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.