But a really strong, well-managed bank only advances to, and discounts bills of exchange for, its customers to such an extent as will enable it to hold from £45 to £50 in cash, money at call and investments to every £100 of its public indebtedness. Cash, of course, is its vital asset; and after cash comes Consols and other British Government securities in which, except at the very height of a panic, there is always a market. These are a bank’s so-called liquid assets; and it may just be added that when a bank mixes its cash and money at call and notice together, and an accommodating auditor declares that such a medley “exhibits a true and correct view of the state of the company’s affairs,” the bank is probably so weak in actual cash as to deem it wise not to publish the figures.
Money at call and short notice would represent advances to the bill-brokers and to the Stock Exchange; and though such loans could doubtless be easily called in during normal times, they would be difficult to collect when the money-market was in a turmoil. A greater part of the advances made to the Stock Exchange, though classed as liquid assets, are in reality loans in disguise; for if the banks were to suddenly ask the stockbrokers to redeem their pledged stocks and shares, those gentlemen would be hammered in clusters; and the shares, when flung upon the market to be sold at what they would fetch, would rapidly depreciate. It would certainly be interesting were the banks to specify the amount of their so-called short loans to the Stock Exchange; and, with a lively recollection of 1890, it is to be hoped that they are kept within bounds, as, upon that occasion, this class of advance hung like a mill-stone round their necks. Such liquid assets, it is to be feared, are more likely to sink the good ship than to save her in a storm.
Having ascertained the ratio per cent. of a bank’s cash in hand to its public liabilities, and glanced at the call-money, the list of investments should be carefully criticized. When a banking company describes its list thus: “Consols and other securities,” it may be taken for granted that its holding of Consols is a small one. This description, in fact, is taken from the balance-sheet of an English provincial banking company, which holds about £19 in cash, call-money and securities to each £100 it owes to its customers; and yet it can find people who are foolish enough to do business with it. Considered as a financial institution, it is practically bankrupt; yet its deposits amount to over £4,000,000. Fortunately, however, this institution is one of the few exceptions which are best avoided. Another very weak joint-stock bank describes its investments as consisting of “English Government and railway stocks.” Its cash and call-money are consolidated into one total; but, more remarkable still, an auditor actually has the impudence to declare that the balance-sheet “exhibits a true and correct view of the company’s affairs,” when, of course, it is not worth the paper upon which it is printed.
A well-managed bank, as a rule, states its holding of Consols distinctly, and, sometimes, the figures at which they have been taken. If it do not, then the value of its British Government securities is given separately. Next, it usually specifies its India Government Stock, and so on; and, finally, “other securities,” which, assumably, are of a non-liquid nature, are given last because they are of the least value from a banker’s point of view. Naturally, if a bank possess a gilt-edged list, it advertises the fact in its balance-sheet; and those companies which indulge in ambiguity are, in nine cases out of ten, the banks to avoid. For instance, you will not find any evasions of this nature in the balance-sheets of such powerful companies as the London and County Bank, the Union and Smiths, the London City and Midland, and other really first-rate institutions, for the simple reason that there is no occasion for them. As a rule, the clearer the balance-sheet, the stronger is the bank; and the sinners, consequently, are the smaller banks, which, situated in a manufacturing centre, are unable to collect sufficient working resources to finance their customers. Their ultimate fate, it need not be said, is amalgamation with a more powerful rival.
When choosing a banker, therefore, one should first ascertain that he has an abundant reserve of cash in hand, and, secondly, that his so-called liquid assets (his cash, call-money and securities) amount to from £45 to £50 against each £100 to which he is indebted to the public. And as to those private bankers who do not issue a balance-sheet, they are, in the first place, guilty of the sin of omission; and, in these days, when faith is not the predominant note, there seems but little inducement to buy a pig in a poke when a large banker’s balance-sheet may be had for the asking.
CHAPTER III
THE CHEQUE AND ITS VARIOUS CROSSINGS
A cheque is often described as a bill of exchange, drawn by a customer on his banker, for a sum certain in money, payable on demand. In these days, when the mere babe produces his cheque-book on the slightest provocation, it seems unnecessary to describe how a cheque should be drawn; though it may just be added that it must bear a stamp of one penny, and that the stamp may be either impressed or adhesive. A customer, therefore, can draw a cheque on his banker upon a sheet of notepaper; but he would be well advised, except under exceptional circumstances, to use the forms supplied to him.