BANKS AND THEIR
CUSTOMERS
A PRACTICAL GUIDE FOR ALL WHO KEEP BANKING ACCOUNTS FROM THE CUSTOMERS’ POINT OF VIEW
BY
HENRY WARREN
AN ENTIRELY NEW AND ENLARGED EDITION
(THE EIGHTH)
With Introduction by a London Banker
LONDON
ROBERT SUTTON
43, THE EXCHANGE, SOUTHWARK STREET, S.E.
1908
(SEVENTH EDITION)
By HENRY WARREN
The Pall Mall Gazette says:—
“Caustic and interesting.”
The Financial News says:—
“Contains a vast amount of useful information intelligently discussed. To educate the public on a technical subject calls for more than ordinary knowledge. It needs what Mr. Warren undoubtedly possesses, and that is a sound, practical understanding, and a thorough common-sense way of setting forth his knowledge in simple form. This our author succeeds admirably in doing.”
The Scotsman says:—
“Cannot be too strongly recommended.”
The Draper’s Record says:—
“Masterly.”
The Birmingham Daily Gazette says:—
“Invaluable.”
Investor’s Review says:—
“Much useful and accurate information about the habits of bankers in dealing with their customers. Especially we commend the chapter ‘How to Check Bankers’ Charges,’ which are often curiously arbitrary and capricious.”
The City Press says:—
“A caustic and forcible pen.”
The Bookman says:—
“The worth of the expert is proved. Mr. Warren on banking subjects enjoys our confidence and many editions.”
And The Glasgow Herald says:—
“Mr. Warren’s caustic criticisms of bankers and their peculiarities have been widely appreciated.”
INTRODUCTION
BY A LONDON BANKER
I confess that when a publisher asked me to write an introduction to Mr. Warren’s little book I experienced some surprise; because, in the past, he handled bankers rather roughly. Perhaps the audacity of the request appealed to me. At any rate, I consented to read the proof-sheets, and, finally, perhaps a trifle reluctantly, to stand sponsor for the work in a qualified sense. I do not agree with all he says, by any means.
Here is the eighth edition of a well-written, interesting guide for the customer, who has obviously found it useful. The book would not have obtained a market unless it were wanted. This must be granted. And I think that it was wanted even from the point of view of a banker.
The author in a short chapter tells us how and why the joint-stock bank came to dwell among us. Then he plunges into his subject—the Guide for the Customer. The chapter on the cheque and its various crossings is admirable. I only wish that the clients of my own bank would read every word of it, and save the time of our cashiers.
He who keeps his account in credit is told much that he ought to know; the depositor is shown how to check his interest; the borrower how to negotiate a loan or advance; and everybody is told the manner in which he may easily check the charges debited in his pass-book. Speaking for my own bank, I do not care who makes use of this clearly-put information. Let our clients obtain the book by all means. We shall then be spared the trouble of answering a host of stupid questions during the busiest parts of the year.
Touching upon “unclaimed balances,” I am of the opinion that the public can be very well trusted to look after its own interests; and after glancing through my own ledgers I think that these unclaimed sums would not amount, in the aggregate, to a really large figure. Most of these dormant balances are insignificant.
As to the pay of bank-men, I do not feel justified in expressing an opinion, beyond asserting that the wants of a bank-clerk are small. My advice to the customer is—“read the book.”
“CITY MANAGER.”
[CONTENTS]
| CHAP. | PAGE | |
|---|---|---|
| Preface | [v] | |
| I | Banking Evolution | [1] |
| II | On the Choice of a Banker | [13] |
| III | The Cheque and its Various Crossings | [19] |
| IV | Credit-Account Customers | [38] |
| V | Deposit-Receipt Customers | [45] |
| VI | The Bank Rate in Relation to Bankers’ Charges | [61] |
| VII | Loans and Advances in London | [68] |
| VIII | Overdrafts in the Country | [75] |
| IX | How to Check Bankers’ Charges | [89] |
| X | Bills, Coupons, Foreign Drafts, etc. | [102] |
| XI | Unclaimed Balances | [110] |
| XII | Bank Shares | [117] |
| XIII | The Pay of Bank-Clerks | [128] |
BANKS AND THEIR CUSTOMERS
CHAPTER I
BANKING EVOLUTION
We owe a great deal to the financial instinct of the Jew, who, having no country of his own, has developed an acquisitive mania for the goods of those people among whom he dwells, thanks to a progressive civilization of which he was the pioneer, in comparative safety; and, by an irony of fate, we are also indebted to him for a religion, which his more subtle mind rejects; yet, stranger still, it is a civilization based on commerce that keeps the whole world moderately sane, and tends to at least hold in check the latent savagery of the blind enthusiast who would still, but for her intervention, indulge in a bloody crusade against all who hold opposite opinions. A true civilization spells toleration; and though a creditor can scarcely hope to be popular with his debtors, he is at least entitled to the protection of the law of the land in which he lives.
The Jews, who are supposed to have come over to England about the time of the Conquest, gradually possessed themselves of the greater part of the coin of the country; and the early English kings constantly resorted to them for loans. As it was thought unchristian to charge usury or interest, the business of a money-lender was consequently held in abhorrence, with the result that the Jews monopolized the trade, and acquired immense fortunes by their dealings. Their wealth naturally excited the intense cupidity of their Christian neighbours, who, making a pretext of their so-called abominations, raided from time to time the Jewish quarters of the various towns, in the hopes of annexing the fabulous treasure in Jewry.
Under the ban of the Church, and detested by the people, the popular feeling against the usurers became so embittered that Edward I, under whose protection they lived, after having in vain attempted to persuade the Jews to accept Christianity, was compelled to banish them from England; and from 1290 to the time of the Commonwealth (a period of about 360 years) the prohibition remained in force. But the money-lender is a necessary evil; and after the departure of the Jews certain Italian merchants, known as Lombards, who had previously settled in England, immediately filled their place; and Lombard Street became as notorious for usury as had been the Jewry.
The Jew may be described as a money-lender, and the Lombard as a merchant-banker, though neither was a banker as the word is now understood. Both, however, lent money at high rates of interest. A banker, in the English sense of the word, is a middleman who borrows from one set of persons at a rate in order to lend to another set at a greater rate, the difference between the two rates being his margin of profit; and banking in this sense was not practised in England until quite the end of the first Charles’s reign, when certain goldsmiths, who were originally dealers in plate and in bullion, became private bankers. The first run upon them was made in 1667, when a Dutch fleet sailed up the Medway; and, later, in 1672 Charles II closed the Exchequer, refusing to pay the bankers either their principal or interest, with the result that failures were numerous.
We are now approaching a new banking era; and in 1694 the Bank of England, which was the first joint-stock bank established in the three kingdoms, was incorporated. The private bankers, instantly recognizing in her a formidable rival, were actively hostile; but all to no purpose; and in a very little while they grouped themselves round the Old Lady, who reduced their rates and kept them in order. Hoares and Childs were in being before the Bank; but the goldsmiths, long before the new movement was a brilliant success, had few direct descendants in London; and the majority of those private bankers who opposed the Act of 1833 belonged to another generation. At its inception the Bank did not enjoy a monopoly; but upon the renewal of its charter in 1708 it was granted the monopoly of joint-stock banking in England, while the partners in a private bank could not exceed six in number. This number was increased to ten in 1857.
Country banking developed slowly in England; and it was not until towards the close of the eighteenth century that private firms began to multiply in the provinces; but the Bank of England’s iniquitous monopoly kept them small and weak, and between 1792 and 1820 over one thousand private bankers came to grief, while the crisis of 1825 further thinned their ranks and almost emptied the vaults of the Bank of England, when it dawned upon the Government that the state of the money-market was distinctly rotten, and that it would remain so until the Bank’s monopoly disappeared. The result was the usual committee and the usual compromise.
The Act of 1826 allowed joint-stock banks of unlimited liability to be formed in England and to carry on business at a greater distance than sixty-five miles from London; but such institutions could not open an office in London. Neither could they issue notes at a place within sixty-five miles thereof, nor draw any bills on London for a less amount than £50. In 1833, however, they were allowed to make their bills and notes for less than £50 payable on demand at their London agents. The demand for these establishments was not at first considerable; and very few were formed until after five or six years of the passing of this Act; but in 1830 the railway movement began in earnest, and from 1833 to 1836 joint-stock banks were established throughout the country in considerable numbers. This sudden boom in banking companies could only have one result; and failures became so numerous that Sir Robert Peel, in 1844, passed his Joint-Stock Banking Act, which, being found worse than the disease itself, was repealed in 1857.
London, we have seen, contained only one banking corporation and numerous private bankers, who, forming a monopoly, were practically rich men’s banks; for they would only accept an account provided the balance was not reduced below a certain sum, while from 1813 to 1833 some twenty of them suspended payment; so stability was not one of their distinguishing characteristics. It soon became apparent that the Bank of England and the private bankers were quite unable to minister to the growing trade of the capital; and in 1833 joint-stock banks were allowed to be formed in London, but upon the distinct understanding that they were to be banks of deposit and not banks of issue. In other words, they could not issue their own notes, so were compelled to use those of the Bank of England. The first London joint-stock bank was the London and Westminster, whose prospectus was issued in 1833; but the shares were subscribed slowly, and the bank did not open its doors to the public until the March of the year following. Then came the London Joint-Stock Bank in 1836, and the Union Bank in 1839.
It is usual, in this little island, to hark back to the good old days, and then, with a sigh, to regret that the old order of things no longer exists; yet it must be confessed that the London private bankers were of no service whatsoever to the small man of business, whom they simply ignored. The joint-stock banks however, ministered to the wants of the small trader; and, by diving into the heart of the masses, proved that a large number of small balances are even more desirable than a small number of large accounts, whilst in the end they practically drove the private banker, handicapped as he was by the law of the land, out of the market, or, at least, reduced him to impotency. But the London joint-stock banks, in those early days, were not without their grievances; and both the private bankers and the Bank of England seized upon every pretext in order to harass them. Being merely common law partnerships, they did not come under the 1826 Act; and until the Act of 1844 they were not relieved from certain restrictions which need not be discussed here.
But the year of banking reform was, of course, 1844, when, fortunately for the trade of the country, the Bank of England was stripped of all its privileges except that relating to the issuing of notes. The Bank Charter Act of 1844 gave the Bank of England the monopoly of issuing notes in London and within sixty-five miles of it. No new bank of issue was to be formed, while a provincial bank, upon opening in London, forfeited its issue. The cheque, however, soon became more powerful than the note; and the larger provincial banking companies gladly made the sacrifice in order to establish themselves in the capital. The next step forward was when the joint-stock banks broke up the cabal of private bankers and were admitted to the Clearing House in 1854; though it is a little remarkable that, having posed as martyrs and vigorously denounced their oppressors, they should now take upon themselves to exclude certain companies which have as good a right as they to enter the sacred portals of the House; but the mote in one’s neighbour’s eye is always so much more apparent than the beam in one’s own.
By the Act of 1858 a joint-stock bank was allowed to limit the liability of its shareholders; but the Act, was not made compulsory; and though all the companies formed subsequently registered under this Act the members of those in existence prior thereto were liable for the debts of the company in which they held shares to their last shilling. Then came the failures of the West of England Bank and the City of Glasgow Bank in 1878; and shareholders in banks of unlimited liability, with the fate of the members of these two institutions before their eyes, began to weigh their responsibilities, with the result that many sold out at panic prices in haste and regretted at leisure. The more prudent, though they held their shares, began an agitation for reform, which gave birth to the Act of 1879. We need not discuss this Act; though it may just be said that every joint-stock bank in the three kingdoms which is not limited by its charter is now a bank of limited liability under the Companies Acts.
At this juncture, perhaps, a few words may be said with reference to the Bank of England, which, with a contempt for evidence that is truly British, the public is convinced cannot suspend payment; yet the Bank’s career has been decidedly checkered; and even after the passing of the Act of 1844 the Old Lady was only saved by the intervention of the Government in 1847, 1857 and 1866, while during the Baring crisis of 1890 she was compelled to borrow from the Bank of France; so, evidently, her system is not by any means a perfect one; but one does not expect perfection in finance. The perfect financial machine and the perfect man are alike impossibilities. As to the latter, did he exist, he would seem positively inhuman.
It need not be said that this sketch of the English banking movement is necessarily imperfect, if only because of the small space into which it is condensed; but the average reader certainly would not trouble to digest two hundred pages on the subject of banking evolution; so possibly it may prove acceptable in this form.
We have seen that the London private banker was a rich man’s banker; but it was otherwise with the country private banker, who was often of great assistance to the small trader, at whom the joint-stock banks will not now look unless he approaches them with his pockets stuffed with securities when anxious to overdraw his account. The maxim of the companies is: “Let the customers take all risks.” And if this rule is broken, then the case is an exceptional one. We need not discuss here whether or not this policy be essential to modern banking; but it is quite evident that the small man of business has lost a good friend in the old-fashioned country banker, whose place has not been taken by that person of peculiar views and training—the bank-manager or clerk-in-charge, whose urbanity must be more than painful to those would-be borrowers without security who ask for bread and are politely offered—a stone.
What we have to discover is why the country banker has been practically forced out of the market by the joint-stock system; and the reason is not difficult to explain. In the first place we know that, since 1857, the partners in a private bank have been limited to ten; consequently, however anxious a banker may have been to extend his system of branches and develop his business, the difficulty of insufficient capital presented itself; whereas his rivals, who can appeal to thousands of small investors, could, once having established their credit, easily obtain as much capital as they required. The private banker, therefore, ministered to the wants of a certain town, district, or county; but the joint-stock banks spread their tentacles throughout the length and breadth of England; and, like an octopus, eventually strangled him in a manner which will be explained.
In London and throughout the provinces there were numerous small firms of private bankers—small, that is to say, when contrasted with their joint-stock competitors. The banks in a manufacturing district or in a busy city would, especially during periods of active trade and rising prices, be called upon to advance large sums to their customers; but if a banker collected his deposits from a few branches within the district whence the demand arose, he would soon find himself unable to meet the requirements of his customers. But the joint-stock banks, which have branches in many counties, can pour their deposits into those centres where demand is active; and it is obvious that a small private banker cannot hope to compete successfully against the superior organization of the companies. With the private banker it soon became a question of restricting advances; and his customers, finding that they could not obtain all the accommodation they required, naturally applied to his rivals, who, if tangible securities were forthcoming, met their demands with ease.
The London and provincial banking companies, which farm both the agricultural and the manufacturing districts, by pouring their surplus capital into the London money-market, speedily obtained all the best business; and those private bankers who did not either amalgamate with, or adopt the system of, their successful rivals found themselves hopelessly out-distanced. Hence the triumph of joint-stock banking and the advent of the director and his humble, most obedient servant, the clerk-in-charge, who “manages” a country branch, but whose power, in reality, is of the smallest, all the applications for advances above a certain sum having to be submitted to the chief office, while he himself is powerless to act until he receives his instructions from headquarters.
This form of competition would be felt less in an agricultural county where the deposits a banker collects are greatly in excess of the demand made upon him for advances; but even there the private banker’s luck has deserted him; for the agricultural depression thinned the ranks of his best customers, and, of course, left him a legacy of bad debts. We should, therefore, expect to see the private bankers disappear from the great towns first, and, finally, from the agricultural centres. The law of the land has kept them small; and the tentacles of the joint-stock companies have almost exterminated a class of men who enjoyed the friendship and confidence of their clients to an extent that a clerk-in-charge upon a salary of from £200 to £500 a year can never even approach.
Though we live in an age of great machines, which, for reasons that will be explained later, can declare huge dividends, every now and again we hear of the inception of a new banking company. The new arrival, perhaps, waxes more than eloquent upon the large dividends paid by the existing companies, and then dwells enthusiastically upon the immense profits it hopes to earn; but can a small company ever establish its credit in face of the network of branches which now cover the land? The person who applies for its shares must certainly be of a most sanguine disposition.
It is the powers that be that always excite the keenest interest, doubtless because of the possibility that a knowledge of their habits and ways may prove of pecuniary benefit to the student; and this object has been kept well in view throughout the following chapters.
CHAPTER II
ON THE CHOICE OF A BANKER
There is an opinion which is very prevalent to the effect that, provided one’s account be an overdrawn one, it does not matter where it is kept; and, of course, if it were possible to find a nice, philanthropic banker who would allow one a big overdraft without even hinting at security, there would be much truth in the assertion; but in view of the existing relations between banker and client, the idea is both unfortunate and fallacious. We have seen how the large joint-stock banks, by developing their system of branches, literally smothered the private banker; and the smaller companies, which possess but few branches, are now being forced to amalgamate with the larger for the same reason. If, therefore, a man has a large advance from a small provincial banking company, it may occur that, just when he is anxious to discount more bills or to increase his overdraft, the bank will be unable to accommodate him; and it therefore follows that a large bank, whose resources are abundant, is as essential to the really great borrower as it is safer for the depositor.
A person whose account is in credit or who leaves money with a banker at interest naturally attaches the greater importance to the safety of his balance or principal; and, secondly, he endeavours to obtain as high a rate as possible; but he would not be so foolish as to sacrifice security to a high rate of interest; though, where the banks are equally well managed, he would select the one that offered him the higher rate or the cheaper facilities. Conversely, the person whose account is overdrawn would, other things being equal, choose the bank that offered to work his account the cheapest.
Now, a banker’s liabilities to the public are due on demand, and at short notice; and they would consist principally of “deposit and current accounts, and notes and drafts in circulation.” These, of course, will be found on the left-hand side of the balance-sheet. As the banker’s deposits may be demanded from him at any unlucky moment, it follows that he is compelled to hold a certain sum of cash (legal tender) in reserve; and the larger that sum, the safer are the customers’ balances. A person, therefore, who is looking for a safe banker, should see that the firm or company which he selects possesses at least from £12 to £18 in coin, bank-notes and cash with the Bank of England against each £100 it owes to the public. He will find the public liabilities on the left-hand side of the balance-sheet and the cash in hand on the right; and a proportion sum will soon give him his answer.
But a really strong, well-managed bank only advances to, and discounts bills of exchange for, its customers to such an extent as will enable it to hold from £45 to £50 in cash, money at call and investments to every £100 of its public indebtedness. Cash, of course, is its vital asset; and after cash comes Consols and other British Government securities in which, except at the very height of a panic, there is always a market. These are a bank’s so-called liquid assets; and it may just be added that when a bank mixes its cash and money at call and notice together, and an accommodating auditor declares that such a medley “exhibits a true and correct view of the state of the company’s affairs,” the bank is probably so weak in actual cash as to deem it wise not to publish the figures.
Money at call and short notice would represent advances to the bill-brokers and to the Stock Exchange; and though such loans could doubtless be easily called in during normal times, they would be difficult to collect when the money-market was in a turmoil. A greater part of the advances made to the Stock Exchange, though classed as liquid assets, are in reality loans in disguise; for if the banks were to suddenly ask the stockbrokers to redeem their pledged stocks and shares, those gentlemen would be hammered in clusters; and the shares, when flung upon the market to be sold at what they would fetch, would rapidly depreciate. It would certainly be interesting were the banks to specify the amount of their so-called short loans to the Stock Exchange; and, with a lively recollection of 1890, it is to be hoped that they are kept within bounds, as, upon that occasion, this class of advance hung like a mill-stone round their necks. Such liquid assets, it is to be feared, are more likely to sink the good ship than to save her in a storm.
Having ascertained the ratio per cent. of a bank’s cash in hand to its public liabilities, and glanced at the call-money, the list of investments should be carefully criticized. When a banking company describes its list thus: “Consols and other securities,” it may be taken for granted that its holding of Consols is a small one. This description, in fact, is taken from the balance-sheet of an English provincial banking company, which holds about £19 in cash, call-money and securities to each £100 it owes to its customers; and yet it can find people who are foolish enough to do business with it. Considered as a financial institution, it is practically bankrupt; yet its deposits amount to over £4,000,000. Fortunately, however, this institution is one of the few exceptions which are best avoided. Another very weak joint-stock bank describes its investments as consisting of “English Government and railway stocks.” Its cash and call-money are consolidated into one total; but, more remarkable still, an auditor actually has the impudence to declare that the balance-sheet “exhibits a true and correct view of the company’s affairs,” when, of course, it is not worth the paper upon which it is printed.
A well-managed bank, as a rule, states its holding of Consols distinctly, and, sometimes, the figures at which they have been taken. If it do not, then the value of its British Government securities is given separately. Next, it usually specifies its India Government Stock, and so on; and, finally, “other securities,” which, assumably, are of a non-liquid nature, are given last because they are of the least value from a banker’s point of view. Naturally, if a bank possess a gilt-edged list, it advertises the fact in its balance-sheet; and those companies which indulge in ambiguity are, in nine cases out of ten, the banks to avoid. For instance, you will not find any evasions of this nature in the balance-sheets of such powerful companies as the London and County Bank, the Union and Smiths, the London City and Midland, and other really first-rate institutions, for the simple reason that there is no occasion for them. As a rule, the clearer the balance-sheet, the stronger is the bank; and the sinners, consequently, are the smaller banks, which, situated in a manufacturing centre, are unable to collect sufficient working resources to finance their customers. Their ultimate fate, it need not be said, is amalgamation with a more powerful rival.
When choosing a banker, therefore, one should first ascertain that he has an abundant reserve of cash in hand, and, secondly, that his so-called liquid assets (his cash, call-money and securities) amount to from £45 to £50 against each £100 to which he is indebted to the public. And as to those private bankers who do not issue a balance-sheet, they are, in the first place, guilty of the sin of omission; and, in these days, when faith is not the predominant note, there seems but little inducement to buy a pig in a poke when a large banker’s balance-sheet may be had for the asking.
CHAPTER III
THE CHEQUE AND ITS VARIOUS CROSSINGS
A cheque is often described as a bill of exchange, drawn by a customer on his banker, for a sum certain in money, payable on demand. In these days, when the mere babe produces his cheque-book on the slightest provocation, it seems unnecessary to describe how a cheque should be drawn; though it may just be added that it must bear a stamp of one penny, and that the stamp may be either impressed or adhesive. A customer, therefore, can draw a cheque on his banker upon a sheet of notepaper; but he would be well advised, except under exceptional circumstances, to use the forms supplied to him.