We come now to Sir Robert Peel’s famous Bank Charter Act of 1844, entitled “An Act to regulate the issue of Bank Notes, and for giving to the Governor and Company of the Bank of England certain privileges for a limited period.” It confirms the curtailed privileges of the Bank for eleven years, subject afterwards to redemption on twelve months’ notice being given and the repayment of the debt due by the Government to the Bank. A clause in the subsequent National Debt Act of 1870, however, provides that the Bank of England shall continue to be a corporation until all the public Funds shall be redeemed by Parliament, thus practically granting it a lease in perpetuity. The Act of 1844—to some of the special provisions of which I shall presently refer—practically regulates the whole banking system of the country, and at the present time governs the Bank of England in the conduct of their business. In accordance with its provisions, the issue of Bank of England notes was first kept distinct from the banking business proper by the creation of the “Issue Department” and the “Banking Department,” with which probably most of my readers are perfectly familiar, at least by name. Besides these Issue and Banking Departments, there is in the Bank a third most important department, devoted to what is generally, though somewhat inaccurately, termed “the management of the National Debt.” In their capacity of bankers to the State the governor and company of the Bank of England have always acted as the financial agents of the Government for distributing, and paying the dividends on, the funded debt, as well as for the performance of other book-keeping duties in connection therewith. Of late years the Bank have undertaken similar duties for the Indian and several Colonial Governments, for the Metropolitan Board of Works, and for various corporations and municipalities. The considerable portion of the Bank premises devoted to this agency business is now generally spoken of by financial and banking writers as “The Department for the Management of the National Debt”—an imposing title doubtless, which says a good deal more than it means, and one, for aught I know, adopted nowadays by the Bank themselves; but, possibly influenced by the recollections of days long gone by, I confess my partiality for the old familiar title of “Stock Offices.”
In the conduct of their business, then, the Bank of England perform three distinct and important functions—that of financial agents, that of issuers of notes under the control of the State, and that of Government and general bankers. The duties involved in these functions are discharged, severally, towards the State and the various governments and corporations for whom they are agents; towards the general public, from or to whom they buy or sell notes and gold; and towards the Government and customers for whom they act as ordinary bankers. I will consider briefly the system by which these three functions are discharged. The offices comprised in the department for the management of the National Debt are the various stock offices in which are kept the stock ledgers and the transfer books, the Dividend Office, the Cheque Office, the Unclaimed Dividend Office, the Power of Attorney Office, and the Will or Register Office. The nature of the business transacted in these different offices is sufficiently indicated by their names, with the exception of the Cheque Office, which, on the lucus a non lucendo principle, is probably so called because it has nothing whatever to do with “cheques,” but is devoted, for the most part, to the purpose of checking the amounts and totals of the dividend warrants paid by the “Dividend Pay Office,” an office which belongs to the Banking Department. Some idea of the amount of work done in the various Stock Offices may be gathered from the circumstance that they employ the services of some 450 clerks. Nearly 2,000 books are in constant use in some ten or twelve rooms. The dividend warrants on the funded debt alone number about half a million a year, and are, when paid, sent to Somerset House for verification, together with a duplicate copy of the dividend book. As a remuneration for its services in connection with the National Debt, the Bank is paid a commission of £300 per million on the first six hundred millions of the amount and £150 per million on the remainder. Since the funded debt is now altogether about £628,500,000, the Bank receives on this account about £184,000 per annum, a remuneration which cannot be considered excessive.
The extreme accuracy and dispatch with which the clerical labor involved in the business of the Stock Offices is performed, is almost marvellous, and reflects the highest credit on the administrative machinery of the Bank. Every possible expedient is resorted to for the purpose of facilitating the work and guarding against error, even to the free employment of the Bank’s printing-office and the use of the stereotype process in the preparation of the dividend books in duplicate. It is worth mentioning that all the old stock ledgers, transfer books, vouchers, and documents connected with the various stocks which have been created since the establishment of the Bank are carefully preserved and systematically arranged for ready reference in the Stock Office Library under the charge of a librarian, whose duties, however, though involving great responsibility, are more monotonous than onerous.
The “Issue Department” of the Bank of England is the outcome of the determination expressed by the Government in 1844 “to regulate the issue of bank notes.” The experience of former years, more particularly that of 1825, had fully demonstrated how undesirable, and even dangerous, it was to leave the circulation of bank notes to the uncontrolled discretion of country bankers, and though there can be no reason to doubt that the Bank of England had hitherto used the power which they possessed of expanding or contracting their circulation at will with great judgment, and substantially to the benefit of the mercantile community, it was thought desirable that the control of the whole circulation in the country should be practically vested in the State, and be governed by some sound financial principle. The theoretical basis of the Act of 1844 is the principle that bank notes should not be mere symbols of credit—simple I O U’s, as it were, which are a confession of a want of cash—but of actual “ear-marked” gold; of ready money, which alone regulates, or should regulate, the extent of the commerce of the country. The soundness of this principle is doubted by many financial authorities on the ground that it checks the proper expansion of trade and in times of crisis has failed in practice. I cannot, however, here discuss the large subject of currency, but must accept the law as I find it, merely stating that in my opinion it affords the only safe basis upon which any sound currency can be regulated. To carry out this law effectually, then, it was obviously necessary that the Government should create or select some establishment from which bank notes might be issued, and in which the gold that these notes represented should be set apart or stored. As the State Bank, the Bank of England was naturally entrusted with these functions. Hence the creation of the “Issue Department.” But in order to afford some elasticity to the circulation, and to deal gently with the “vested interests” of the Bank of England and country bankers alike, the Act provides that no banks of issue shall be permitted other than those in existence in May, 1844, and that an average of the note circulation of these banks shall be taken, which shall in future be the maximum circulation allowed to them. This maximum was subsequently fixed at about eight and three-quarter millions. Provisions are also made by which, on certain terms, issuing banks may cede their privilege of issue to the Bank or forfeit them altogether in case of bankruptcy or certain changes in the constitution of their partnerships. The total amount of these “lapsed issues” since 1844 is about two and three-quarter millions, leaving the present authorized maximum circulation of the country banks at about six millions. No stipulation is made that any proportion of this circulation shall be based upon gold. This matter is left entirely to the judgment of the bankers themselves, whose discretion, however, there seems no reason to question, since from the weekly returns supplied to the Government in conformity with the Act, it appears that not more than one-half the notes of the maximum issue are in actual circulation. With regard to the Bank of England, permission is accorded to the Issue Department to issue notes to the amount of fourteen millions upon securities—including the £11,015,100 due by the Government to the Bank—to be set apart for the purpose of guarantee. The Bank is furthermore permitted to increase the amount of notes issued on securities to the extent of two-thirds of the lapsed issues of country banks. The extra issue thus acquired is now £1,750,000, which brings up the total amount of issue on securities to £15,750,000, inclusive of the Government debt. Any further issue of notes must be represented by an equal amount of bullion or gold coin transferred to the separate vaults of the Issue Department, but one-fourth of the amount so transferred may consist of silver bullion.
The Bank are required to furnish the Government with a weekly report of the accounts of the Issue and Banking departments. This report, which is popularly called “The Bank Return,” is published each Thursday afternoon, and is copied in the morning newspapers of Friday, together with the comments and deductions, more or less speculative and intelligent, of the different City editors. The Bank Return, so far as it regards the Issue department, is simplicity itself. Let the reader put one of them before him. On the one side he will find the total amount of notes issued, and on the other the bases of the issue, divided into the “Government debt,” the “other securities” (which together make up the total of £15,750,000, above mentioned), “gold coin and bullion,” and “silver bullion,” if there be any, which is very seldom the case. The simple term “bullion” signifies gold bullion, or gold in bars, which the Bank are compelled to receive from any person tendering it, in exchange for notes, at the rate of £3 17s. 9d. per ounce of 22 parts out of 24 of pure gold.
It is evident that the amount of bank notes issued varies in exact proportion to the amount of gold in the Issue Department, the issue against the Government debt and other securities being invariable. Roughly speaking, the contraction or expansion of the circulation indicates a corresponding curtailment or increase in commercial facilities or requirements. Hence the Issue Department return becomes an important guide to the operations of bankers, brokers, and financial firms, by whom it is carefully watched, since the increase or diminution of the stock of gold may be said respectively to be a signal of safety or danger. The receipts or withdrawals of gold in any large quantity by or from the Bank are of two kinds, inland and foreign. The former for the most part occur at certain regular periods of the year, such as the harvest season, Scotch “term-time,” &c. They exercise but a very modified and temporary influence on the money market, for the laws by which they are governed are very fairly understood and recognised, and the amount of gold actually in the kingdom remains unaltered. It is far different, however, with the demand or supply of gold from foreign countries, the importance of which to the financial world is so great that the amount of gold received or delivered by the Bank on foreign account is by them made known day by day, and is duly chronicled in the City articles of the morning papers. The exports and imports of gold (which practically, regulate the note issue) are governed by the state of the foreign exchanges, which are probably a mystery to many of my readers, but which up to a certain point may be readily understood. Approaching the subject as tenderly and in as elementary a manner as possible, I will at once simplify matters by saying that, with a few exceptions (such as regard India, Russia, China, &c.), the foreign rates of exchange represent the amount of money in its own currency (be it paper or gold) that the specified financial centre of each country is willing to give for a pound sterling on London. They vary almost daily, and are indications either of indebtedness or of the abundance or scarcity of money, and are described as favorable or unfavorable to this country according to whether they are high or low. A rate of exchange is an indication of indebtedness, according to the position of the balance of trade or indebtedness between the country fixing it and England. When in any given country this indebtedness is in favor of England, it is obvious that in that country bills on London for the purpose of remittance will be in demand, and will fetch more money; consequently the rate at which they will be purchased rises. When the balance of trade is against England, it is equally evident that bills on London are not so much wanted, and the price of them—that is the rate of exchange—consequently falls.
But I have said that a rate of exchange may be an indication of abundance or scarcity of money in the country quoting it; and it is often so in this manner. Let us suppose that there is no balance of trade to settle between a given country and England, but that the rate, of discount, or value of money, in the former is, say, three per cent., while in England it is, say, four per cent. It follows that primâ facie it is more profitable to send surplus money to England for employment than to keep it at home. In the absence of trade bills a demand for drafts transferring money to London sets in, and the rate of exchange rises. Let us now reverse this condition of things. Suppose money to be dearer in a given country than in England; it is evident in that case that capitalists here would find it more profitable to employ their money in that country than at home, and that the foreign rate of exchange would consequently fall. I have spoken hitherto of remittances by bills or drafts only, but it is obvious that a scarcity of these vehicles for the transfer of money may so drive up the rate of exchange that it becomes more profitable to send gold. When this point is reached the foreign rate of exchange is said to stand at “gold point.” If I have made myself clearly understood, the reader will now see how the rate of discount by attracting or repelling money affects the movement of gold in the Bank of England, and why, when the Bank desire to either simply protect their stock of gold or their “reserve,” and so prevent any contraction of the note issue, or to attract gold from abroad and so expand the circulation, or increase the “reserve,” they raise the official rate of discount step by step until the desired end is accomplished; or why, when the stock of gold is large and the note issue may with safety be contracted, they facilitate the trade of the country by lowering their minimum rate, at the risk of gold being required for export. He will, too, gain some slight idea of how the world’s stock of gold is moved about from country to country at the call of commerce, and how true it is that the trade of any country is, or ought to be, regulated solely by its supply of gold, or ready money.
The offices comprised in the Issue Department of the Bank are the Hall, the Bullion Office, and the Gold-weighing Room. In the Hall, notes and gold are exchanged by the public one for the other, and notes are exchanged for other notes of a higher or lower denomination. In the Bullion Office bar-gold is bought at the rate of £3 17s. 9d. per ounce, or exchanged for sovereigns at the rate of £3 17s. 10-1/2d. per ounce, at which rate bullion is also sold. Nearly all the imports of gold and silver to this country are taken to the Bank of England for delivery to the consignees. The duties connected with these consignments are undertaken by the Bullion Office, where small charges are made for weighing, packing, and collecting freight, &c. In the Gold-weighing Room gold coin is weighed automatically, at the rate of about 2,000 pieces an hour each, by about a dozen beautiful little machines worked by an atmospheric engine. Bank notes are not re-issued after having been once paid, and in the Bank Note Office registers are kept in which are recorded the dates of issue and return to the Bank of each respective note. The particulars of the payment of any note can be ascertained by a reference to the Bank Note Library, where the paid and cancelled notes are kept for seven years, after which they are burnt on the Bank premises. For the privilege of issuing the £15,750,000 against securities, and for exemption from stamp duty, the Bank pay an annual sum of about £200,000, together with any profit which they may derive from the notes issued against gold to the Government. The paper on which bank notes are printed is manufactured expressly for the Bank of England at Laverstock in Hampshire, but the dies from which the water-mark is made, as well as the plates from which the notes are printed, are made at the Bank. The notes are all printed at the Bank’s own printing-office under the care of the printing superintendent, the quantity of notes required from time to time being regulated by the chief cashier, who is responsible for their safe custody as soon as, by a second process of printing, the numbers and dates have been filled in for the purpose of issue. The average number of bank notes paid and cancelled each day is more than 40,000, and no less than 80,000,000 cancelled notes may be found as a rule, stored and sorted for reference, in the Bank Note Library. The Bank of England also undertakes the printing of “rupee paper” for the Indian Government.
The “Banking Department” of the Bank of England is the separation of the ordinary banking business from the business of financial agency and issuing notes. In a speech on the renewal of the Bank charter in 1844 Sir Robert Peel said, “With respect to the banking business of the Bank, I propose that it should be governed on precisely the same principles as would regulate any other body dealing with Bank of England notes.” The Bank Act of 1844, then, does not touch the management of the Banking Department in any way beyond requiring that a weekly statement of its assets and liabilities shall be published. This statement—which forms part of the “Bank Return”—may be thus analysed. On the left hand side are the liabilities, divided into the liability towards the proprietors of the Bank as shown by the amounts of “Proprietors’ Capital” and “Rest” (which latter is practically an addition to the capital); the liability to the Government, as shown by the amount of “Public Deposits,” which are the balances of different Government accounts; the liability to the customers as shown by the amount of the “Other Deposits,” which are the sum of the balances of the current or “drawing” accounts; and the liability to the holders of the Bank’s acceptances as shown by the amount of “Seven-day and other Bills” in circulation. On the other side of the statement are the assets by which these liabilities are represented, divided into “Government Securities,” which show the amount of the banking capital invested in Government securities; the “Other Securities,” which show the amount of other investments made by the Bank; and, separately, the “notes” and “gold and silver coin,” which show the amount of cash in hand for the current purposes of the Banking Department. This sum of notes and gold and silver coin forms, so to speak, the cash assets of the Bank, and the proportion which it bears to the current liabilities disclosed by the public and other deposits and seven-day bills is called the proportion of reserve to liabilities, and is always a matter of great interest, and often of great anxiety, to the City on Thursdays.
The question of the proportion which these cash assets should bear to liabilities is one of extreme importance to a prudent banker. It is generally considered that it should be about one-third, but a proportion of reserve to liabilities of only 33 per cent. in the Bank Return would create considerable anxiety, while in an ordinary joint-stock bank’s accounts it would, I fancy, be abnormally great, far greater than that disclosed by the half-yearly accounts submitted to the shareholders, which may naturally be supposed to represent the financial position in the most favorable light. The publication of the weekly Bank Return is so useful and important to commerce, banking, and finance that it is to be regretted that the law which calls for it is not extended to all joint-stock if not to private banks. We might then hope to see an end put to that faulty system of banking which in good times, in order to pay extraordinary dividends, encourages over-trading by giving every possible facility to speculation, and, when a reaction comes, suddenly cuts off all “accommodation,” calls in all resources, and drives its customers to the Bank of England, in the hope of obtaining that ready money which it is no longer willing itself to supply. The Bank of England, through their Banking Department, undertake duties merely towards their own customers and the Government. Their banking business is conducted for the most part (in theory, at all events) on the same lines as any other banking institution. It is unreasonable, therefore, to suppose that it is any part of their duty, in times of panic or crisis, to find ready money for a public shunted over to them by its own bankers, who from an inordinate desire to pay large dividends have placed themselves in a position of inability or unwillingness to find it themselves. And yet some such theory as this is advanced by many well-known writers on banking and finance. Bankers, probably knowing the weak points in their system, become sadly selfish, and are quick to take fright at the first signs of a panic, which they often do much to increase. The suspension of the Bank Act is to them the only true solution of the difficulties caused by over-trading, over-speculation, and inflation of general business. At their earnest entreaty—not at the solicitation of the Bank of England—has the Act been thrice suspended: not, as subsequent events proved, because any suspension of the Act was really necessary, but because bankers hesitated to do their duty to their customers, except under the shelter of its protecting wing. Nothing can be more erroneous, or, indeed, more mischievous, than the doctrine that it is the duty of the Bank of England to keep the “reserve” of the whole country, simply on the ground that, for Clearing House purposes, it suits the convenience of bankers to entrust them with large balances, and because they act as agents for the Government in automatically regulating the note issue of the kingdom.