Backing a Cheque for a Friend.
The man who backs a cheque in order to oblige a friend should remember that he makes himself responsible for its payment, and that should his friend have no money to meet it, he, the indorser, will be called upon to make good the loss. He does not merely vouch for the respectability of his friend, but he also guarantees that his cheque will be duly honoured upon presentation, which is quite another matter. One should, therefore, decline to back a cheque for a stranger upon any consideration.
CHAPTER IV
CREDIT-ACCOUNT CUSTOMERS
As by far the greater number of a bank’s customers keep their accounts in credit, we will begin this chapter by considering what average balance should entitle a person to have his account worked free of charge. In London, a man who opens a small account with a bank, and whose credit balance averages £100, will not be debited with any commission at the end of the quarter or half-year when the companies rule off their books, while in the suburbs an appreciably smaller balance is accepted, and, occasionally, interest is allowed there upon current-account balances, though one will have to press pretty hard for it. Competition is now so keen between bank and bank that it is sometimes possible to make very close terms.
In the country it is considered that an average balance of £50 upon a small account pays expenses. However, the bank-manager, who is as human as the gentleman who sells one a dog, seldom neglects to make a small charge upon these accounts when he considers that their owners will stand 10s. a year or so. Broadly speaking, you can please yourself whether you pay it or not. This class of business, of course, is absolutely safe; so the customer, if he cannot come to terms with the manager, is able to take his account to the cheapest market, always remembering that it is never wise to bank with a second-rate firm, whatever advantages may be offered.
Though a man keep a balance of £10,000 to his credit, he will not receive one penny in the shape of interest unless he ask for it, and, even after having arranged a rate, it is advisable to check the banker’s figures and ascertain that you are getting it, as, sometimes, they are apt to err in his favour, through small debits that have been deducted from the interest, and which, consequently, do not appear in your pass-book.
The following illustration, perhaps, will show how matters stand:—
A keeps an average balance of £150
B keeps an average balance of £600
C keeps an average balance of £5,000
The banker, if B and C are easy-going men, whose financial experience is small, will conduct their accounts on the same terms as he does A’s. He will, that is to say, work each account free of charge. But such treatment is evidently unfair, for if A’s account is worked free, then assuming that those of B and C give but little more trouble, each is entitled to some allowance upon his average balance. They should certainly endeavour to obtain it.
If the manager be interviewed, he may endeavour to convince either B or C, by a process of reasoning, which is more persuasive than scientific, that money is so cheap that, really, a high rate is out of the question. He will further explain that his directors, as a rule, do not make an allowance upon creditor current accounts; but should either just hint at removing his account, a rate will be instantly allowed, for competition among the banks for a large credit account is so active that the customer has only to be firm and fairly reasonable in his demands. The manager, of course, will endeavour to pay as little as possible. Of that we may be quite sure. The customer, on his side, should try to obtain the maximum rate, which is 1½ per cent. below Bank rate in London, and in the provinces the usual country rate.
Original sin, not being yet eradicated from our race, a bank-manager, who is endowed with his full share, sometimes endeavours to persuade a customer to transfer sums from his current account to deposit receipt, but it is always prudent to remember that his advice is not disinterested, and that he is acting “upon instructions.” Experience proves that, after a little while, a customer becomes tired of continually transferring sums from his running account to deposit, and then, when his account is getting low, paying the deposit-receipts to his credit. Finding the process a weariness to the flesh, he often ends by giving it up in disgust, when once again the wily banker is a gainer at his expense. By obtaining a rate of interest upon his daily current-account balances the customer is spared this trouble; and, if he fail to induce his banker to grant it, then when his account is in credit beyond a certain agreed sum, he should take care to get a deposit-receipt.
Bankers, like individuals, are the slaves of their environment, and in the Midlands and elsewhere, where it is usual to allow a rate on the daily balances, commission is also charged on the turn-over or sums debited. Interest upon the daily creditor balances is allowed at, say, 1½ per cent. below bank rate, and a commission of ⅛ per cent. is charged on the cheques a customer draws. The lower the rate of interest and the higher the commission rate, the more profitable, of course, is the account to the banker. The customer, therefore, when checking his banker’s charges and allowances, will take care that he is receiving the maximum rate of interest, and paying the minimum or lowest commission rate, which varies from ⅛ to ¹/₁₆ per cent., while it is sometimes possible to arrange for a reduced and merely nominal charge. A person, when he sees a “little interest” credited in his pass-book, is disposed to increase his balance, on the assumption that he is being allowed a rate; but before doing so he should certainly ascertain what the rate will be, for, upon examination, this allowance is occasionally found to appeal more strongly to one’s senses than to one’s critical acumen.
Having disposed of the paying average credit balances we can now discuss those accounts that have a large turn-over. A trader, for instance, who draws a considerable number of cheques during the course of a half-year, and whose balance is small, cannot expect his banker to work his account free of charge; but it is difficult to draw up a table showing what he ought to pay, for the simple reason that some bank-managers debit him with a rate which they think he will stand. A ¹/₁₆ per cent. commission, that is to say, 1s. 3d. upon each £100 he draws out by cheque, seems a very full rate; and as there is a good market for this class of account he should not disburse one penny more. The owner, who always has a balance on the right side, can, if he find his banker unreasonable, easily negotiate with his rivals, who are delighted to see fresh faces. Indeed, it is quite possible that he may succeed in getting his account worked free, or for a nominal fee of half a guinea or so, if the turn-over is not very large.
It is now time, perhaps, to give a brief sketch of the manner in which a manager charges his ledgers at the end of the quarter or half-year. As a rule he and the accountant go through the books together; and as there is no recognized scale by which the charges are regulated it follows that they consider the man as well as the nature of his account. The business of the manager is to make his branch pay; therefore, if you do not criticize your commission rate, you may rest assured that he will succeed brilliantly at your expense. Should he think that the customer lacks experience, and is not acquainted with the fact that competition between bank and bank for creditor accounts is active, then he charges him ⅛ per cent. When, on the other hand, he is aware that the client checks his expenses, caution is exercised; and if the manager decide to claim commission the sum debited will be extremely small.
After all, in the ordinary affairs of life one does not accept without question the price of the seller; and if a customer be so unwise as to think that a bank-manager has a higher sense of honour than his kind, then he must be prepared to take the natural consequences. For instance, D and E keep an average balance of £100 in their bankers’ hands, and the turn-over of each account is about £1,500 for the half-year. The manager, knowing that D is not critical, charges him ¹/₁₆ per cent. commission, or 18s. 9d. E, he asserts, is a most unpleasant man, who, when charged upon a previous occasion, threatened to remove his account unless the sum were given back to him; E, therefore, who is aware that competition is one of the factors that determine price, has his business done free.
A large trader or merchant, as a rule, does not allow his banker to have the use of a considerable amount of money free of interest; and those accounts that are from, say, £1,000 to £10,000 in credit, usually belong to women, who are not accustomed to the management of money. The manager, anxious to stand well with his directors, some of whom increase his salary if he add to the profits of his branch, does not, of course, suggest to these ladies the advisability of receiving interest upon at least a portion of their balances, but, on the contrary, being wise in his generation, endeavours, by resorting to those social amenities that raise him higher and higher in their estimation, to hide the awkward word from their view, while laughing in his sleeve at their excessive credulity.
The customer who keeps his account in credit should ask his banker: “What average balance must I maintain in order that your people will work my account free?” That sum ascertained, he can act upon the advice contained in this chapter.
CHAPTER V
DEPOSIT-RECEIPT CUSTOMERS
A deposit-receipt, which is not a negotiable instrument, cannot be transferred by one person to another. Where the receipt is issued in more than one name, instructions should be given to the banker as to whether, in the event of withdrawal, the note is to be signed by all or by any two or any one of the depositors. Should no instructions be given, then all must sign when a withdrawal is made, or when the interest is taken. These receipts, as a rule, are issued subject to either seven or fourteen days’ notice of withdrawal; but the notice, in practice, is not enforced, bankers merely writing it upon the note in order to protect themselves in the event of a run. Most banks, however, decline to pay interest unless the sum has remained in their possession for at least one month.
The large London banks, though they compete eagerly the one against the other for well-secured advances and loans, have closed up their ranks against the depositor, their practice being, both in London and the suburbs, to allow 1½ per cent. below Bank rate upon money left with them on deposit, every alteration in the rate being advertised in the leading papers. All one has to do, therefore, in order to ascertain the London rate for money on deposit-receipt is to deduct 1½ from the Bank of England rate which may be seen in the city-article of every newspaper. Whether or not certain banks offer special rates to favoured individuals is a matter of opinion; or, again, they may bid higher for large sums for fixed terms; but the small depositor may take it for granted that, with their rates on loans and advances reduced by competition among themselves, the banks are determined to keep down the deposit rate. In fact, the large London bankers have united for this very purpose, though it must be remembered that the agreement is not binding at the country branches of the London and provincial institutions.
A banker is a middleman who borrows from depositors at a rate in order that he may lend to others at a higher rate, the difference between the two rates being his margin of gross profit. A certain portion of his deposits, we know, he obtains in exchange for granting banking facilities, and upon the rest he allows a rate of interest, while he has to maintain a reserve of so-called cash and gilt-edged securities against the danger of sudden withdrawals and panics. At the moment the companies cannot control the advance rate, or fix from time to time a minimum rate for secured advances; but in London we see that they have succeeded in getting the depositor under their thumb, thereby, of course, increasing their profit margin at his expense. Their next move will probably be an attempt to corner the borrower against tangible securities, as has been successfully accomplished by the banks in Scotland. The number of English banks is rapidly decreasing through absorptions and amalgamations, so, in the end, it is more than probable that we shall see a monopoly, and that all the large banks will one day unite for the purpose of fixing, at each change of the Bank rate, their deposit rate, and, also, their lowest or minimum rate for secured advances.
In the provinces the banks, when loanable capital is cheap, are able to lend and to discount at higher rates than in London, so the country deposit rate never falls so low as that of London. Neither, however, does it advance so high when loanable capital is dear, because the provincial banks then find some difficulty in increasing their rates upon bills and loans proportionately. The following table will enable one to see the difference between the rate allowed in London and the country:—
| Bank Rate. | London Deposit Rate, 1½ below Bank Rate. | Country Deposit Rate. |
|---|---|---|
| 5 | 3½ | 3 |
| 4½ | 3 | 2½ to 3 |
| 4 | 2½ | 2 to 2½ |
| 3½ | 2 | 2 |
| 3 | 1½ | 1½ to 2 |
| 2½ | 1 | 1½ |
| 2 | ½ | 1½ |
In the country, we must remember, there is no combination or ring of bankers who meet to decide the rate, which, therefore, is not “fixed” from time to time on the basis of the Bank rate, though, of course, the country deposit rate moves up and down in sympathy with the Bank of England’s published rate of discount or official minimum, as it is called. There is, moreover, some competition for deposits in the country, but it is very slight; and, unless the banker think that a man may be useful, he seldom bids appreciably higher than his rivals for his money. The small private banker, it is true, may offer more interest, but a depositor should take care to examine his balance-sheet before he entrusts him with either his spare capital or his savings.
A few of the purely provincial joint-stock banks, whose branches are situated in a manufacturing centre, and which, in consequence, are never overburdened with working resources, offer higher rates than the great companies, but they are the weaker of their kind, and it is therefore questionable whether one should lend to them. In every probability one’s principal would be safe, but it would not be so safe as in the hands of the really large London and provincial institutions, whose reserves afford the customer a much better guarantee; consequently it is always wise to consider whether the additional risk, be it never so small, is worth taking for the slight increase in the rate.
Of course the country depositor will take care to inquire what rates the other large banks in his town are granting, so that he may judge whether his own banker is allowing him a fair rate. Again, if the amount of his deposit be, say, over £1,000, he can sometimes obtain a special rate; and he may rest quite assured that, if he do not interest himself in the matter, the bank-manager will allow him the lowest rate possible, for as there is not a fixed minimum it follows that some, more especially during certain conditions of the market, are obtaining better rates than others. A little pressure will occasionally induce the manager to quote, as he quaintly calls it, a “special” rate of interest, if he consider the customer’s name be worth keeping on his books. It may be added that some people, in order to minimize their risk, keep their current accounts with one banker and deposit with another.
We can now refer to the table of rates on page 48. The country rate, of course, is stated approximately, for we have seen that under certain conditions the customer may possibly obtain more. Glancing at the table, we find that when the bank rate is at 2, the London depositor receives ½ per cent. and the country depositor 1½. If the London customer deal with a London and provincial bank, it will obviously pay him better to deposit at one of the country branches. He should, therefore, if he consider that money is likely to be cheap for some considerable time, give notice in London and transfer his deposit to the country. If his banker object, he can deposit with any large, well-managed provincial bank. With the Bank rate at 2½ the move would pay him, but when it rises above these figures the rate is either equal or in his favour. A person who keeps two banking accounts, one in London and the other in the country, can make this move with the greatest of ease; and by transferring his deposit from the one to the other as the rate favours him, he may easily increase his interest. Conversely, with a high bank rate it may pay the country depositor to transfer his principal to London. There is no occasion to let the banker see the move.
In London and the great cities a large proportion of the deposits at interest, especially during periods of depression, would represent capital temporarily withdrawn from trade, and awaiting either more profitable investment or an increased demand and rising prices. It is this accumulation of idle capital that tempts the company-promoter from his lair, and sometimes results in a Stock Exchange boom, whilst it always produces an increased demand for the so-called gilt-edged variety of securities and a consequent rise in their price. The country depositor, however, even when he leaves fairly large sums at interest, is generally waiting to invest his money in house property, which will return him from 5 to 6 per cent., or to place it out on a first mortgage at from 3½ to 4 per cent. In the first instance, he is careful not to purchase old property that will swallow up much of his rent in repairs. Cautious by nature, he shakes his head dubiously at the glowing prospectus of the promoter, and refuses to believe in the high-toned and cunningly tuned leaflets with which the bucket-shops favour him, for he likes to see his investment, to feel it, to walk upon it. Paper does not satisfy his soul; he is not even without his suspicions of banker’s paper; but when he possesses house property, then all he has to fear is the Almighty and a bad earthquake, and he can sleep comfortably on those risks.
Country depositors consist largely of working men, clerks, artisans, small shopkeepers, dressmakers, women of slender means, and so on, together with the banks’ current-account customers. The huge aggregate of deposits is made up principally of small sums, so it is easy to keep down the rate, because the great majority are ignorant of the condition of the money-market, and hardly seem to be aware that the Post Office gives 2½ per cent. upon small sums left with it. The companies trade upon the ignorance of their depositors; and though a few of the better-informed customers withdraw their savings when the rate is extremely low, experience has taught the banks that the great bulk of them simply grumble and take what is offered.
Seeing that the deposits are spread over so great an area, and among men and women who have not sufficient business knowledge to invest their savings advantageously, the banks have been able to keep down rates without reducing their own resources; and the few who do withdraw their savings when the deposit rate is at 1½ per cent. are practically of small account when contrasted with the alternative policy the companies would have to adopt in order to retain them, for it obviously pays better to lose a few receipts than to raise the rate to 2 for the whole of the deposits. For instance, a bank would rather lose £100,000 by withdrawals when the rate is at 1½ than pay 2 per cent. on £5,000,000 for the purpose of preventing the drain, £25,000 being too large a premium to sacrifice for the purpose of retaining its connexion intact, when, perhaps, money is being employed in the London shortloan market at 1½ per cent. and under.
Again, very many of the country depositors look upon the deposit-receipt as an investment, and the banks, quite naturally, do not wish to inform them that even Consols are a more profitable one. Not so very many years ago the country minimum deposit rate was 2, and it was not without certain misgivings that it was reduced to 1½; but, as we have seen, the experiment proved safe, though the banks, given another long period of a 2 per cent. Bank rate, will hardly care to risk 1 per cent. in the provinces, as it seems pretty certain that, were the minimum further reduced, disgusted depositors would invest their savings either in the Post Office or the gilt-edged class of securities. Having once turned this stream of deposits into another channel, it is improbable that a higher rate would tempt them back again; and as the depositor is essential to the modern banking system, the provincial banks will think many times before they risk a rate below 1½, even when cheap capital is again reducing their dividends right and left.
A customer, before leaving his money with a banker, will be careful to inquire what rate he is to receive, and if the rate be not written upon the receipt, then he might pencil the answer he gets upon the back of the document. If there be three good banks in his town, and he has, say, £200 to deposit, there can be no harm in his going to all, and asking the highest rate each is allowing. John Jones, we will assume, holds a deposit-receipt for £200 dated 10th June and he takes it to the bank on 9th December following in order to draw the interest at the rate of 2 per cent. per annum. Between 10th June (excluding the first day) to 9th December (inclusive) there are 182 days, so the banker owes him 2 per cent. per annum on £200 for 182 days. Hence the following sum:—
| 200 × 2 × 182 | = £1 19s. 10d. |
| 100 × 365 |
The cashier, therefore, pays John Jones £1 19s. 10d. in cash, and gives him a new receipt, dated 9th December, for £200. A depositor, as a rule, draws his interest twice a year. Some persons, however, leave their receipts from three to five years without disturbing them; and the bank-manager, always anxious to swell the profits of his branch, is careful, when they are presented, to make his calculations at simple interest instead of at compound. Deposit customers, therefore, even when they do not require the interest due to them, should present their receipts six months after date in order to have the interest added to the principal, when both bear interest together.
For instance, assuming that John Jones had not required his interest, then he would have taken a new note for £201 19s. 10d.; but Mr. Jones, who is acquainted with the internal economies of a bank, and who is also aware of the intense frugality of the agent, knows that the companies do not allow interest upon the odd shillings of a deposit-receipt; so, giving the cashier an additional twopence, he takes a fresh note for £202, and walks away very well satisfied with himself. Were he to omit taking this precaution each half-year, and to hold his receipt for, say, five years, then, when he took it in, he would merely get certain rates upon £200 for five years. The larger the principal the greater, of course, is the loss of interest to the depositor.
Should not the depositor reside in the neighbourhood he can, after the expiration of six months, write his name on the back of the note and send it through the post to his banker, with the request that a new receipt be returned to him for the amount of the principal and interest. In the event of his wishing to draw the interest, a banker will send him either a draft or postal orders for the amount due to him, as he may direct. Of course, if he at any time require part of the principal, he will state what amount, and give directions whether the interest is to be added to the new receipt for the balance or to be included with the sum he is withdrawing, while he will take care to write his name upon the back of the note before despatching it. When sending a receipt by a messenger it is usual to write a note to the banker, telling him just what one requires and requesting him to pay the bearer of the letter.
Where interest amounting to £2 and over is withdrawn, the deposit-receipt must have on the back a penny postage stamp, which the depositor should cancel by writing his name across it. This must be done upon each note when the depositor has a plurality of receipts. Where, however, the interest upon any one is less than £2, a stamp is unnecessary. Nor is it required when the depositor adds principal and interest together and takes a fresh note for the aggregate, but where principal and interest or principal or interest amounting to £2 or over is withdrawn, the receipt must bear a penny stamp.
We now come to the question of the seven or fourteen days’ notice on these receipts, and, as previously stated, the banker seldom or never enforces his claim, though, when notice is not given, he occasionally deducts fourteen days if the whole of the principal be withdrawn. When this is contemplated it is better, perhaps, to give the necessary notice, but the manager, should the customer protest against this deduction, generally gives way. Again, if the note be for £100, and the depositor withdraw £50, and take a new receipt for the balance, the banker may deduct a certain number of days from the term on £50 (the sum withdrawn without notice). The customer, by checking his interest, will discover this loss, which the teller, if he remonstrated with him, will obligingly make good. It is also as well to bear in mind that some banks have two rates.
The London depositor, we know, receives 1½ below Bank rate; so assuming that Mr. Jones, of Whitechapel, held a note for £200, dated 5th February, 1903, and took it to the bank to draw the interest on 5th July of the same year, he would want to know how much was due to him at the latter date. First, therefore, he must ascertain whether any changes were made in the Bank rate during the period in question; and upon inquiry he found that the “official minimum” was raised to 4 per cent. on 2nd October, 1902, and lowered to 3½ on 21st May following, and to 3 upon the 18th June next.
Now, from 5th February (exclusive) to 5th July (inclusive) there are 150 days. His banker, therefore, owed him:—
| Bank Rate was from | |||
|---|---|---|---|
| 105 | days’ int. at 2½ p.c. p.a. on £200 | Feb. 5 to May 21 | 4 p.c. |
| 28 | days’ int. at 2 p.c. p.a. on £200 | May 21 to June 18 | 3½ p.c. |
| 17 | days’ int. at 1½ p.c. p.a. on £200 | June 18 to July 5 | 3 p.c. |
| 150 | days |
Here we get three rule-of-three sums, and, perhaps, it were as well to give a statement of the first, viz.:—
| 200 × 2½ × 105 | = | £1 | 8 | 9 | |
| 100 × 365 | |||||
| 28 days at 2 p.c. per annum on £200 | = | 0 | 6 | 1½ | |
| 17 days at 1½ p.c. per annum on £200 | = | 0 | 2 | 9½ | |
| Interest due | £1 | 17 | 8 | ||
Mr. Jones, of Whitechapel, then, should have received £1 17s. 8d. from his banker in cash and a fresh deposit-receipt, dated the 5th July, 1903, for £200. At each change of the bank rate the London depositor, when calculating his interest, must make a fresh sum, as in the above illustration, and so, too, must the country depositor when the fluctuation of the Bank of England rate is sufficiently wide to influence the rate of interest allowed in the provinces, though the latter must remember that he can only ascertain the rate by making inquiries of the bankers themselves or among those of his friends who deposit with them.
Adverting to the dates in the foregoing illustration, a few words of explanation are perhaps necessary, for it will be seen that under the heading “Bank rate was,” 21st May and 18th June, the days upon which the official minimum was changed, are placed opposite different rates. The Bank of England directors examine their weekly return or balance-sheet, which is made up to the close of business each Wednesday on the Thursday following, and in the afternoon of the latter day any change in the Bank’s rate of discount is announced. Of course, during abnormal times the rates may be changed on any day as the exigencies of the moment may direct; but, fortunately, though the money-market is subject to fits, its surface, as a rule, is seldom so violently perturbed as to call for drastic remedies, and we shall find that the dates in question were Thursdays. It follows, therefore, that these days opened with the bank rate at one figure and closed with it at another. Hence the anomaly to which attention has been drawn. The banker owed Mr. Jones, of Whitechapel, interest at 2½ per cent. from 5th February (exclusive) to 21st May (inclusive). On the 21st May, we know, the Bank rate was reduced from 4 to 3½ per cent.; so he owed him 2 per cent. on his principal from 21st May (exclusive) to 18th June (inclusive)—the date of the next change. Should not the reason of this be quite clear to any reader, if he remember that from 21st to 22nd May the Bank rate would have been one day at 3½ per cent. the difficulty will probably disappear.
From an investment point of view the deposit-receipt seems hardly worth consideration, because even Consols, over a period of five years, will return an appreciably higher yield; but when one is merely waiting for a suitable investment to turn up, or for a revival of trade, then the deposit-note exactly meets one’s requirements, for its only charm lies in the fact that the depositor gets back his principal intact. When the deposit rate is low trade is generally dull, and the prices of gilt-edged securities consequently move up. The depositor, therefore, when the rate is high should not be tempted to let his money remain with his banker for that reason alone, because he can then, as a rule, buy gilt-edged securities at cheaper figures, and, needless to say, the average return on his purchase-money will greatly exceed the average rate of interest on deposit. Conversely, if he buy the so-called gilt-edged variety of securities when interest is low, he is much more liable to a loss of capital should he want to realize them when trade is good and the rate of interest high. It follows that the man of business, who finds capital accumulating in his hands during periods of temporary depression, when interest, of course, is low, prefers taking a deposit-receipt for his idle capital, which he hopes to again use in his business directly markets improve, to purchasing, say, Consols at a time when demand has enhanced their price, and, consequently, added to his risk of loss upon realization.
Some banks, instead of issuing a deposit-receipt for money left at interest, give the depositor a pass-book, in which the sum he leaves is credited. Each time the depositor leaves new money he takes his book with him, and the cashier enters the amount therein to his credit, while he draws out his interest, or any part of the principal he may require, by cheque. As the banker rules off his deposit-ledgers half-yearly, and then adds the interest due to each customer to the principal, it follows that principal and interest, when the balance is brought forward, give a return to the customer, who by this method receives compound interest on his capital or savings. The advantages of this system are too obvious to call for explanation, but it may be added that, when a deposit customer is given a cheque-book, he should be careful not to operate too freely upon his account, as some bankers then transfer the balance to their current-account ledgers, their reason being that the account has ceased to be used for the purpose for which it was opened, and that, therefore, the depositor is no longer entitled to interest.
The chapter on “Unclaimed Balances” should prove especially interesting to depositors.
CHAPTER VI
THE BANK RATE IN RELATION TO BANKERS’ CHARGES
Very many persons who are out of touch with money-market problems fail to see why the Bank of England’s rate of discount should be in any way connected with a banker’s charges; and though, to those who have not studied the question, the swaying of the pendulum seems due to some occult influence, the forces that move it are both visible to the naked eye and capable of explanation. In the first place, the Bank of England keeps the cash reserves of all the banks in the United Kingdom, and, as a natural consequence, possesses the only large store of gold in the land. The other banks, which are dependent upon this accumulation, become nervous immediately the gold in the Bank’s vaults begins to leave the country in appreciable quantities, because, should not the Bank of England be able to meet their demands, they, too, will be unable to supply the requirements of their own customers.
We need not, in a small book of this description, enter into the mysteries of the foreign exchanges, or discuss internal and external drains of gold, but the Bank, in order to arrest a drain of gold outwards, raises its rate, when the other banking companies, equally anxious to stop the efflux, raise their rates too, with the result that borrowers, whether upon bills or securities, have to pay more. Conversely, when the Bank’s reserve is high and the political horizon unclouded this nervous feeling no longer exists. The Bank, we will assume, then lowers its rate, and the other banks follow suit, when the borrower pays less.
When speaking of the money-market, the London money-market is always implied, and here we encounter the bill-brokers to whom the banks advance their surplus funds. The banks, that is to say, finance their rivals, who make bills a speciality, and whose knowledge of bills of exchange is doubtless both extensive and peculiar. Seeing that the banks themselves discount trade-bills for their customers, the necessity of a middleman or bill-broker between the person who discounts a bill and the banker who supplies the capital is not very apparent, but the broker’s “turn,” when he re-discounts with the banks, is extremely small; so it is quite possible that were the banks to establish special departments to deal with this business, the slight increase in their rates would not compensate them sufficiently for the troubles of management. As, under this system, the brokers’ rate of discount is below that of the banks, it follows that all the bank-bills and most of the best trade-bills pass through the hands of the bill-brokers, while bills are also sent to them from all the great cities. The bankers, consequently, discount inferior paper at higher rates for their own customers.
But the Bank of England is a great bank of discount. Moreover, it pays a dividend like any other bank, and, as the bill-brokers are its rivals, it follows that it cannot afford to allow all the business to drift into their hands. When, therefore, the brokers’ rate (the market rate) is below its own, it either takes steps to make its own rate of discount, as the saying is, “effective,” or else it reduces its advertised rate of discount (the Bank rate). The Bank makes its rate representative or effective by selling Consols, and thereby reducing “bankers’ balances.” The banks in consequence have less to lend to the brokers, who are then bound to apply to the Bank of England, which compels them to discount their bills at its own terms, and the rate in the outside market, of course, advances.
We can see, therefore, that though the Bank rate is sometimes either above or below the market rate, it is necessarily never out of touch with it for any very considerable length of time; so now, perhaps, it will be understood why the banks allow 1½ below Bank rate on deposit; and their reason for basing their rate for loans and advances upon the Bank of England’s advertised rate of discount will also be apparent.
Of course, the demand for, and the supply of, loanable capital decides the rate of interest, and as demand and supply are never equal, the rate is always fluctuating, but we might just remember that our artificial banking system “influences” the rate from time to time. During periods of dull trade, when loanable capital accumulates in the hands of the banking companies, we should expect to see a low Bank rate, because, prices of commodities having fallen, people are less anxious to borrow, while fewer bills are on offer, and, the demand for those bills having increased proportionately, it follows that the holders can discount them at a cheap rate. But when business is brisk and the prices of commodities are rising, more bills are drawn, and as the fund with which they are discounted is not limitless, it follows that the increasing demand upon that fund sends up the rate. Bankers, consequently, who have also to meet the requirements of their current-account customers, are sometimes obliged to administer a salutary check to speculation by making the rate almost prohibitive in order to protect their reserves of cash, as if they then lent to all and sundry even Lombard Street would collapse.
Now the Bank of England, we have seen, holds the national reserve, as it were, and is, in consequence, the pillar upon which the money-market rests. Threadneedle Street (the Bank) is, therefore, the centre of the money-market (hence the description “central institution”) into which Lombard Street (the rest of the banks in the United Kingdom) pours its reserve and surplus cash. We might describe the Bank as the heart of the money-market, through which a stream of cash and credit-documents is continually flowing. The brokers (the outside market), who practically keep no reserves of cash, are largely financed by Lombard Street, which, however, calls in its advances to them during certain conditions of the market; and the bill-brokers are then compelled to fall back upon the Bank of England which holds the bankers’ reserves. In assisting the brokers the Bank is also supporting the credit of Lombard Street; so, clearly, the interests of each division are identical; and the closer and more friendly the relations between them the smoother will be the surface of the money-market.
But we have to consider the Bank rate in relation to bankers’ charges; and here another factor must be introduced, to wit, the nature of the securities deposited by the customer. The business man’s favourite investments are English railways, Corporation Stocks, Industrial Companies, and so on, whilst occasionally, endowed with imagination, and recognizing how erratically the earth dispenses her favours, the blessed uncertainty of mines appeals to his gambling instinct. As a rule, a banker’s loans and advances are not covered by Consols, because it would pay the borrower better to sell out and place the sum they realized to his credit. Advances against Consols would be made principally to stockbrokers and to speculators who had bought them largely in the hope of a rise in price.
Competition for an advance, which is covered by tangible securities, is keen both in London and the provinces, and competition, we must remember, tends to reduce the rate. Then, again, assuming that the Bank rate be 3 per cent., and that a banker suggests 4 per cent. on an advance covered by railway debentures, the customer may not see the force of maintaining a margin of 10 per cent. between the market-price of his stock for the protection of his banker, and paying him, say, ¾ per cent. more than his securities return on his purchase-money. As the customer’s loan or advance is well secured, and as the banker will only advance to the extent of 90 per cent. of the market-price on the condition aforesaid, he is only willing to pay Bank rate upon the sum he borrows.
We next have to consider the amount of pressure the customer can bring to bear on his banker, of whom his securities make him practically independent. He may, in the first place, threaten to remove his account unless his banker grant him a loan at 3½. Secondly, he may decide that it will pay him better to sell his debentures at the market-price. Again he may only require the loan for a few months or even weeks; and as, in his opinion, the debentures will probably appreciate in value, he may decide to pay 4 per cent. for a short period to either selling out or troubling to find a cheaper market. Obviously, the higher the Bank rate advances the less disposed is this class of customer to pay ½ per cent. above it; so, when the official minimum is at 5 and 6, he can often arrange for an advance at Bank rate or even at a ½ below it. On the other hand, the banker, when Bank rate is at 2 or 2½, generally refuses to lend at less than 3 per cent. per annum. The rate, therefore, upon a secured advance is influenced by the nature of the cover deposited as well as by the state of the money-market.
This description of the market is, of course, the veriest sketch, but, perhaps, it may possibly prove somewhat enlightening to those who have hitherto regarded this very simple subject as an exceptionally difficult one.
CHAPTER VII
LOANS AND ADVANCES IN LONDON
We are told that London banking is quite different to country banking, but it is a difference of degree rather than of kind, and in London, as in the provinces, the bank-manager has two rates—one for those who, taking him at his word, do not attempt to bate him down, and a second and lower rate for those persons who, knowing that he is of the City, and scenting instinctively a servant of the company, who is in possession of instructions, literally force his hand. A seller in a free market where competition is vigorous generally has at least two prices, though, of course, he only advertises one of them, and the banks, which are not one whit in advance of the commercial ethics of the times, base their rate upon expediency as well as upon the Bank of England’s rate of discount. In stating so human and obvious a fact one can only apologize for its intense triteness, and urge, in extenuation, the blind, unreasoning faith of some people in the modern bank-manager. Such faith may be beautiful, but, believe me, it is costly.
Mention has been made of the distinctions between country and London banking, and one of these appears to be the adoption of the “loan-account” system by the City banks, but “loan accounts” are not by any means unknown in the provinces, though the opening of them is exceptional. Moreover, though this system is greatly in evidence at the head-offices of the joint-stock banks, the farther one moves away from Lombard Street the less firmly is it established, and one finds in the books of the London branch banks a medley of the two systems. That is to say, some customers adopt the “loan-account,” and others pay a rate upon their daily debtor balances, together with a commission on the turn-over of their accounts.
When a “loan account” is opened by a customer, the banks do not charge a commission upon his current account, but, as we shall see, neither do they neglect to make amends for this omission. A customer, we will suppose, when the Bank rate is at 3 per cent. obtains a loan of £20,000 from his banker at Bank rate. He draws a cheque for this sum, which the banker debits to a “loan account” in his name, then places £20,000 to the credit of his current or running account. Now the interest at the rate of, say, 3 per cent. is calculated on the loan account, so if the customer’s average credit balance for the half-year amounts to about £4,000, then he has paid 3 per cent. per annum upon £4,000 which he has never used. In other words, he has given his banker something like £60 for working his account during the half-year. Further, some London banks charge a commission of ⅛ per cent. on the amount of the loan. This they add each half-year to his interest, which, in the present instance, would be debited in his current account pass-book thus: To Interest, £325. By carefully checking his banker’s charges he will make this discovery, and, of course, promptly demand that £25 be returned to him.
It can now be seen that the London bank-manager is as eager to snatch a commission as his country confrère, and, moreover, that he is not without his opportunities, which, when the client is considered safe, he seldom neglects. In other words, he does his duty like other honest folk whose misfortune it is to be employees; and he does not specify the ⅛ per cent. on £20,000 in the pass-book for the simple reason that he knows it is safer disguised as interest.
The customer naturally does not see why he should pay a rate upon £4,000 which he has not wanted, and which, in reality, the banker has not lent, though he has created credit in his own books to that extent by two simple entries on the debit and credit side of his ledgers. Assuming that no commission was charged on the loan, £60 a half-year seems a large sum to pay him for working an account, especially as most of his rivals will bid against him for a well-secured loan. The customer, therefore, should insist upon receiving the same rate upon his daily creditor current-account balances as he is paying upon his loan, and if he consider that his banker is entitled to a commission for working his account, then he can arrange for a fair nominal charge, but he may succeed in getting it worked free. Again, when his current account is largely in credit, he can transfer a certain sum therefrom to his loan account, and, by moving balances from the one to the other, as occasion may arise, save himself an appreciable sum in the shape of interest; but he may be too busy to adopt this course, and it is evident that the first suggestion, which is better adapted to his wants, will save him both time and money. Naturally the banker will object, but the client will make it his business to endeavour to overcome such opposition, which will be either strong or weak in proportion to the nature of his cover and the desirability of retaining his account.
We next come to the rate a borrower should pay upon a well-secured loan or advance, and here, again, we may touch upon a distinction between London and country banking. A banker, like any other dealer, adapts his business to his surroundings, but in a great city like London he is practically compelled to specialize more or less, and but little money is lent in the City upon mortgage, whereas overdrafts are granted freely in the country against the deeds of house property. Of course there are exceptions; and certain well-known firms, whose credit is beyond question, may not even be asked for any security when they borrow at certain times of the year, but they soon would be if the loan began to assume a permanent character; for though a banker may be willing to advance to an influential and reputable firm without cover just at those seasons when demand upon it is heaviest, he assumes that such assistance will only be required temporarily, and would instantly become nervous should it appear from his books that the firm was slower than usual in reducing the loan, whilst immediately he perceived that a certain amount of it threatened to take the form of a permanent advance he would ask for security.
The City banks are too busy to give much attention to the wants of the small man of business, and, broadly speaking, they require marketable securities before they will grant a loan or advance. The suburban manager, however, who is only on the edge of this struggling mass of humanity, views the smaller applicant with a kindlier eye, because the large borrower seldom approaches him, so in the suburbs one can borrow on mortgage just as one can in the country. Indeed, suburban banking approximates very closely to country banking, the one noticeable distinction being the deposit rate. The West-end banker, again, has his peculiarities, and it by no means follows that the rules and regulations of a bank’s head-office in the City are in complete harmony with those of one of its branches within a quarter of an hour’s walk of the seat of government. It is, therefore, impossible to define London banking, because London is vast, and the system eminently elastic and adaptable.
The following table will give one a fair idea of what rate should be paid upon a loan or advance, fully covered by securities which can be sold on the Stock Exchange practically at any moment:—
With Bank rate at 2 % Customer pays 2½ to 3 %
With Bank rate at 2½ % Customer pays 2½ to 3 %
With Bank rate at 3 % Customer pays 3 to 3½ %
With Bank rate at 3½ % Customer pays 3½ to 4 %
With Bank rate at 4 % Customer pays 4 to 4½ %
With Bank rate at 4½ % Customer pays 4½ to 5 %
With Bank rate at 5 % Customer pays 4½ to 5½ %
With Bank rate at 5½ % Customer pays 5 to 6 %
With Bank rate at 6 % Customer pays 5½ to 6 %
It must be distinctly understood that this table will only serve the purpose of a guide to what the rate ought to be, and that the customer can, if his credit be good, by bringing pressure to bear upon his banker, very probably make a closer bargain with him. For instance, with the Bank rate at 4½, a person whose securities and credit are beyond question might obtain a loan at ½ below Bank rate. He may further arrange that his rate shall be ½ per cent. below Bank rate, with a minimum to the banker of 3 or 3½. That is to say, his rate will never be less than 3 or 3½, and when the Bank rate is above 3½, then he pays ½ below it.
On the other hand, the customer who accepts the rate mentioned by the manager without question fares badly, for no dealer quotes his minimum rate first. He reserves that, as is usual in the highest financial circles, until last, and he finds it difficult to look pleased when it is forced from him, because his directors, if he quoted it too often, may come to the conclusion that his hand is losing its cunning. The client will have to do more than ask in order that he receive: he must use argument that is convincing. Knowing that certain bank-managers are running about the City in search of desirable accounts, just as are bill-brokers for first-class paper, he not unnaturally comes to the conclusion that he can find a cheaper market elsewhere, so, having exhausted the gentler modes of suasion, the client finally and reluctantly threatens to apply elsewhere, or reveals the fact that he has already done so, and with what result, when the manager, if he think him in earnest, quotes his very lowest rate, and asks him not to mention it outside. Where the loan is a small one, however, the directors will not trouble themselves greatly as to whether it either goes or remains.
The much-vaunted 1 per cent. above Bank rate is, of course, only paid by the small man, whose securities are not of the better class, and by the customer who has not studied the market. Some London banks, we know, charge a rate on the daily balances and a commission, but this is the ordinary country practice, so, in order to avoid reiteration, it has been thought desirable to discuss the method in the next chapter.
CHAPTER VIII
OVERDRAFTS IN THE COUNTRY
In the preceding chapter we discussed the “loan account” and its mysteries, and now we are brought face to face with the country practice of granting the customer a “limit.” The banker, we will assume, agrees that, upon his depositing certain securities, he may overdraw his current account to the extent of £1,500. This sum, then, is the client’s “limit” which he is not supposed to exceed, and if he draw a cheque that would, when presented for payment, overdraw his account beyond the agreed figures were the banker to honour it, the latter is entitled to return the document without notice. As a rule a bank reserves to itself the right of calling in a loan or advance at any moment, but in practice reasonable notice is always given.
Though the customer has arranged for a “limit” of, say, £1,500, it is quite possible that he will not overdraw his account to that extent; but at those seasons of the year when his outgoings are always in excess of his receipts the balance against him at the bank will draw closer to his limit. If, however, his business be in a healthy condition the corner will soon be turned; and as his payments in begin to exceed the cheques he draws, his indebtedness to the bank speedily sinks below the average. Each payment to his credit reduces his debit balance, and every cheque debited, of course, increases it, but as the banker charges him a rate upon the sum owing at the end of each day, it follows that the customer only pays interest upon the actual money he has borrowed—not upon the amount of the “limit” as does the London client upon the amount of his “loan.” This arrangement is much the fairer to the borrower, who, however, must take care that the banker do not charge him a high rate of commission upon his turn-over under it.
We can now consider the rate of interest a customer should pay on an advance which is more than covered by marketable securities that can be sold on the Stock Exchange at a moment’s notice. Most provincial towns, we know, are over-banked; and as each banker is the rival of the rest it follows that a person whose cover is tangible can, by playing off the one against the other, obtain very fine rates. But he may not care to adopt these tactics; still, as the method may appeal to some, it would be a pity not to dwell upon its possibilities, for it is often undoubtedly effective where argument fails. The would-be borrower of this class may be referred to the table of rates in Chapter VII, and to the remarks made concerning well-secured advances in London, as, competition for a secured overdraft being even more keen in the country, where tangible securities are less in evidence, he should experience little difficulty in coming to a similar arrangement with reference to the rate of interest.
For instance, suppose a man who possesses a good list of marketable stocks and shares wishes to borrow £5,000 from his banker, and calls upon the branch-manager, who at once expresses the opinion that his directors will have no hesitation in granting his request. They next discuss terms. The manager, who is a humble servant of the company, and who, moreover is anxious to pass the rest of his days in that honourable capacity, looks at his customer, thinking hard the while, and then, trusting his man lacks business experience, suggests 5 per cent. per annum on the overdraft and ⅛ per cent. on the turn-over. The turn-over of an account consists of the cheques, bills, etc., debited during the quarter or half-year, and the customer, therefore, is asked to pay a commission of 2s. 6d. upon each £100 debited in his pass-book. There is nothing very remarkable in this request on the part of a dealer in cash and credit who is selling his wares, and to express surprise is to display a lack of knowledge of business procedure, but to agree to his proposals would betoken a lamentable ignorance of the market.
Should the Bank rate be at 4 per cent. the customer would endeavour not to pay more, for his securities do not give him that return, and he has the option of selling them. And as to paying a rate on his turn-over, he knows that if he make application elsewhere he can probably find a banker who will forego that charge, so he either refuses to entertain it or else agrees to pay a merely nominal sum. With a higher Bank rate than 4, he will try to obtain his advance at ½ below the official minimum; and if the Bank rate be low, and loanable capital therefore cheap at the moment, he can suggest “½ per cent. below Bank rate with a minimum of 3½.” Here, again, reference may be made to the previous chapter. Of course, if there are only two banks in his town, and consequently but little competition, he will not find the manager so ready to listen to him, but he certainly should not pay more than Bank rate when it is above 3½, while he will remember that the manager’s advice, if he be so rash as to express an opinion, is not disinterested.
We next come to the customer whose “limit” is covered by marketable securities and deeds of house property or land. The banker will have the property valued by his own man, and then perhaps advance up to about two-thirds of the value placed upon it after the deeds have been examined by the bank’s solicitor and formally deposited, the customer, of course, paying all expenses. The securities, if they are a fairly good list, he will advance against to the extent of about 75 per cent. of their market value, thus leaving a margin of 25 per cent. in his favour to cover the risk of depreciation, for they take care of themselves—these bankers. The majority of advances in the provinces would be made against securities and deeds in varying proportions, and it is as well to remember that the larger the proportion of tangible securities the smaller should be the rate.
A banker, it need not be said, does not want to be bothered with a man, however good his securities, if he think that there is the probability of his having to call in the advance or to claim against his estate in the Bankruptcy Court; and though a customer cannot deposit marketable stocks and shares to the full extent of his advance, but is compelled to offer deeds and securities, as in our illustration, his credit is often so good that many other bankers in his town would readily listen to his proposals, and be only too glad to get his name on their books, perhaps even at a small sacrifice. Such a person can make a very close bargain with his banker, and would not, for instance, think of paying 5 per cent. when the Bank rate is at 3 or under. He would, in fact, especially if he were conducting a large business, probably be in a position to make as good terms as the man whose securities are wholly tangible.
The manager, of course, let the Bank rate be what it may, will endeavour to obtain from 4½ to 5 per cent. upon the overdraft of an account thus secured, and to charge a rate of from ¹/₁₆ to ⅛ per cent. upon the turn-over; but if the customer show fight, and losing the account may not be thought desirable, because of the local influence he possesses, then, rather than risk his applying elsewhere, the agent usually lowers his rates, for he naturally does not enjoy the thought that esteemed clients are perhaps paying little calls upon his rivals, and thereby advertising his own unpopularity. When the rate of commission is the bone of contention the customer’s first aim will be to pay no commission whatsoever, and to at least arrange for his advance at Bank rate with a minimum of 4 per cent. Probably he may do better with reference to his interest rate; and, if he finds that the manager holds out for commission, then he can agree to a nominal charge of from one to five guineas or so each half-year according to the volume of his business.
We now have to discuss the position of those persons who can only offer their banker the deeds of house property, land, and those other securities for which the market is a purely local, and, therefore, uncertain one. A banker, whose deposits are mostly payable at call and short notice, naturally prefers to advance against those securities that are quoted on a Stock Exchange, and does not care to lock up a large proportion of his resources in house property, etc., of which he cannot readily dispose in an emergency. But tangible securities are not always to be had for the asking; and, as he must employ his capital in order to pay a dividend, he is compelled to advance to a certain extent against, from his point of view, the less desirable securities such as houses and shares in some local company, though he always prefers to deal with the man who can deposit the more easily negotiable variety. Further, a prudent banker will only devote a certain amount (and that a relatively small amount) of his resources to advancing against the deeds of houses, land, and so on; and as the demand for overdrafts against this class of cover is always greatly in excess of the supply, it follows that those persons who borrow upon it have to pay high rates.
We have seen that the client who possesses tangible securities can, broadly speaking, make his own terms but it is otherwise with the man who wants an overdraft for business purposes against the deeds of a house he owns; and he it is who is compelled to pay 5 or 5½ per cent. per annum interest, be the Bank rate what it may, and ⅛ per cent. on the turn-over of his current account; for he will not find the competing banks anxious to secure his business by lowering their rates. Should his credit be good, and his business be considerable, he might succeed in reducing his commission rate to ¹/₁₆ or even ¹/₃₂ per cent., and, of course, he will make the attempt, but it would be unwise to more than wish him success in his endeavour. A really large tradesman, however, whose securities consist of this variety, will sometimes find a bank-manager anxious to secure his account, because he thinks he may influence others in his favour, and such a man will not pay high rates before he has at least sounded two or three managers of well-known banks and discovered that their terms are not more liberal. He may even find that he can get his account worked free of commission, or have the one he is paying appreciably reduced.
Again, a man can mortgage his property, but, as a rule, he prefers to obtain a “limit” on it from his banker, more especially if he intend gradually paying off the advance, as, should he borrow £500 on mortgage, he will have to pay a rate on that sum, but when he obtains a “limit” of £500, and his account is only £250 on the wrong side, he pays on the smaller amount only. As a rule, a solicitor acts as middleman between a mortgager and mortgagee; and the borrower might remember that solicitors, when advancing their clients’ money, or, indeed, when they act in any capacity, are quite as human as bank-managers, and that it is always advisable to higgle with them over the rate, which, of course, should be based on the value of loanable capital at the time. The deed usually stipulates for six months’ notice on either side.
A customer who is desirous of obtaining an advance upon property which already has a first mortgage upon it, will not find the banks either sympathetic or eager to assist him; though if his banker be “in” with him he will, of course, accept any additional security which is likely to lessen his risk or minimize his loss. In the usual course of his business second mortgages and equities of redemption are not thought desirable, and then, again, the law does not give a second mortgagee all the protection it might.
The current-account customer, who calls upon the bank-manager with the object of obtaining an overdraft against property, will generally be asked if his life is assured, and if he reply in the negative, he may be requested to assure to the extent of the “limit” the bank is ready to grant him, and to deposit the policy as collateral security with the deeds. Many men of small means assure their lives, and a banker, provided the office be a good one, will generally advance up to the surrender-value of the policy. This he ascertains by applying to the assurance company, which tells him at what figure they will commute it. The rates charged upon this class of security are high.
Where the customer’s overdraft is only partially secured, he must make the best terms he can for himself; and, as there is practically no competition for such an account, he will probably have to pay from 5 to 6 per cent. per annum interest and from ⅛ to ¼ per cent. on his turn-over. These are the maximum rates, which, no doubt, he will attempt to reduce, though with what success must remain problematical. The person who obtains an overdraft without security must, as a rule, give thanks, and pay up with a light heart, for should he apply elsewhere he would be received with open-mouthed astonishment. A good name in the banking world implies that its owner is worth some few thousands of pounds; and though, in the moral sense, its value is considered beyond price, directors, while appreciating it in the abstract, regret their inability to safely ensconce it within their safes, and therefore, as practical men, their powerlessness to advance against it unless backed by collateral securities.
Lastly, a few words may be said anent personal security. If you have a wealthy friend who is willing to sign a promissory note with you, or to guarantee your banker against loss up to a certain sum, an overdraft can soon be arranged; but such a request puts friendship to the severest test, and it may be extremely difficult to find your friend at home should he as much as suspect the reason of your visit.
We can see that competition is centred around the safe business, and that though those persons who possess tangible securities can make very close bargains, the less desirable is the cover from a banker’s point of view, other considerations being equal, the higher are the rates the customer will probably be asked to pay. The man who possesses the right class of securities should, therefore, take them to the cheapest market, and the owners of the less marketable varieties might remember that from 4½ to 5 per cent. per annum on the overdraft and ⅛ per cent. commission on the turn-over are very full rates, which may often be considerably reduced when the customer, whose credit is good, does a large and profitable business.
The only remaining subject for discussion is the relation that exists between the bank-manager and his directors, who confine his power to very narrow limits. The city-manager, for instance, at the head-office of a London joint-stock bank, might be empowered to grant loans to the extent of from £2,000 to £3,000 without first obtaining the consent of the board. Any application in excess of his “discretionary power,” as it is called, would have to be submitted to the directors, two or three of whom, during certain hours, are always in attendance each day, in order to deal with those requests for large loans where an immediate decision is essential, while a full board would probably sit twice a week. The board, of course, would be asked to confirm the decisions of the “daily” committee, and from time to time the loans granted by the city-manager would be subjected to criticism by that body.
At the metropolitan, suburban and country branches the “discretionary power” of the agent or manager would be based upon the amount of business transacted at the branch. In a small town of from 20,000 to 30,000 inhabitants a manager might have power to grant, when necessary, loans to the extent of £350 and under, without first obtaining the sanction of the board. All applications for advances in excess of his power would have to be immediately submitted to the head-office, accompanied by a letter, describing the nature of the security offered, and stating the desirability of obtaining or keeping, as the case may be, the account. This report, in every probability, would be addressed to the “advance department,” where it would be criticized by the officials before going into the board-room. Many questions would be asked with reference to the working of the applicant’s account, his annual turn-over, and so on. If he came to them from a rival bank then they would want to see his pass-book, and, were he already a customer, the manager would send a list of his daily balances and comment upon his means, habits, etc. Having satisfied themselves upon these points, the chief of the advance department reports to the general manager, who submits the application to the board. The process, it will be seen, is cumbersome and necessarily slow, for it often takes the machine as many days to give a decision as it does a private banker minutes.
The manager, evidently, has very little real power under this system, and, practically, the branches are managed from the head-office, the agent being a kind of clerk-in-charge, who reports to, and announces the decision of, his directors. Indeed, the rules and regulations are framed for this very purpose, and the banks make it part of their policy to effectually hold their managers in check, and to so arrange the work of an office that but little is left to their decision, while it is the duty of the accountant to instantly report any irregularity to the general managers. The average bank-manager, it must be remembered, has had neither a business nor a financial training, and it would therefore be extremely risky to give him a large field in which to make experiments. Of the two evils the boards of the banking companies choose by far the lesser, and, by allowing him a small “power,” they tether him like a donkey to a stake, thereby limiting his grass to the length of his rope.
In a large manufacturing city a manager’s discretionary power would not exceed £1,000 to £1,500, and in the smaller cities it would range from £500 to £1,000, while in the provincial towns it would be from £300 to £500, according to population. Each month the manager, as a rule, has to send to the head-office a report upon all accounts that are over his power, together with a separate one relating to bills discounted, and at least twice a year he must submit a long return of every overdrawn account on the books of the branch certified by the accountant and himself. The head-office, in short, watches him as a cat does a mouse, and criticizes those advances he himself is allowed to make severely should they not meet with the approval of those in authority.
Then, again, as though determined that his steps shall not stray from the beaten track, inspectors visit his branch four or five times during the course of a year, and, needless to say, the board thinks it neither necessary nor desirable to advise him of the day one will arrive. When the inspection is a short one the unwelcome visitor counts the cash, checks the bills and securities, just glances casually through the ledgers and then takes his departure, when the atmosphere seems lighter by his very absence, for exalted officials are a weariness to the flesh. But during a long inspection, which occurs about twice a year, the manager has to make a short report upon every overdrawn account in the books. This done, he gives his report to the inspector, who reads through his remarks and proceeds to criticize them. Having added a few words of his own, the visitor posts the bulky report to the advance department at the head-office, and, finally, it is laid upon the board-room table. Then the fun begins. The manager, after a few weeks of anxious suspense, receives a long list of caustic inquiries relating to certain overdrawn accounts which have failed to satisfy the board, together, perhaps, with imperative instructions to get such-and-such overdrafts reduced to certain figures at a given date. Sorely tried in temper, the poor agent sets about answering the questions put to him, and then, much against his will, he writes to certain clients whom he asks to give him a call.
Now, perhaps, the customers of the joint-stock banks will understand why they receive so many letters requesting them to keep their accounts at the agreed limit, or even to reduce or pay off the overdraft unless they can deposit either more desirable or additional security. At such a moment an irritable person is disposed to regret that “a company has neither a body to be kicked nor a soul to be damned.”
CHAPTER IX
HOW TO CHECK BANKERS’ CHARGES
Bankers make up their pass-books in two ways. When the customer is in account with the banker the cash he pays in appears on the right-hand side of his book, and the cheques he draws out on the left. The more general method, however, is to make the bank in account with the customer, when the debits and credits in the pass-book are an exact copy of the client’s own cash-book, whereas the entries in the bank’s ledger are reversed. The latter and more usual practice will be adopted in this chapter.
Customers often complain that they are unable to check their half-yearly charges, that they do not quite understand at what rates they have been charged; and as some bankers are most careful to add the interest and commission together, and then to enter the aggregate in the pass-book as “charges” simply, it is a little difficult to understand how they expect their clients to check their interest and commission. For instance, suppose a man is charged £5 2s. 6d., and that the banker writes in his pass-book:
By charges, £5 2s. 6d.
Here we have a puzzle that is more than Chinese in its intricacy and suggestiveness, for it is evident that unless the customer remembers that he has arranged to pay, say, 4 per cent. per annum interest and ⅛ per cent. commission, he will experience considerable difficulty in verifying the figures. As a matter of fact, the companies are not particularly anxious to enlighten him, for see how easily the client could have checked his charges were they specified thus:—
| By interest at 4 per cent. | £4 | 2 | 0 |
| By ⅛ per cent. commission on turn-over | 0 | 15 | 6 |
| By postages | 0 | 5 | 0 |
| £5 | 2 | 6 |
Such a statement is almost beautiful in its simplicity, and the entry “postages” may, perhaps, give us some clue to the mystery, as it is evident that a manager, by debiting charges in one sum, is thereby enabled to hide certain debits such as “postages,” “telegrams,” “legal expenses,” “stamps,” and so on, at which, were they entered separately in the bank-book, the customer would probably strongly protest. And then, again, by adopting this method of darkness, those persons who leave everything to the agent never know their rates, and they are sometimes too timid to call and inquire, as though fearing that such a request would reflect upon the agent’s honour.
Certain banks have an account open in their ledgers called Law Charges or Sundry Charges, to which doubtful debits are posted in the names of various customers. At the end of each half-year these sums are credited to the account in question and included in the clients’ charges. When, for instance, a manager does not wish a person to know that he is paying a fee of £3 3s. to the bank’s solicitors for the examination by them of certain deeds which he has deposited as security, he will probably resort to this subterfuge.
We can now criticize the account of John Jones, who on the 31st December, 1902, owed his banker £500 2s. 6d., and examine the entries in his pass-book from that date to the 30th June, 1903, when his bankers rule off their books and calculate their charges. Assuming that Mr. Jones keeps proper books, he will have an account in his ledger, which, after making allowance for cheques drawn but not presented for payment, will agree with his pass-book in every particular. The following is a copy of his bank-book:—
The London and Cheatem Bank, Ltd., with Mr. John Jones.
| Dr. | Cr. | ||||||||||
| 1903. | 1902. | ||||||||||
| Jan. | 20. | To Cash | £300 | 1 | 6 | Dec. | 31. | By Balance | £500 | 2 | 6 |
| 1903. | |||||||||||
| Apl. | 22. | To Cash | 90 | 1 | 3 | Feb. | 15. | By Smith | 10 | 0 | 0 |
| May | 15. | To Cash | 200 | 5 | 0 | Mar. | 31. | By Jones | 70 | 3 | 4 |
| May | 18. | To Cash | 50 | 0 | 0 | Apl. | 22. | By Robinson | 8 | 0 | 6 |
| May | 31. | To Cash | 9 | 0 | 0 | May | 26. | By Self | 5 | 10 | 0 |
| June | 10. | To Cash | 100 | 0 | 0 | June | 5. | By Williams | 16 | 11 | 2 |
| June | 28. | To Cash | 7 | 0 | 0 | June | 25. | By Brown | 7 | 2 | 3 |
| June | 30. | To Interest | 0 | 3 | 2 | June | 30. | By Charges | 5 | 2 | 6 |
| By Balance | 133 | 18 | 8 | ||||||||
| £756 | 10 | 11 | £756 | 10 | 11 | ||||||
| June | 30. | To Balance | £133 | 18 | 8 | ||||||
Mr. Jones’ ledger, then, assuming that none of his cheques are outstanding, will show the same balance at the debit of “bank,” though, of course, the dates will not agree, as Mr. Jones credits the bank on the day that he draws a cheque, whereas the bank debits him on the day that it pays it. We can see that his banker paid a cheque to Smith on the 15th February. If John Jones drew the said cheque on the 12th, then he debited Smith’s account and credited the bank on the same day. But these entries, as we shall see in our next illustration, appear upon the opposite sides of the banker’s ledger.
Mr. Jones, whose securities are tangible, has arranged with the manager that he is to pay 4 per cent. per annum on the overdraft and ⅛ per cent. on his turn-over, and to receive 1½ per cent. on his daily credit balances. Having received his pass-book, he wishes to check his charges, and after making two or three attempts, he is convinced of the futility of his efforts, so renounces his task in despair. He has worked the figures out in his own way, which, though a little primitive, he generally finds answers pretty well, and, as his figures come to something like those entered in the pass-book, he supposes that it is all right. Perhaps the following copy of his account as it stands in the bank’s ledger may therefore prove both illuminating and instructive:—
Jones, John, General Dealer, 5, High Street, Exeter.
| Date. | Particulars. | Dr. | Cr. | Dr. or Cr. | Balance. | Days. | Total. | Total. | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1902. | £ | £ | £ | £ | £ | ||||||||||||
| Dec. | 31. | To Balance | 500 | 2 | 6 | Dr. | 500 | 2 | 6 | 20 | 10,000 | ||||||
| 1903. | |||||||||||||||||
| Jan. | 20. | By Cash | 300 | 1 | 6 | Dr. | 200 | 1 | 0 | 26 | 5,200 | ||||||
| Feb. | 15. | To Smith | 10 | 0 | 0 | Dr. | 210 | 1 | 0 | 44 | 9,240 | ||||||
| Mar. | 31. | To Jones | 70 | 3 | 4 | Dr. | 280 | 4 | 4 | 22 | 6,160 | ||||||
| Apl. | 22. | By Cash | 90 | 1 | 3 | ||||||||||||
| To Robinson | 8 | 0 | 6 | Dr. | 198 | 3 | 7 | 23 | 4,554 | ||||||||
| May | 15. | By Cash | 200 | 5 | 0 | Cr. | 2 | 1 | 5 | 3 | 6 | ||||||
| May | 18. | By Cash | 50 | 0 | 0 | Cr. | 52 | 1 | 5 | 8 | 416 | ||||||
| May | 26. | To Self | 5 | 10 | 0 | Cr. | 46 | 11 | 5 | 5 | 235 | ||||||
| May | 31. | By Cash | 9 | 0 | 0 | Cr. | 55 | 11 | 5 | 5 | 280 | ||||||
| June | 5. | To Williams | 16 | 11 | 2 | Cr. | 39 | 0 | 3 | 5 | 195 | ||||||
| June | 10. | By Cash | 100 | 0 | 0 | Cr. | 139 | 0 | 3 | 15 | 2,085 | ||||||
| June | 25. | To Brown | 7 | 2 | 3 | Cr. | 131 | 18 | 0 | 3 | 396 | ||||||
| June | 28. | By Cash | 7 | 0 | 0 | Cr. | 138 | 18 | 0 | 2 | 2,268[*] | 278 | |||||
| June | 30. | By Interest | 0 | 3 | 2 | Cr. | 139 | 1 | 2 | ||||||||
| 181 | 37,422 | 3,891 | |||||||||||||||
| To Charges | 5 | 2 | 6 | 133 | 18 | 8 | 4 per cent. per ann. on | ||||||||||
| To Balance | 133 | 18 | 8 | £37,422 for 1 day | £4 | 2 | 0 | ||||||||||
| 756 | 10 | 11 | 756 | 10 | 11 | ⅛ per cent. on turn- | |||||||||||
| over £617 | 0 | 15 | 6 | ||||||||||||||
| June | 30 | By Balance | 133 | 18 | 8 | Cr. | 133 | 18 | 8 | Postages | 0 | 5 | 0 | ||||
| £5 | 2 | 6 | |||||||||||||||
| Allowed— | |||||||||||||||||
| 1½ per cent. per ann. | |||||||||||||||||
| on £3,891 for 1 day | £0 | 3 | 2 | ||||||||||||||
[*] Three days’ interest upon “cheques” paid to credit. 756 × 3.
Now everything should be as clear as the flowing brook to Mr. Jones. He should, in the first instance rule a sheet of paper in exactly the same manner as the specimen page of the banker’s ledger. He next carries the entries from his pass-book to the ruled sheet, taking care that each amount, whether debit or credit, is placed under its right date, and at the end of each day, or when the next date appears, he extends the balance, as in our illustration, for it is upon this balance that the bank either allows or charges him interest for one, two, or twenty days, as the case may be, at an agreed rate. He then multiplies this balance by the number of days, and carries the product into a “total” column, which he adds up at the end of the half-year. This done, the rest is a very simple business for anybody who can manage a rule-of-three sum.
The banker, we can see, brings forward the amount of Mr. Jones’ indebtedness on the 31st December when his books were ruled off. This opening entry, which amounts to £500 2s. 6d., is placed in the debit column of his ledger, and extended as a debit balance. Upon the morning of the 1st January, therefore, one day’s interest was owing on £500, but the next operation upon the account did not take place until 20th January; and as from 31st December (excluding the 31st and counting 1st January as one day) to 20th January (inclusive) there are twenty days, the customer owes twenty days’ interest upon £500. If we multiply 500 by 20, as in our form, and carry the product into “total” column, he then owes one day’s interest upon £10,000. The result, of course, is precisely the same; so a banker, in order to save a multiplicity of calculation, adopts this rule throughout, with the result that, at the end of the half-year, his client owes one day’s interest upon £37,422.
Bankers, when referring to the figures in the “total” columns, speak of them mysteriously as “decimals,” and the customer, upon hearing so ominous a word, jumps to the conclusion that bankers’ calculations are most difficult and involved, when, in reality, they are of the simplest nature imaginable. Evidently the product in question is the result of a simple multiplication sum; so why bankers should speak of extending the “decimals,” when there is none to be extended, must ever remain one of the enigmas of their trade.
As a rule, should the shillings in the balance column be ten or over, the banker, in making his calculations, calls them one pound, and when less than ten shillings he ignores them. On the 20th January, for instance, the shillings are excluded, but upon the 26th May £47 is the sum we have to multiply by five. Further, in arriving at the number of days between two dates, exclude the first date and include the second, or vice versa, but do not include both dates.
The second “total” column of our form is for creditor results, or, as bankers incorrectly call them, creditor decimals, the left-hand column being, of course, the debtor, and the right the creditor, just as though they were left-and right-hand pages of a cash-book. Having ascertained the number of days from date to date, we add them up, and next proceed to balance them. From 31st December, 1902, exclusive, to 30th June following, inclusive, there are 181 days, and, as those are the figures in our days’ column, we know that they are correct. Next we add up the “total” columns, and here great care is necessary, because it is impossible to balance the figures.
Dealing with the debit total first, we find that John Jones owes his banker one day’s interest at 4 per cent. per annum upon £37,422. Hence:—
| 37,422 × 4 × 1 | = £4 2s. |
| 100 × 365 |
But Mr. Jones will make these figures £35,154, and the answer £3 17s. 1d., and upon asking for an explanation he will be told that he has been charged three days’ interest upon the cheques he paid to his credit during the half-year. The banker argues that his client receives credit for the cheques he pays in immediately, whereas he himself has to collect them through the “clearing,” and does not receive the money for two or three days. The argument is somewhat fallacious as to the length of time, but we need not discuss that minutely. Mr. Jones points out that he pays in cash and local cheques as well as cheques upon London and country bankers, and that, therefore, he cannot understand why the manager charges him three days’ interest upon the total sum paid to his credit during the half-year. He will, of course, decline to submit to this charge, and request the manager to refund him 4s. 11d. (three days’ interest upon £756 at 4 per cent. per annum).
With reference to the rate, the average Bank rate from 31st December to 30th June works out at £3 17s. 1d. While his account was overdrawn, however, the official minimum was at 4 the whole time, so the rate is a fair one, but this question has already been discussed in the previous chapter.
His banker owes him 1½ per cent. per annum upon his creditor balances, which are multiplied by the days and extended in our second “total” column. He has, therefore, to receive 1½ per cent. per annum upon £3,891 for one day. Hence:—
| 3,891 × 1½ × 1 | = 3s. 2d. |
| 100 × 365 |
As this is the sum debited in the pass-book, Mr. Jones’ mind is at rest à propos of the correctness of the figures; but it will probably occur to him that the rate might be improved, for the fact that one is borrowing at 4 and lending at 1½ is not conducive to harmonious thinking.
Next, he checks the commission on his turn-over, which he makes £117. He pays ⅛ per cent., of course, upon the amount of the cheques credited in his pass-book during the half-year, and these come to the sum aforesaid. Hence:—
| 117 × 1 | = 2s. 11d. |
| 100 × 8 |
But his banker has charged him ⅛ per cent. on £617. His glance falls upon the balance forward of £500 2s. 6d., and it at once occurs to him that the manager has charged him thereupon, that, in short, a mere banker’s opening entry has been included in his turn-over. Excited by this discovery, Mr. Jones calls upon his banker, and points out to him, with a touch of Celtic intensity, that he sees no earthly reason why he should pay 12s. 7d. simply because the bank has made an entry of its own in his pass-book. Moreover, with a keen eye for mathematics, he clearly demonstrates that he has already paid commission upon the various transactions which resulted in the said balance; so the manager, adjusting his spectacles, and praying Mr. Jones to moderate his language, allows that, in the hurry of business, a little mistake has occurred. A customer, when checking his charges, should see that he does not pay commission upon opening entries of this description, as, needless to say, they are merely there in order to enable the banker to balance his books, and bear no relation whatever to a client’s turn-over, though they are sometimes added to it.
Just referring to the rate of commission, ⅛ per cent. we know, seems too much, so Mr. Jones may be recommended to read Chapter VIII of this book.
Lastly, we come to the entry “Postages, 5s.” The manager, during the half-year, writes numerous letters to his customers, sends their pass-books to them through the post, and so on; therefore, in order to reduce his incidental expenses, he debits a few shillings to certain easy-going clients before the books are ruled off, and so as to prevent awkward questions being asked, he includes these small sums with “charges.” Mr. Jones, who has probably not received half a dozen letters from the bank during the half-year, will naturally refuse to pay this imposition.
Should a customer not have made arrangements with the manager as to the rates he is to pay, he would ask at what rates his account has been charged, and then proceed to check the banker’s figures in the manner indicated in these pages. Such an entry as “charges” has nothing better than its extreme vagueness to recommend it, and the client, when he finds this word in his pass-book, should, if he experience any difficulty in checking the figures, return it to the manager with the request that he will give him full particulars as to the rates of interest and commission, and also tell him the amount of any additional charge or charges, if there be any.
We can now make out a table of the amount Mr. Jones has to reclaim from his banker:—
| Customer’s Calculations. | Banker’s Calculations. | |||||||
|---|---|---|---|---|---|---|---|---|
| 4 per cent. per annum | 4 per cent. per annum | |||||||
| on £35,154 | £3 | 17 | 1 | on £37,422 | 4 | 2 | 0 | |
| ⅛ per cent. on £117 | 0 | 2 | 11 | ⅛ per cent. on £617 | 0 | 15 | 6 | |
| Postages, nil | 0 | 0 | 0 | Postages | 0 | 5 | 0 | |
| Balance to be refunded | 1 | 2 | 6 | |||||
| £5 | 2 | 6 | £5 | 2 | 6 | |||
The commission on £617 is 15s. 5¹/₁₀d., but a banker would charge 15s. 6d. Mr. Jones, we can see, has been overcharged to the extent of £1 2s. 6d., and we may rest quite assured that he will not be easy in his mind until he has recovered this sum from his banker.
Sometimes a customer, when ruling off his own books, draws a cheque for, say, £600, and pays it to his credit at the bank. This would be a cross entry. But does he understand that this sum will be included in his turn-over, and that if he be charged ⅛ per cent. thereupon, he pays 15s. to his banker for making a couple of entries in his ledger? Again, if the manager charge him three days’ interest at 5 per cent. per annum upon the sums paid to his credit, he will pay another 5s. (about), and at this rate a cross entry of £600 would cost him 20s. The luxury, it must occur to him, is expensive; and as this illustration is not a figment of my imagination it is evident that everybody who keeps a banking account should understand how to check a banker’s charges.
It seems an act of supererogation to point out that the average account would contain very many more entries than the one under review, but if the reader will carefully follow these instructions he should find little difficulty in checking the charges in any bank-book. Where the account has been overdrawn during the entire quarter or half-year the first “total” column must be used. Our example is that of a mixed account, and both columns are required; but should the account be a creditor one, then the extensions are made in the second “total” column, and the banker, of course, will allow the customer a rate.
When checking the interest of a loan account it is advisable to obtain a separate pass-book from the banker, and not to take out the entries from the current-account pass-book wherein the interest is debited. Should it be found that the commission has been charged upon the amount of the loan, the customer would ask for an explanation, and in checking his interest he would proceed in exactly the same way as shown in our example.
Again, we have seen that some customers arrange that their rate shall be either Bank rate or ½ above it, as the case may be. Suppose that the Bank rate on the 22nd April were raised from 3 to 3½ per cent., and that it had stood at 3 from 31st December. The customer, who has agreed to pay his banker ½ above Bank rate, will then owe 3½ per cent. per annum on the sum or sums he has borrowed from 31st December to 22nd April. Applying this hypothesis to the account under review, we rule a line beneath the figures 6,160 in “total” column, and add up the column, which comes to 30,600. From 31st December (exclusive) to 22nd April (inclusive) there are 112 days (see page 59), and, as the figures in the days’ column give the same result, we know that they are correct. The customer, then, owes his banker one day’s interest at 3½ per cent. per annum upon £30,600. At each change of the Bank rate this process must be repeated; so instead of having one rule-of-three sum to work out, as in our illustration, there may perhaps be four or five of them.
Should the fortunate possessor of a large creditor account have arranged with his banker that he is to receive 1½ per cent. below Bank rate on his daily credit balances, then assuming that the balances on our form were creditor, the banker would owe 1½ per cent. per annum on £30,600 for one day. The customer, when calculating the amount due to him, would proceed in the same manner as indicated above, and he might remember that, in arriving at the number of days from one change of the Bank rate to another, he excludes the day from which he calculates and includes the date to which he calculates. The rest is easy.