Unless the Bank rate be unusually high, the banks allow one-and-a-half per cent. below it upon money left at interest in London. The country deposit rate, which is somewhat higher, is affected to a certain extent by competition in the provincial towns and cities. But the Bank would not confine its efforts to London if its hand were forced. It would offer high rates at its branches, and might even open fresh offices. The bankers' deposit rates would then be forced upwards in order to arrest the drain from themselves to the Bank of England. No; Lombard Street cannot play fast and loose with the Old Lady; and, if certain critics will reflect, they will see that the Bank has less to fear from a change in our present system than have those who occasionally threaten her. Her position, were the banks foolish enough to withdraw their balances, is not quite so hopeless as it is sometimes made to appear upon paper. Indeed, the better the understanding between the Bank and Lombard Street, the safer is our "one reserve" system, and consequently the less liable is the country to financial crises—for it is only by the united action of all the great banks that the situation can be saved in times of stress. This was clearly proved during the Baring scare of 1890.
The "clearing" bankers from time to time fix the deposit rate for London by the Bank rate, and though their country branches are not bound by their decision—which is advertised in the newspapers directly a change is made—the country deposit rate fluctuates with the Bank rate, though, as a rule, it neither falls so low as the London rate when capital is cheap, nor advances so far when it is dear. Further, the rates charged for loans and advances should be regulated to a certain extent by the Bank rate. However, that is a question which need not be entered into here.
Should the bankers decide to keep their own reserves, it is evident that the Bank of England's rate of discount would immediately cease to be a representative rate, and that a powerful rival, with a great history and a clean record, would at once begin to compete against the bankers for both deposits and advances. Were the Bank of England, so to speak, to decide to remain outside the system, Lombard Street could not even fix a minimum deposit rate for London, because the Bank, if it required capital, would bid against its rivals, and would soon obtain all it needed. Instead of being more stable, rates in the open market would move up and down with startling suddenness. Would-be borrowers, puzzled by such irritating movements, would soon grow nervous, for the prices of commodities would fluctuate too, and everybody would be afraid to make large purchases. The closer one examines the question, the more absurd appears the suggestion of a split between the Bank and our great joint stock banking companies; and the only wonder is that any person with the slightest sense of proportion can seriously advance so dangerous a proposition, which that friend of our youth, "Euclid," would have at once pronounced "absurd."
Custom has placed its seal upon our banking system; and the person who is rash enough to break that seal may discover that he has released new forces, which, though theory plainly demonstrates that they will act in a certain direction, are pretty sure to make their way through an unsuspected flaw which offers less resistance. A system which has been over two hundred years in the building cannot be changed in a day—especially a system which, even if it be not understood, has entered into the daily life of the people. It is because the system is not understood that the change would be so dangerous—so irritating. It would be asking the British public to think, to change its habits, to suddenly adopt new ideas; and as that mysterious body has never yet been educated up to thinking for itself, it would be found that it would kick against a new system like the stubborn donkey it is. Here is the real danger. The change, if the public would adapt itself to it, might prove beneficial—but the public would not; and as even its advantages over the present system are doubtful, where is the practical banker who would suggest the move? His one aim is not to disturb the money market, and for that reason alone he would hesitate to remove the Bank of England from its position in the centre of the system; but when we remember that the Bank, by accepting deposits, could probably beat Lombard Street at its own game, the change in question need not be discussed seriously.
There is one other phase in modern banking which, perhaps, calls for notice, and that is the fierce competition for safe business taking place between the banks themselves both in London and the provinces. Most of our large towns and cities are overbanked. Consequently, the public has a choice of many markets, as it were; and, quite naturally, it tries to lend in the dearest and to borrow in the cheapest. It may be asked: How much longer will this state of affairs exist? And the answer is: Just so long as the banks decide that it shall; and not a day longer!
The better the risks of banking are understood by the public the more difficult will it be for a weak bank to attract custom; and as the smaller banks, especially in the manufacturing centres, are unable to obtain sufficient deposits to meet the demands for advances, it follows that, when their loans grow out of all proportion to their resources, they are compelled to amalgamate with a large institution possessing numerous branches, and therefore in a position to collect huge sums of loanable capital, and distribute it just where it is wanted.
For instance, a large bank collects very much more capital in certain districts than it lends therein; but at branches situated in busy manufacturing cities the demand for capital, especially when trade is brisk, approximates much too closely to the sums collected at those branches to be compatible with sound banking. However, the bank has accumulated more than it requires in other towns, and is therefore in a position to transfer the surplus to those places where demand is strong, and, at the same time, to maintain a good ratio of liquid assets to liabilities, whereas a local bank in a busy centre can often only meet the requirements of its customers by advancing to a dangerous extent.
The directors of such banking companies are beginning to realise this danger; and fearful that one day they may be caught short of cash, the smaller joint stock banks are gradually being absorbed by the greater companies, whose numerous tentacles enable them to distribute their capital evenly throughout their system, and to maintain fair cash reserves against their liabilities.
As the small banks disappear, competitors are removed from the market; and there is every probability that banking in this country will by-and-by be in the hands of a few large and powerful banking companies. The public could not resist the banks were they to unite against it. Already the "clearing" banks have fixed the deposit rate for London, and it is only one step farther to declare the minimum rate at which they will advance—for what resistance can the public offer to a combination with more than £910,000,000 in deposits alone behind it?
Were the banks to hold a conference, and to decide that competition must be kept within bounds, the public would not have a voice in the matter. The English banks, like those of Scotland, would, after having come to some arrangement among themselves, meet from time to time in order to fix the minimum rates of interest and commission, and their customers would either have to pay those rates or else obtain accommodation outside the confederation. Of course, all the banks would have to close up their ranks before this arrangement would be possible, and, at the moment of writing, it seems improbable that certain companies, which make a business of competition, could be persuaded to come inside. So long as the banks are divided the public will be able to drive bargains with them, but, directly they fall into line, their rule will begin, and the quicker the smaller companies disappear the nearer the reign of the banks approaches.