A few months ago, writing in this Journal on the subject of banking amalgamations, I referred to one of the objections against them, that they tended towards the creation of monopoly, and so encouraged hope on the part of those who would like to see all forms of industry managed by the State, that the banking business might sooner or later be taken over and worked as a State monopoly. At that time this danger of monopoly seemed to be still fairly remote, but since then the progress of amalgamations has brought it appreciably nearer, and so has vigorously stimulated both the hopes and fears of those who consider that it tends to bring nearer the seizure of banking business by the State. The fear is expressed by Sir Charles Addis, manager of the Hongkong Bank and director of the Bank of England, in the July number of the Edinburgh Review in a very interesting article on the "Problems of British Banking." Sir Charles observes that:
"It may even be questioned whether the gigantic size they have already attained does not constitute a menace to the predominant position which the Bank of England has hitherto enjoyed as the bankers' bank. How will the Bank of England be able to maintain its supremacy and control the money market, surrounded by banks individually greater and more powerful than itself, especially when the object in view is by raising the rate of interest to prevent an internal or external drain upon our gold reserve? It is even conceivable that the finance of the State may be threatened, and it is probably for this reason that in Germany the Prussian Minister is said to be considering a State monopoly of banking. Nor can the psychological effect of these great aggrandisements of capital in the hands of a few banks be ignored. They are virtually Government-guaranteed institutions. The insolvency of one of the great banks would involve such widespread disaster that no Government could stand aside. They would be compelled to make use of the national resources in order to guarantee the solvency of private banks. From Government guarantee to Government control is but a step, and but one step more to nationalisation. We are playing into the hands of Mr Sidney Webb and the Socialists."
As it happens, in the July number of the Contemporary Review, Mr Sidney Webb was developing the same theme, namely, the inevitability of banking monopoly and the necessity, as he conceives it, of defeating private monopoly for the sake of profit, by State monopoly to be worked, as he hopes, in the public interest. His article is headed by the rather misleading title, "How to Prevent Banking Monopoly," for, as has been said, Mr Webb very much wants monopoly, says that it cannot be helped, and sees the fulfilment of some of his pet Socialistic dreams in the direction of it by the bureaucrat whom he regards as the heaven-sent saviour of society. His very interesting argument is most easily followed by means of a series of quotations.
"We are, it is said, within a measurable distance of there being—save for unimportant exceptions—only one bank, under one general manager, probably a Scotsman, whose power over the nation's industry would be incalculable. Even in the crisis of the war the matter is receiving the attention of the Government.
"In the opinion of the present writer, the amalgamation of banks in this country, which has been going on continuously for a century, though at varying rates, and is being paralleled in other countries, notably in Germany, and latterly in the Canadian Dominion, is an economically inevitable development at a certain stage of capitalist enterprise, and one which cannot effectively be prevented."
Mr Webb considers that there is no economic limit to this policy of amalgamation, and that the gains it carries with it are obvious. He dilates upon these as follows:—
"It may be worth pointing out:
"(a) That apart from the obvious economies in the cost of administration, common to all business on a large scale, there is, in British banking practice, a special advantage in a bank being as extensive and all-pervasive as possible. Where distinct banks co-exist, there can be no assurance that the periodical shifting of business, the perpetual transformations in industrial organisation, the rise and fall of industries, localities or firms, the changes of fashion and the ebb and flow of demand, and even a relative diminution of reputation may not lead to a shrinking of the deposits and current account balances of any one bank, or even of each bank in turn. Accordingly, every bank has to maintain an uninvested, or, at least, a specially liquid, reserve to meet such a possible withdrawal. The smaller, the more numerous, the more specialised by locality or industry are the competing banks, the larger must be this reserve. On the other hand, if all the deposit and current accounts of the nation were kept at one bank, even if it has innumerable branches, as the experience of the Post Office Savings Bank shows, no such shifting of business would affect it; no mere transfers from firm to firm or from trade to trade would involve any shrinking of its aggregate balances; and it would need only to have in hand, somewhere, sufficient currency to replenish temporarily a local drain on its 'till money.' The nearer the banks can approach to this condition of monopoly, not only the lower will be their percentage of working expenses, but also the greater will be the financial stability, and the smaller the amount that they will need to keep uninvested in order to meet possible withdrawals.
"(b) That the process of amalgamation has involved an ever-increasing elimination, from the British banking business, of the typical profit-maker, first as partner in a private bank, then as a director in a Joint Stock bank, representing a large personal holding of shares; and the gradual transfer of practically the whole conduct of the business to what may be called 'disinterested management'—that is to say, management by trained, professional officers serving for salaries, whose remuneration bears no relation to the profit made on each piece of business transacted. The part played in the business by the directors themselves seems to be, with every increase in the magnitude and scope of the concern, steadily diminishing; and these directors, moreover, come to be chosen, more and more, not because of their large holdings of shares, or because of their ancestral or personal connection with banking, but because of their reputation or influence, commercial, social or political. The result is that, along with the process of amalgamation, there has been going on a transfer of the whole management of banking to the hierarchy of salaried officials; whilst the supreme decisions on financial policy are in the hands, in practice, of a very small group of salaried general managers, only partially in consultation with an equally small group of chairmen of boards of directors, themselves usually drawing not inconsiderable salaries."
It seems to me that Mr Webb exaggerates in rather a dangerous degree the reduction, through amalgamation, of the necessity which obliges a bank to keep a considerable reserve of cash. It is quite true that under normal circumstances cash withdrawn from one bank finds its way in due course to another, and that with regard to these mere "till money" transfers there might be a considerable reduction in the amount of cash required if all the banking of the country were in the hands of one business, so that what was withdrawn from one branch would be paid into another. But this fact would not alter the need which compels a bank to keep considerable reserves in cash in order to provide against the possibility of a run. A State bank, if the public takes it into its head that it prefers to have a larger proportion of currency in its own pocket rather than in its bank, may find itself pulled at for cash just as vigorously as a bank managed by private enterprise. This was shown in August, 1914, when very large sums were withdrawn from the Post Office Savings Bank during the crisis which then impelled many members of the public to hoard money, or compelled them to take it out of their banks because they did not find that the ordinary system of payment by cheques was working with its usual ease.