The bill-brokers, finding that they cannot obtain the funds from the ordinary sources wherewith to repay the amounts “called” from them, must have recourse to the Bank of England—both for discounting bills and for short loans. These facilities are there granted to them on certain conditions. The accommodation thus granted to the bill-brokers amounts to very large figures when the resources of the Money Market become locked up, owing to some special cause, such, for instance, as the issue of a big loan like the Transvaal loan of May, 1903. For this loan the “application money” alone, in the hands of the Bank of England, amounted to over £35,000,000, the bulk of which had been temporarily taken from the balances of other banks, thus reducing their lending powers and compelling them to call their advances from the bill-brokers.
Notes, and Gold and Silver Coin.—These two items together form what is known as the “Reserve” of the Bank, and the Reserve is the most important item appearing in the Weekly Return, and the item on which the attention of the Money Market is constantly fixed.
On looking at the balance sheet of one of our joint-stock banks, we find that the first item appearing among the assets of such an institution is “Cash in hand and Balance at the Bank of England”; but it is impossible to tell from this how much is actual cash, and how much balance at the Bank. The average proportion of “Cash and Bank of England balance” to “liabilities to the public” held by our leading joint-stock banks is about 15 per cent., while the proportion of “Cash” (Notes, and Gold and Silver Coin) to “liabilities” with the Bank of England has averaged 50 per cent. during the last ten years, and the fall of its reserve to anything like 15 per cent. would doubtless be coincident with a world-shaking panic. The reason of this great divergence in the proportion of cash in hand held by the Bank of England in comparison with other banks needs explanation, as do also the means taken to maintain the Reserve at a figure of presumed safety.
The “Reserve” is the reserve of the Banking Department only, and has no connection with the Issue Department as regards the convertibility of its notes. The great importance that is attached to the Reserve being maintained at a large figure is due to the fact that not only can this Reserve be drawn upon for home requirements, but that it is open to attack, and serious attack, from abroad.
As regards home requirements, the needs of the public in usual times follow a regular course, and one that is known and can be provided for beforehand; but this is not the case as regards foreign demands, and it is in connection with these demands that most of the changes in the Bank Rate owe their origin. If the directors of the Bank of England had to deal with home demands only, the question of fixing the Bank Rate would be an easy one—that is, of fixing the rate at which they are nominally prepared to discount for the public and for bill-brokers, and the rate which, by custom, governs the interest allowed on deposits and in many cases the rate charged for loans by other banks. But London is the most open market for gold in the whole world, and any country which requires gold for any purpose can draw it from London with more ease than from any other quarter. Hence our stock of gold is peculiarly open to attack, and in fixing the Bank Rate from time to time, the directors have to consider the question of whether gold is coming to us or leaving us. If gold is coming here in large quantities, the Reserve will improve, money will be plentiful with ordinary banks, who will consequently be prepared to lend at cheaper rates—considerably below the advertised rate of the Bank of England—and that institution will gradually lower its rate so as to keep in line with the prevailing conditions. On the other hand, if gold is leaving us in considerable quantities, the Reserve will of course fall, and this will be followed by a gradual tightening of rates in the Money Market, and the Bank Rate will be raised, not only in order to check the export of the metal, but to attract imports. Why a high Bank Rate is likely to attract foreign gold to our shores, and a low rate to have the contrary effect, will be explained in a later chapter dealing with the [Foreign Exchanges].
CHAPTER VIII
THE GROWTH OF JOINT-STOCK BANKS
We have already seen in dealing with the Bank of England that the formation of a bank with more than six partners was supposed to have been expressly prohibited by the Bank’s Charter. The direct result of this presumed prohibition was the establishment throughout the country of a large number of small private banks. Many of these were institutions of credit, ably managed and backed with a fair capital; but the majority of them were weak, and in times of trouble proved a source of danger and loss to the community. The various financial crises of the later part of the seventeenth and the early part of the eighteenth century gradually brought home to the people and the Government the unwisdom of the system whereby the growth of small banks was fostered, and the establishment of large and wealthy institutions was forbidden. At length—in 1826—the Bank of England was by Act of Parliament compelled to part with a portion of its presumed monopoly, and joint-stock banks were allowed to be established outside a sixty-five-mile radius from London.
It is somewhat remarkable that after the formation of joint-stock banks was at last permitted, very small advantage was at first taken of the permission thus afforded; one joint-stock bank was founded at Lancaster, another at Bradford, and a third at Norwich. But it was not until a period of commercial prosperity set in that any considerable number of such banks were founded. In the year 1833, however, and for a few following years, a large number of provincial joint-stock banks sprang into existence.