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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XVIII

Commerce and Finance - Chapter XVIII

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII







ENGLISH BANKING.

BANK OF ENGLAND; PEEL'S ACT, 1844; ONE RESERVE; BANKING
AND ISSUE DEPARTMENTS.

After the industrial revolution which set in during the latter
part of the eighteenth century, England took first place, com-
mercially, among the nations of Europe, and London became the
financial capital and center of her growing commerce. As the
trade of Amsterdam declined, that of London increased, and as
wealth accumulated, England gradually became a creditor natipn/
London as loaning and investing extensively in various parts

a Financial of the world. She is at the present time the great
creditor nation of the world, loaning through the
bankers of London large sums to foreign governments and citi-
zens. These loans and investments necessitate the return of in-
terest and dividends to the bankers of Lombard Street, in the
aggregate amounting annually to many millions of pounds.
Many of the largest transactions in the world are settled in
London, and the world's supply of gold there finds its natural
point of distribution. London has thus become, practically,
the center of the exchanges of the world, and is not inappro-
priately called the "World's Clearing House." Whether this
conditon of affairs is due to the general westward course of em-
pire and commercial development; to the freedom of the British
Isles from invasion and the ravages of war; to the genius of the
people for finance and commerce; or to the money system and the
Bank of England itself, or all of these combined, is not easy to
determine, but there are many Englishmen who would ascribe
it chiefly to the Bank of England. Certain it is, that the
Bank of England is the center around which the commercial and
monetary systems of the British Empire revolve, and the support

178

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BANK OF ENGLAND. 179

of the whole fabric. The Bank of England, although a highly
privileged establishment, is not a government institution. It has
practically a monopoly of the note issuing power, and its notes
are the only legal tender currency of the United Kingdom. It
is the chief depository of a government which has no public
treasury. It keeps the registry of the public debt, issues the
consols and pays the interest thereon, and yet, withal, it is only
a private corporation, subject to no government inspection or
control, and managed by a board of directors who are alone
responsible to the stockholders, the same as in the case of other
corporations.

The Bank of England was founded in 1694 in very much the
same manner as the Bank of Venice as a result of the financial
straits of the government. William and Mary were in sore need
of funds to prosecute the wars against Louis XIV. Their treas-
ury was empty and their credit weak. The increasing wealth of
the country since Elizabeth's reign had been the cause of a large
number of private banks springing up in London and other parts
of the realm, each issuing its own notes to whatever extent they
would be accepted by the public. The necessity for a great
central bank, similar to that of Amsterdam or the Italian cities,
was becoming apparent. The government desired a popular
loan of a million sterling, and William Patterson, a Scotchman,
crystallized the idea by proposing that Parliament should ask a
origin of l an k v public subscription, and in order to make

the Bank of the proposition attractive, include a grant of in-
corporation, with banking privileges to be enjoyed
by the subscribers and their successors. In this way 1,200,000
was raised at eight per cent, interest, and the subscribers were
incorporated as the "Governor and Company of the Bank of
England," with that amount as a capital.

The bank was to have the privilege of issuing notes, keeping
the accounts of the public debt, and of transacting a general
banking business, with almost a complete freedom from restraint.



180 HISTORY OF BANKING.

The entire capital was loaned to the government and thus the
bank had a revenue of nearly 100,000 at the very outset of its
career. It began at once to issue circulating notes based upon
the government securities which it held, another productive
source of income. These bills, however, were only
transferable by endorsement, like ordinary promis-
sory notes, and bore interest two conditions
which must have confined them to a very limited circulation.
Three years later the bank was compelled to suspend specie
payment, and the necessities of the government were such that
in consideration of the stockholders advancing another million
pounds to the government the bank's charter was modified. The
new charter authorized the issue of notes payable to bearer on
demand, thus laying the foundation for the present system
of Bank of England notes. It also gave the corporation a mo-
nopoly of the banking business in the kingdom by providing
that no other bank, or corporation in the nature of a bank,
should be allowed to carry on business in the kingdom. The
rate of interest on the government loan was then reduced to six
per cent. Further loans to the government and corresponding
additions to its capital were afterwards made by the bank from
time to time, until in 1722 its capital stood at nearly nine
million pounds, with a handsome surplus (called the "Best"),
which enabled its dividends to be made uniform. In 1782 its
capital had risen to more than eleven millions and a half, and
in 1816 it had further increased to 14,553,000, or about $72,-
000,000, at which figure it has stood ever since. Its loans to the
government increased almost as its capital enlarged, but in 1834
the government paid about one-fourth, reducing the total to
11,015,100, which is its present amount. The interest has
been reduced from time to time, until it has reached the present
rate, 2J per cent.

The monopoly of the Bank of England, dating, as has just
been stated, from 1697, was modified in 1742 so as to permit



BANK OF ENGLAND NOTES. 181

partnerships having six persons or less to issue circulating notes,
and allow companies or partnerships of more than six persons to
perform other functions of a bank. Under this law private
banks were formed and notes were issued quite extensively dur-
ing the latter half of the eighteenth century. About the year
1772 the check system was devised and brought into use, and
proved such a convenience that many of the London banks
discontinued the issue of notes. In 1826, owing to the general
Legislation demand for better banking facilities throughout

Affecting the kingdom, and the slowness of the Bank of

England in establishing branches, Parliament
passed an act giving to companies of more than six persons the
right of issuing notes, when established at a greater distance
than sixty-five miles from London, thus limiting the monopoly of
the Bank of England in territory. Then in 1833 the law was
again amended so as to permit companies and partnerships,
although composed of more than six persons, to carry on the
business of banking in tendon or within the sixty-five mile
radius, provided they did not issue circulating notes. This act
was followed by the formation of numerous joint-stock banks
in London as well as throughout neighboring towns, and bank?
of issue began business beyond the sixty-five mile limit. The
London and Westminster Joint-Stock Bank, one of the leading
banks of London at present, was founded at this time (1835).

Thus matters progressed until the accession of Sir Eobert
Peel to the Premiership of England, and the question of the
renewal of the bank's charter in 1844. The panics of 1811 and
1825, and the panicky conditions in 1837 and 1839, had aroused
much discussion, and public opinion was disposed to regard the
vicious note circulation which had extended rapid-
ofxtSli 8 J ty an( ^ widely as the cause of these repeated com-

mercial crises. Prior to the act of 1844 the law
made no distinction in the bank's liabilities, the resources being
held equally as security for deposits and the redemption of cir-



182 HISTORY OF BANKING.

culating notes. Under this state of affairs, if the depositors
demanded coin to such an extent as to exhaust the reserve there
would he no coin left for the note holders, or vice versa. In
the panic of 1825 the demands of depositors reduced the reserve
to only a little more than a million pounds, while there was
yet outstanding note issues amounting to over twenty-three mil-
lion pounds. By the act of 1844 Parliament undertook to make
the notes of the Bank of England secure and limit the issue of
hank notes of all other banks in the realm. With a stable cur-
rency redeemable in gold, Sir Robert Peel believed that fear and
distrust, the bases of panics, would be banished from English
commerce, and panics would cease, and yet three years after
the passage of the act (1847) the country experienced a panic,
and ten years thereafter (1857) one of the greatest financial
panics ever known shook the English banking and commercial
world from center to circumference, to be followed in 1866 by
still a third panic of intense severity.

By the act of 1844 the bank was 'divided into two depart-
ments, viz., the banking department and the issue department.
The former was to perform the functions of ordinary banking,
such as receiving deposits, discounting paper, selling or buying
exchange, etc. The latter was charged with the exclusive issue
and redemption of circulating notes. These two departments
of the bank were to be kept as separate and distinct as though
they were two independent corporations. The issue department
Division into was required to hold either government securities
TWO Depart- or coin or bullion for all notes issued by it, and
since the original provision limits the amount of
the securities to 14,000,000, it follows that all notes issued
above that amount must have an equivalent of coin or bullion in
the vaults of the Bank. Of the 14,000,000 in securities 11,-
015,100 due by the British government formed a part. The act
also provided that the Bank might hold silver to the extent of
one-quarter of its gold, and issue notes against such holdings,



"PEEL'S ACT" OF 1844. 183

but this was never done. By another provision of the act,
should any other bank, issuing notes at the time of the passage of
the act, discontinue such issue, the Issue Department of the Bank
of England might increase its holdings of securities to the amount
of two-thirds of the issue of said retiring bank, and issue its
own notes against such securities. By this means the Bank of
England will eventually become the exclusive bank of issue, for
one by one the joint-stock banks discontinue their issues, and
cannot resume them, the privilege passing directly to the Bank
of England.

The amount of securities held by the issue department against
which notes may be issued by the bank has been increased from
time to time by the discontinuance of note issues by other banks,
until it amounted in 1900 to 17,775,000, and the amount of
notes issued against gold coin or bullion on hand amounted to
27,116,000, making a total of outstanding circulating notes
44,891,000. It will thus be seen that the issue department of
the bank is simply an establishment for the exchange of notes
Bank of ^ or b u Hi n or bullion for notes. Every Bank

England of England note outstanding is practically a gold

certificate, since the bank has gold on hand to pay
on demand every note that it has put in circulation, except the
comparatively small portion of the reserve represented by the
debt, and which is partially covered by the bank's surplus. These
notes are a legal tender, as long as the bank is able to redeem
them in gold. By thus keeping a redemption fund of gold in
the bank vaults sufficient to actually redeem the notes in circu-
lation, the element of credit is entirely taken out of the circulat-
ing medium of the United Kigdom, and the note holder knows
that he can get its face value in gold at any moment. This
stability of the currency, it was believed by the supporters of the
Peel Act, would banish all fear from the minds of note holders
and prevent the hoarding of gold. Since the hoarding of money
through fear partially causes panics by making loanable capital



184 HISTORY OF BANKING.

scarce, it was contended that when the motive to hoard was
destroyed panics would cease.* But the panics of 1847, 1857 and
1866 were not prevented by the stability of the currency, and
in fact the panic of 1866 was only allayed by the announcement
that the Bank of England had authority from the government
to issue notes in excess of the redemption fund on hand. On
the worst day of the panic, May 11, 1866, called "Black Friday,"
the bank found its reserve in the Banking Department reduced to
nearly 3,000,000 at the close of business. That evening the
chancellor of the exchequer recommended that the bank act be
suspended, and this was promptly done by the government. The
announcement on the following morning that the Bank of En-
gland had authority to issue notes beyond the limit to whatever
extent was necessary, quieted the fears of the people, and affairs
returned to their normal condition.

Ordinarily the banking department has no power to borrow
of the issue department. It may take notes to the issue depart-
ment and exchange them for gold or vice versa, the same as
outside persons, but during each of the three panics, viz., 1847,
1857 and 1866, the government suspended the bank act, and
permitted the banking department to borrow notes from the
issue department without depositing gold in exchange. No doubt
the knowledge of the fact that this has been done in the past
and will be done again in case future emergencies require it,
will have a strong tendency to prevent panics in future.

This suspension of the banking act in case of panic or great
emergency is the only elasticity of the English currency.t At

*Fear is not so much a cause of panics as one of its pronounced features,
and the hoarding of money through fear intensifies the alarm by depleting
the cash reserves in the banks, and by destroying their lending power for
the time being, makes "loanable capital" (which may be actual money, and
may be only bank credit) scarce.

tThe suspensions of the bank act under stress of emergencies show the
unsoundness of the theory or "principle" upon which it rests. Only a
currency based on credit can have elasticity. Credit can both stretch and
contract; money cannot, though its volume may vary both actually and
relatively in any country, nor can it be made to respond automatically to
the needs of the hour.



BANK OF ENGLAND. 185

all other times there is no expansion to it whatever. Not a note
can be issued without the gold is deposited in place of it, and
hence the total volume of Bank of England notes in circulation
in the kingdom is dependent upon the amount of gold in the

vaults of the issue department of the Bank of En-
the currency gland. Then again, the system has been criticised

on account of the large amount of gold which is
kept constantly locked up and idle, while it is claimed that a
safe and conservative reserve could be maintained and still re-
lease several million pounds of gold now in the vaults which
could be turned into circulation and productive use. The de-
fenders of the system say that the act prevents the over-issue of
notes, which would be a greater injury than the loss of the use
of a portion of the gold reserve, and furthermore that the gold
is the property of the holders of the bank notes, who have ac-
cepted the notes on condition that they could return them to the
bank and receive gold for them at any time. The statement of
this department of the bank May 20, 1903, was:

ISSUE DEPARTMENT.

Government debt ......... 11,015,000



(
(



Gold coin and bullion ...... 33,407,405

Besides the Bank of England notes there is a large amount of
gold and silver in circulation in the United Kingdom, necessi-
tated by the fact that the Bank of England does not issue notes
for less than 5. The Scotch banks are allowed to issue notes
for 1, and a large portion of this circulation is in small denomi-
nations.

The sources of profit of the issue department are not exten-
sive nor numerous. The government pays 2J per cent, interest
on its debt (11,015,100), and interest is received on the other
securities which the bank holds. In addition to this the bank
makes a profit on the purchase of foreign coin and bullion
brought to it, as it buys gold at the legal price of 3.17s.9d. per
ounce, and turns it into the mint at a profit of l^d. per ounce.
The bank also derives a considerable profit from the destruction
of bank bills. Any bill which is not presented at the bank
counter in forty years is considered lost and credited to the profit
account.




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