1. Common Features
The central banks differ considerably in organization and business methods, but perform essentially the same functions; that is, they act as financial agents for their respective governments; discount high-grade commercial and bankers' bills for other banks and usually for private persons; administer the cash reserves of the entire country; and furnish the greater part and, in some cases, the entire supply of bank notes.
The other large banks do most of the business with the public, the central bank's relations being chiefly with them and with the government. They conduct checking accounts with merchants, manufacturers, farmers, and others; receive and invest savings deposits, and deal in certain classes of investment securities; conduct the domestic and foreign exchanges; discount various kinds of commercial and banking bills, frequently those not available for discount at the central bank; and make advances on personal and other kinds of security. Their main offices are located either in the central money market of the country or in important financial centers, and their branches are extended to all places in which banking facilities are supposed to be needed. As a rule, they are less restricted by legislative provisions than are the national and state banks and trust companies of the United States, and are less carefully supervised and inspected by public officers.
Commercial and bankers' bills are widely used as credit instruments between buyers and sellers and between bankers and their customers. A common method of procedure, when a sale is made on time, is the drawing of a bill for the amount due, by the seller upon the buyer, payable at the end of the credit period agreed upon, and accepted by the buyer, and the discount of the bill by the seller's bank. In foreign and in some branches of domestic trade, the banker's bill is used on account of its more general acceptability as an object of discount, such bills usually being discountable by the central bank and by banks far distant from the place in which the bill originated.
In case a buyer desires to furnish his creditors with bills of this kind, he arranges with his banker for a line of "acceptance" credit, which permits people who sell goods to him to draw bills upon his banker instead of himself, the banker agreeing to accept the bill and guaranteeing its payment at maturity. The seller will usually have no difficulty in discounting such a bill at his own bank, no matter how far removed it may be from the home of the buyer, the character of the accepting bank being known throughout the financial world. "Acceptance lines" are usually granted only on condition that the customer agrees to supply the bank with the funds necessary for meeting the accepted bills as they fall due, and to pay a fee for the accommodation. Ample security that these obligations will be met is usually demanded.
2. The English System
In the English system, the central bank is the Bank of England, with the possible exception of a few private banks, the oldest financial institution in the country. It is privately owned and privately governed. Its board of directors, chosen by the stockholders, consists of twenty-four persons, a portion of whom are practically life members, being regularly reelected when their terms of office expire. The others usually serve alternate years only, vacancies being filled by promising young men selected from the business houses of London. The oldest director is regularly elected to the office of governor of the Bank, and the next oldest to that of deputy governor, both serving two years, the deputy governor regularly succeeding to the office of governor, and the ex-governors forming the life members of the board and constituting a kind of advisory council to the governor, and known as the Board of Treasury.
The head office of the Bank of England is in London, and there are eleven branches, two in London and nine in the provinces. By a law passed in 1844, the Bank was divided into two departments, called respectively the banking and the issue departments, the latter having exclusive charge of the issue of notes, and the former of all other branches of the bank's business.
This same law prescribed the conditions under which notes could be issued. It provided that the Bank of England might issue £14,500,000 of notes in exchange for securities, and any amount in addition in exchange for an equal amount of coin or bullion. Additions to the amount issued in exchange for securities might be made by order of the government to the extent of two-thirds the amount of issues relinquished by the other issuing banks, all such banks in existence at the time the act was passed being permitted to retain, without increasing, their existing issues. Most of these other issues having been abandoned since 1844, the Bank of England is now permitted to issue in exchange for securities £18,450,000. The securities against which these issues are made were transferred to the issue department by the banking department, and consist of the debt owed by the government to the bank and of other government or governmentally guaranteed securities. The issue department freely issues additional notes in exchange for an equal amount of gold coin or bullion, and on demand redeems notes in gold coin. Since the amount of notes all the time outstanding greatly exceeds £18,450,000, the business of the issue department is confined to the exchange of notes for gold coin and bullion and the redemption of notes in gold.
The banking department receives and disburses the funds of the government, manages the public debt, and serves as the government's agent in most of its other financial operations; receives on deposit from other financial institutions the money which comes into their possession, and supplies them with such money funds as they need from day to day in payment of checks drawn against their balances; discounts bills of exchange with a minimum maturity of four, and in exceptional cases six, months; and to a limited extent makes advances on and invests in high-grade public and other securities. Besides the English government and financial institutions, it has other customers, but it is to be presumed that these are of a special character, since the conditions under which it does business with private persons are in most cases more onerous than those prescribed by other banks, and consequently not attractive to the ordinary business man.