figures of the private banks were
included, since their number has been reduced, since 1891, from 37 to
6. These figures are eloquent of the manner in which the number of
individual banks has been reduced, while the extent of the banking
accommodation given to the community has enormously grown, so that the
power wielded by each individual bank has increased by the force of
both these processes.

The consequent reduction in competition which is causing some concern
among the trading community has not, as it seems to me, gone far
enough yet to be a serious danger. The idea that the big banks with
offices in London give scant consideration to the needs of their local
customers seems to be so contrary to the interests of the banks that
they would be extraordinarily bad men of business if those who were
responsible for their management allowed it to be the fact. It is
probably nearer the truth that banking competition in the provinces is
still so keen that the London management is very careful not to allow
anything like bureaucratic stiffness to get into the methods by which
their business is managed. By the appointment of local committees they
are careful to do all they can to see that the local interests get all
the credit that is good for them. That local interests get as much
credit as they want is probably very seldom the case, because it is a
natural instinct on the part of an eager business man to want rather
more credit than he ought to have, from a banking point of view.
Business interests, as long as they exist in private hands, will
always want rather more credit than there is available, and it will
always be the duty of the banker to ensure that the country's industry
is kept on a sound basis by checking the tendency of the eager
business man to undertake rather more than is good for him. From the
sentimental point of view it is certainly a pity to have seen many of
the picturesque old private banks extinguished, the partners in which
were in close personal touch with their customers, and entered into
the lives of the local communities in a manner which their modern
counterpart is perhaps unable to do. Nevertheless, it is difficult
to get away from the fact that if these institutions had been as
efficient and as well managed as their admirers depict them to have
been they would hardly have been driven out of existence by the stress
of modern developments and competition. Whatever we may think of
modern competition, in certain of its aspects, we may at least be
sure of this--that it does not destroy an institution which is really
wanted by the business community. And if the complaint of local
interests is true, that they are swamped by the cosmopolitan
aspirations of the great London offices, they always have it in their
power to create an institution of the kind that they want, and by
giving it their business to ensure for it a prosperous career. As long
as no such tendency is visible in the banking world we may be pretty
sure that the views expressed concerning the neglect of local
interests by the enormous banks which have grown up with London
centres in the last thirty years is to a great extent a myth. It
has now announced, however, that the whole problem involved by the
amalgamation process is to be sifted by a committee to be appointed
for this purpose.

Another apprehension has arisen in the minds of those who view with
critical vigilance the present tendencies of business and the
present development of economic opinion among a great section of the
community. If, it is urged, the banks continue to swallow one another
up by the process of amalgamation, how will this tendency end except
in the creation of one huge bank working a gigantic money monopoly
which the Socialistic tendencies of the present day will, with some
reason, insist ought to be taken over by the State for the profit of
the taxpayer? This view is frankly put forward by those advocates of a
Socialistic organisation of society, who say that the modern tendency
of industry towards combinations, rings and trusts is rapidly bringing
the Socialistic millennium within their reach without any effort
on the part of Socialistic preachers. They consider that the trust
movement is doing the work of Socialism, much faster than Socialism
could do it for itself; that, in short, as has been argued above
in regard to banking, the tendency towards centralisation and the
elimination of competition can only end in the assumption by the State
of the functions of industry and finance. If this should be so, the
future is dark for those of us who believe that individual effort
is the soul of industrial and financial progress, and that industry
carried on by Government Departments, however efficient and economical
it might be, would be such a deadly dull and unenterprising business
that all the adaptability and tendency to variation in accordance with
the needs of the moment, which are so strongly shown by individual
enterprise, would be lost, to the great detriment of the material
progress of mankind.

As things are at present, there is little need to fear that
Socialistic organisation of industry could stand up against competent
individual effort. Anybody who has ever had any business dealings
with a Government Department will inevitably shudder when he tries to
imagine how many forms would have to be filled up, how many divisions
of the Department the inevitable mass of papers would have to go
through, and how much delay and tedium would be involved before the
simplest business proposition could be carried out. But, of course, it
is argued by Socialists that Government Departments are only slow and
tied up with red tape because they have so long been encouraged to do
as little as possible, and that as soon as they are really urged to do
things instead of pursuing a policy of masterly inactivity, there is
no reason why they should not develop a promptitude and elasticity
quite as great as that hitherto shown by the business community.
That such a development as this might take place in the course of
generations nobody can deny; at present it must be admitted that with
the great majority of men the money-making incentive is required to
get the best out of them. If the process of education produces so
great a change in the human spirit that men will work as well for the
small salary of the Civil Service, with a K.C.B. thrown in, as they
will now in order to gain the prizes of industry and finance, then
perhaps, from the purely economic point of view, the Socialisation
of banking may be justified. But we are a long way yet from any such
achievement, and if it is the case that the rapid centralisation of
banking power in comparatively few hands carries with it the danger
of an attempt to nationalise a business which requires, above all,
extreme adaptability and sensitiveness to the needs of the moment
as they arise, this is certainly a danger which has to be carefully
considered by those who are responsible for the development of these
amalgamation processes.

And now another great stone has been thrown into the middle of the
banking pond, causing an ever-widening circle of ripples and provoking
the beginning of a discussion which is likely to be with us for some
time to come. Sir Edward Holden, at the meeting of the London City and
Midland Bank shareholders on January 29th, made an urgent demand for
the immediate repeal of the Bank Act of 1844. This Act was passed,
as all men know, in order to restrict the creation of credit in
the United Kingdom. In the early part of the last century the most
important part of a bank's business consisted of the issue of notes,
and banking had been carried on in a manner which the country
considered unsatisfactory because banks had not paid sufficient
attention to the proportion of cash that they ought to hold in their
tills to meet notes if they were presented. Parliament in its wisdom
consequently ordained that the amount of notes which the banks should
be allowed to issue, except against actual metal in their vaults,
should be fixed at the amount of their issue at that time. Above the
limit so laid down any notes issued by the banks were to be backed by
metal. In the case of the Bank of England the limit then established
was L14,000,000, and it was enacted that if any note-issuing bank gave
up its right to a note issue the Bank of England should be empowered
to increase its power to issue notes against securities to the extent
of two-thirds of the power enjoyed by the bank which was giving up its
privilege. By this process the Bank of England's right to issue notes
against securities, what is usually called its fiduciary issue, has
risen to L18,450,000; above that limit every note issued by it has to
be backed by bullion, and is actually backed by gold, though under
the Act one-fifth might be in silver. It was thus anticipated by the
framers of the Act that in future any credit required by industry
could only be granted by an increase in the gold held by the issuing
banks. If the Act had fulfilled the anticipations of the Parliament
which passed it, if English trade had grown to anything like the
extent which it has done since, it could only have done so by the
amassing of a mountain of gold, which would have lain in the vaults of
the Bank of England.

Fortunately, however, the banking community had at its disposal a
weapon of which it was already making considerable use, namely, the
system of issuing credit by means of banking deposits operated on by
cheques. Eight years before Peel's Act was passed two Joint Stock
Banks had been founded in London, although the Bank of England
note-issuing monopoly still made it impossible for any Joint Stock
Bank to issue notes in the London district. It is thus evident that
deposit banking was already well founded as a profitable business when
Peel, and Parliament behind him, thought that they could sufficiently
regulate the country's banking system so long as they controlled the
issue of notes by the Bank of England and other note-issuing banks. It
is perhaps fortunate that Parliament made this mistake, and so enabled
our banking machinery to develop by means of deposit banking, and so
to ignore the hard-and-fast regulations laid upon it by Peel's Act.
This, at least, is what has happened; only in times of acute crisis
have the strict regulations of Peel's Act caused any inconvenience,
and when that inconvenience arose the Act has been suspended by the
granting of a letter of indemnity from the Treasury to the Governor of
the Bank.

Under Peel's Act the present rather anomalous form of the Bank of
England's Weekly Return was also laid down. It shows, as all men know,
two separate statements; one of the Issue Department and the other of
the Banking Department. The Issue Department's statement shows the
notes issued as a liability, and on the assets side Government debt
and other securities (which are, in fact, also Government securities),
amounting to L18,450,000 as allowed by the Act, and a balance of gold.
The Banking Department's statement shows capital, "Rest" or reserve
fund, and deposits, public and other, among the liabilities, and on
the other side of the account Government and other securities, all the
notes issued by the Issue Department which are not in circulation, and
a small amount of gold and silver which the Banking Department holds
as till money.

Sir Edward Holden's proposal is that the Act should be repealed
practically in accordance with the system which has been adopted by
the German Reichsbank. The principles which he enumerates, as those on
which other national banks of issue work, are as follows:--

1. One bank of issue, and not divided into departments.

2. Notes are created and issued on the security
of bills of exchange and on the cash balance, so that
a relation is established between the notes issued
and the discounts.

3. The notes issued are controlled by a fixed
ratio of gold to notes or of the cash balance to notes.

4. This fixed ratio may be lowered on payment
of a tax.

5. The notes should not exceed three times the
gold or cash balance.

By this revolution Sir Edward would abolish all legal restriction on
the issue of notes by the Bank of England. It would hold a certain
amount of gold or a certain amount of cash balance against its notes,
but in the "cash balance" Sir Edward apparently would include 11
millions odd of Government debt, or of Treasury notes. As long as its
notes were only three times the amount of the gold or of the "cash
balance," and were backed as to the other two-thirds by bills of
exchange, the situation would be regarded as normal, but if, owing to
abnormal circumstances, the Bank desired to increase the amount of
notes issued against bills of exchange only and to reduce the ratio of
its gold or its cash balance to its notes, it would, at any time, be
enabled to do so by the payment of a tax, without going through the
humiliating necessity for an appeal to the Treasury to allow it to
exceed the legal limit.

At the same time, by the abolition of Peel's Act the cumbrous methods
of stating the Bank's position, as published week by week in the Bank
Return, would be abolished. The two accounts would be put together,
with the result that the Bank's position would be apparently stronger
than it appears to be under the present system, which makes the
Banking Department's Return weak at the expense of the great strength
that it gives to the appearance of the Issue Department. This will be
shown from the following statement given by Sir Edward Holden of the
Return as issued on January 16th, and as amended according to his
ideas:--

BANK STATEMENT, JANUARY 16, 1918.

ISSUE DEPARTMENT

Notes Issued .. L76,076,000 Gold .................. L57,626,000
Government Debt ....... 11,015,000
Other Securities ...... 7,435,000
----------- -----------
L76,076,000 L76,076,000
Ratio of Gold to Notes Issued = 75.7 per cent.

BANKING DEPARTMENT.

Capital ....... L14,553,000 Government Securities ...... L56,768,000
Rest .......... 3,363,000 Other Securities ........... 92,278,000
Deposits-- Notes .......... L30,750,000
Public L41,416,000 Gold and Silver 1,143,000
Other 121,589,000
----------- 163,005,000 ------------- 31,893,000
Other Liabilities ... 18,000
----------- -----------
L180,939,000 L180,939,000

Ratio of Cash Balance to Liabilities = 19.6 per cent.

RECONSTRUCTED BALANCE-SHEET OF THE BANK,
JANUARY 16, 1918.

Capital L14,553,000
Rest 3,363,000
Notes Issued (circulation) 45,325,000
Deposits 163,005,000
Other Liabilities 18,000
___________
L226,264,000

Gold L58,768,000
Currency Notes 11,015,000
___________ L69,783,000

Government Securities 56,768,000
Other Securities 7,435,000
_________ 64,203,000

Other Securities 92,278,000
___________
L226,264,000

Ratio of Gold to Notes =129.7 per cent.
" " Cash Balance to Liabilities = 33.5 "

It need not be said that these proposals have aroused the liveliest
interest. At the Bank Meetings held since then several chairmen
have been asked by their shareholders to express their views on Sir
Edward's proposed revolution. Sir Felix Schuster pronounced cautiously
in favour of the revision of the Bank Act, and said that he had
advocated it seventeen years ago. Lord Inchcape, at the National
Provincial Meeting, thought that the matter required careful
consideration. Most of us will agree with this view. There is
certainly much to be said for a reform of the Weekly Statement of the
Bank of England, giving, it may be added, a good deal more detail
than Sir Edward's revised balance-sheet affords. But concerning his
proposal to reconstruct our system of note issue on a foreign model,
there is certain to be much difference of opinion. In the first place,
owing to the development of our system of banking by deposit and
cheque rather than by issue and circulation of notes, the note issue
is not nearly so important a business in normal times in this country
as it is in Germany and France. Moreover, the check imposed upon our
banking community by the need for an appeal to the Treasury before it
can extend its note issue beyond a certain point often acts with, a
salutary effect, and the view has even been expressed that if that
check were taken away from our system it might be difficult, if not
impossible, to maintain the gold standard which has been of such
enormous value in building up the prestige of London as a financial
centre. I do not think there is much weight in this argument, since,
under Sir Edward's plan, the note issue could only be increased
against discounts, and the Bank, by the charge that it made for
discounts, would still be able to control the situation. From the
practical point of view of the present moment, a strong objection
to the scheme is that it would open the door to fresh inflation by
unrestricted credit-making just when the dangers of this process are
beginning to dawn even on the minds of our rulers.