We have seen that the history of the Bank of England may be divided into two periods. From 1708 to 1826 the Bank enjoyed the monopoly of joint stock banking in England. After 1826 it had to adapt itself to a constantly changing environment. England, in fact, outgrew the Bank, just as the financial world has outgrown London. The directors of the Bank of England were City merchants, whose ideas usually run in a particular groove. It is not, therefore, in the least remarkable that they stuck to old customs and neglected new opportunities. The directors of the London and Westminster Bank made the same mistake. So did those of the Union Bank of London, the London Joint Stock Bank, and one or two others, simply because their training was of the City: that is to say, like the streets around the Bank, narrow.
To a very great extent the Bank of England is dependent upon the bankers' balances, for, unless it held them, it would not be able to finance the Government. If its directors had, however, thoroughly understood the movement of 1826, the Bank would now be a much more independent institution, and would be a power in every county in England and Wales. In 1826 the Government expressly desired the directors of the Bank to open country branches, and by 1830 it possessed eleven offices in the large provincial towns. But the innovation was not encouraged by those in authority, and to-day the Bank of England possesses only nine country and two Metropolitan branches. Unquestionably a golden opportunity was neglected, for, had the directors decided to open in the large provincial towns, Bank stock would probably be worth over five hundred at this moment.
At first the joint stock bank movement was neither popular nor successful, but nobody questioned the credit of the Bank of England; and if that institution had quickly met the wants of the country by opening branches in the towns, it could have had the pick of the provincial business, for everybody, including both commercial firms and the leisured classes, would have been anxious to deal with a bank which was absolutely above suspicion. And who would dream of making a run upon the "Government" bank? The Bank would gradually have accumulated vast deposits, which would have made it independent of the "bankers' balances"; but the ground is now covered with banking companies, and the Bank of England's opportunity is gone, never to return. At present it is a great bank of discount. Had it farmed the provinces in earnest, it would have become a great deposit bank, deriving its power from its depositors and the Government account, instead of from the Government and the bankers, as it now does. But its directors were not trained bankers, and they failed to realise the important part that branches or feeders were to play in the new system, consequently, with the huge capital of the Bank, large dividends on its stock are now out of the question.
Our present system is, after all, the result of chance as well as of skill. It grew. Further it committed all the follies of youth and inexperience. Then, again, at the beginning, it was as a house divided against itself, and consequently upon more than one occasion it fell, for a banking system can only be worked successfully when all the strong members are pledged either to stand or to fall together. Indeed, our system would be considerably strengthened if the great banks were in closer touch with the Bank of England.
Some few years ago, when there was a somewhat bitter feeling between Lombard Street and the Bank, it was often suggested that were each bank to keep its own reserve of cash the rate of discount would be more stable; but, in the event of such a change, the banks would undoubtedly have to maintain increased reserves, and a greater proportion of their resources would consequently be non-productive. As they would then have less capital to lend, it also follows that, even if rates in the open market did fluctuate less, the average rate of discount paid by the public would be higher, because there would be less capital in the London short loan money market to meet the demands of the bill brokers and stockbrokers.
On the other hand, if the banks realised their investments in proportion as they increased their reserves, and so maintained the same amount of capital in the London short loan fund, their own profits would decrease; and the bank proprietors are not philanthropists. In the one case the public would suffer, and in the other the banks themselves would lose, whilst in neither instance is the advantage to be gained at all proportionate to the risk incurred by a sudden disturbance of credit.
Our present system, with all its imperfections, has gradually grown up around the Bank of England, and if Lombard Street were to decide to keep its own reserve, the result would be confusion, and confusion might be followed by panic—so great is the faith of the public in the Old Lady, whose history entitles her to both consideration and respect. The change might, or might not, result in a run upon Lombard Street; but the Bank of England, whether or not the money market were disorganised, would not lose the confidence of the nation, which is convinced that the Bank cannot fail.
Lombard Street, we may rest assured, would not risk so drastic a change. It may be urged that, were the banks to keep their own reserves, the Bank could not finance the Government, which would then have to borrow to a greater extent in the open market; and perhaps such would be the case. But though the Bank of England is at present largely dependent upon the "bankers' balances," and upon the power derived from its position in the centre of the system, it must not be assumed, even if the banks could agree among themselves as to the ratio of cash each should hold, that the Bank would be compelled to bow to their decision.
As a matter of fact, such a decision on the part of Lombard Street would change the Bank of England from a discount bank into a deposit bank—a metamorphosis which Lombard Street could not face with equanimity. The Bank, whatever arrangements it may make with its own customers, does not at present compete against Lombard Street for deposits at interest; but were the bankers to withdraw their balances, the Bank would be compelled to appeal to the public for deposits, and who can doubt that it could not attract as much capital to its vaults as it required? The Bank would only have to make its rate of interest sufficiently attractive, and the public would rush to it with deposits. Where would Lombard Street be then?