The so-called English Joint-Stock Banks are classified into three groups, known as metropolitan, metropolitan and provincial, and provincial banks. The metropolitan banks have their head offices in London, and do not, as a rule, extend their branches beyond the suburbs of the metropolis. The metropolitan and provincial banks have their head offices in London and branches scattered throughout the provinces, as well as in various parts of the city and suburbs, and the provincial banks have their head offices in the larger provincial cities, and each one confines its branches usually to the town and country districts tributary to the city in which its head office is situated. Often the provincial banks establish branches in London.
For banking purposes, these banks are the chief reliance of the agriculture, industry, and commerce of the country, but competing with and supplementing them are the bill brokers and discount houses, the private banks, and the foreign and colonial banks. The bill brokers and discount houses make a business of dealing in foreign and domestic bills of exchange. They buy in the first instance a large percentage of the bills brought to market, keep some of them until maturity, and sell the remainder to the other banks, usually indorsing them first. A large part of the capital employed in their business is obtained by loans made from the other banks, subject to call and secured by the bills they purchase deposited as collateral.
The private banks are the remnant left of the oldest group in the country. There were private banks in London centuries before the Bank of England was incorporated, and previous to 1826 the Bank of England was their only competitor. Since 1844 their number has steadily diminished. Those which remain have, as a rule, built up a special constituency, to the special interests of which they cater. Among them are strong institutions, but as a class their importance in the system is not great, and is waning.
The foreign and colonial banks are branches of important institutions in foreign countries and the English colonies which have a considerable volume of business to transact in London. They serve as intermediaries between their respective countries and the English money market, and on account of the enormous volume of foreign commerce which is financed in London, their number is large, and the rôle they play on that market is important.
In the operation of this machinery, the most noteworthy features are the reserve system, and the administration of the discount rate of the Bank of England. There is no law on the English statute books prescribing the amount of cash which banking or other financial institutions shall keep in their vaults. The custom of these institutions regarding that matter is to keep on hand relatively small sums and to rely upon the Bank of England or some other London banking house for the replenishment of their supply as needed. For this purpose, London and many provincial banks keep balances with the Bank of England, and other banks maintain balances with other London institutions. These balances may be obtained by the deposit of coin or Bank of England notes or by rediscounts. Another widely used resource is the calling of loans made to bill brokers or discount houses. Such loans or a considerable volume of bills of the kind discounted by the Bank of England, or both, are regularly carried by London banks and counted as a part of their reserves.
On account of these practices, surplus cash not needed in the conduct of the current business of the country speedily finds its way into the vaults of the Bank of England, and additional supplies, when needed, come from this source. The administration of the cash reserves of the country thus becomes one of the important duties of the Bank of England, in the performance of which variation of the rate charged on discounts is the most important device.
Many years' experience has enabled the Bank to determine with a considerable degree of accuracy the volume of the demands for cash likely to be made upon it from day to day, and consequently the amount that it should keep on hand in the vaults. Whenever this amount approaches the minimum regarded as consistent with safety, the directors raise the rate of discount, and when the amount on hand becomes excessive, they lower it. The efficiency of this procedure in increasing the reserves in the one case and in decreasing them in the other is due to certain conditions and practices which deserve attention at this point.
Long-established custom has made the rate of interest paid on deposits in London and other parts of England vary with the discount rate of the Bank, and on this account the market rate of discount also varies in the same manner. The Bank of England is thus ordinarily able to regulate the market for commercial paper. Since paper payable in London is a favorite form of investment for continental bankers, by raising its rate of discount and with it the market rate above the level of the rates of some or all of the continental centers, the Bank of England is able to induce these bankers to send money to London for investment and thereby to increase her reserves, and by lowering its rate below the level of the rates in these continental centers, she is able to induce them to sell some of the paper they already hold, and thus to furnish a market for her surplus funds and diminish her reserves.
On account of the readiness with which the international gold movement responds to variations in the discount rate of the Bank of England, the need for an elastic system of bank note issues is not felt in England to the same extent as in other countries. It is this fact, doubtless, which explains the retention to the present day of the essentially inelastic bank note system created by the act of 1844.