OUR BANKING MACHINERY

February, 1918

The Recent Amalgamations--Will the Provinces suffer?--Consolidationnot a New Movement--The Figures of the Past Three Decades--Reductionof Competition not yet a Danger--The Alleged Neglect of LocalInterests--Shall we ultimately have One Huge Banking Monopoly?--TheSuggested Repeal of the Bank Act--Sir E. Holden's Proposal.

Banking problems have lately loomed large in the financial landscape.It will be remembered that about a year and a half ago a Committeewas appointed to consider the creation of a new institution speciallyadapted for financing overseas trade and for the encouragement ofindustrial and other ventures through their years of infancy, andthat the charter which was finally granted to the British TradeCorporation, as this institution was ultimately called, roused agreat deal of opposition both on the part of banks and of traders whothought that a Government institution with a monopoly characterwas going to cut into their business with the help of a Governmentsubsidy. In fact, there was no subsidy at all in question, and thefears of the trading world of competition on the part of the newchartered institution only arose owing to its unfortunate name, whichwas given to it in order to allay the apprehensions of the banks whichhad been provoked by the title originally designed for it, namely, theBritish Trade Bank. There seems no reason why this Company shouldnot do good work for British trade without treading on the toes ofanybody. Although naturally its activities cannot be developed on anysubstantial scale until the war is over, its Chairman assured theshareholders at the end of January that its preliminary spadework wasbeing carefully attended to.

After this small storm in a teacup had died down those interested inour banking efficiency were again excited by the rapid progress madeby the process of amalgamation among our great banks, which began toshow acute activity again in the last months of 1917. The suddenlyannounced amalgamation of the London and South-Western and Londonand Provincial Banks led to a whole host of rumours as to otheramalgamations which were to follow; and though most of these proved tobe untrue a fresh sensation was aroused when the union was announcedof the National Provincial Bank of England and the Union of London andSmith's Bank. All the old arguments were heard again on the subject ofthe objections, from the point of view of industry in the provinces,to the formation of great banking institutions, with enormous figureson both sides of the balance-sheet, working from London, often, it wasalleged, with no consideration for the needs of the provincial usersof credit. These latest amalgamations, which have united banks whichalready had head offices in London, gave less cause than usual forthese provincial apprehensions, which had far more solid reason behindthem when purely provincial banks were amalgamated with institutionswhose head office was in London. Nevertheless, the argument was heardthat the great size and scale on which these amalgamated banks werebound to work would necessarily make them more monopolistic andbureaucratic in their outlook, and less elastic and adaptable in theirdealings with their local customers.

It seems to me that there is so far very little solid ground for anyapprehension on the part of the business community that the recentdevelopment of banking evolution will tend to any damage to theirinterests. The banks have grown in size with the growth of industry.As industry has tended more and more to be worked by big battalions,it became necessary to have banking institutions with sufficientlylarge resources at their command to meet the great requirements of thehuge industrial organisations that they had to serve. Nevertheless,the tendency towards fewer banks and bigger figures has grown withextraordinary celerity, as the following table shows:--

MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC.,SINCE 1886.

December No. of Number of Capital Deposit and Total
31st Banks Branches Paid up Current Liabilities
Accounts
1886 109 1,547 L38,468,000 L299,195,000 L376,808,000
1891 106 2,245 43,406,000 391,842,000 486,632,000
1896 94 3,051 45,203,000 495,233,000 599,518,000
1901 74 3,935 46,631,000 584,841,000 698,150,000
1906 55 4,840 48,122,000 647,889,000 782,353,000
1911 44 5,417 47,265,000 748,641,000 885,069,000
1916 35 5,993 48,237,000 1,154,877,000 1,316,220,000

This table is taken from the annual banking numbers of the Economist. It will be noticed that in 1886 there were in England 109joint-stock banks with 1547 offices, whose accounts were tabulatedin the _Economist's_ annual review. Their total paid-up capital was38-1/2 millions, their deposit and current accounts were just under300 millions, and their total liabilities were 377 millions. In thecourse of thirty years the 109 banks had shrunk by the process ofamalgamation and absorption to thirty-five, that is to say, they hadbeen divided by three; the number of their offices, however, had beenmultiplied by nearly four, while their deposit accounts had grown from300 millions to 1155, and their total liabilities from 377 to 1316millions. By the amalgamations announced at the end of 1917, and thatof the County of Westminster with Parr's announced on February 1st,the number of joint stock banks will be reduced to 32. The picturewould be still more striking if the figures of the private banks wereincluded, since their number has been reduced, since 1891, from 37 to6. These figures are eloquent of the manner in which the number ofindividual banks has been reduced, while the extent of the bankingaccommodation given to the community has enormously grown, so that thepower wielded by each individual bank has increased by the force ofboth these processes.

The consequent reduction in competition which is causing some concernamong the trading community has not, as it seems to me, gone farenough yet to be a serious danger. The idea that the big banks withoffices in London give scant consideration to the needs of their localcustomers seems to be so contrary to the interests of the banks thatthey would be extraordinarily bad men of business if those who wereresponsible for their management allowed it to be the fact. It isprobably nearer the truth that banking competition in the provinces isstill so keen that the London management is very careful not to allowanything like bureaucratic stiffness to get into the methods by whichtheir business is managed. By the appointment of local committees theyare careful to do all they can to see that the local interests get allthe credit that is good for them. That local interests get as muchcredit as they want is probably very seldom the case, because it is anatural instinct on the part of an eager business man to want rathermore credit than he ought to have, from a banking point of view.Business interests, as long as they exist in private hands, willalways want rather more credit than there is available, and it willalways be the duty of the banker to ensure that the country's industryis kept on a sound basis by checking the tendency of the eagerbusiness man to undertake rather more than is good for him. From thesentimental point of view it is certainly a pity to have seen many ofthe picturesque old private banks extinguished, the partners in whichwere in close personal touch with their customers, and entered intothe lives of the local communities in a manner which their moderncounterpart is perhaps unable to do. Nevertheless, it is difficultto get away from the fact that if these institutions had been asefficient and as well managed as their admirers depict them to havebeen they would hardly have been driven out of existence by the stressof modern developments and competition. Whatever we may think ofmodern competition, in certain of its aspects, we may at least besure of this--that it does not destroy an institution which is reallywanted by the business community. And if the complaint of localinterests is true, that they are swamped by the cosmopolitanaspirations of the great London offices, they always have it in theirpower to create an institution of the kind that they want, and bygiving it their business to ensure for it a prosperous career. As longas no such tendency is visible in the banking world we may be prettysure that the views expressed concerning the neglect of localinterests by the enormous banks which have grown up with Londoncentres in the last thirty years is to a great extent a myth. Ithas now announced, however, that the whole problem involved by theamalgamation process is to be sifted by a committee to be appointedfor this purpose.

Another apprehension has arisen in the minds of those who view withcritical vigilance the present tendencies of business and thepresent development of economic opinion among a great section of thecommunity. If, it is urged, the banks continue to swallow one anotherup by the process of amalgamation, how will this tendency end exceptin the creation of one huge bank working a gigantic money monopolywhich the Socialistic tendencies of the present day will, with somereason, insist ought to be taken over by the State for the profit ofthe taxpayer? This view is frankly put forward by those advocates of aSocialistic organisation of society, who say that the modern tendencyof industry towards combinations, rings and trusts is rapidly bringingthe Socialistic millennium within their reach without any efforton the part of Socialistic preachers. They consider that the trustmovement is doing the work of Socialism, much faster than Socialismcould do it for itself; that, in short, as has been argued abovein regard to banking, the tendency towards centralisation and theelimination of competition can only end in the assumption by the Stateof the functions of industry and finance. If this should be so, thefuture is dark for those of us who believe that individual effortis the soul of industrial and financial progress, and that industrycarried on by Government Departments, however efficient and economicalit might be, would be such a deadly dull and unenterprising businessthat all the adaptability and tendency to variation in accordance withthe needs of the moment, which are so strongly shown by individualenterprise, would be lost, to the great detriment of the materialprogress of mankind.

As things are at present, there is little need to fear thatSocialistic organisation of industry could stand up against competentindividual effort. Anybody who has ever had any business dealingswith a Government Department will inevitably shudder when he tries toimagine how many forms would have to be filled up, how many divisionsof the Department the inevitable mass of papers would have to gothrough, and how much delay and tedium would be involved before thesimplest business proposition could be carried out. But, of course, itis argued by Socialists that Government Departments are only slow andtied up with red tape because they have so long been encouraged to doas little as possible, and that as soon as they are really urged to dothings instead of pursuing a policy of masterly inactivity, there isno reason why they should not develop a promptitude and elasticityquite as great as that hitherto shown by the business community.That such a development as this might take place in the course ofgenerations nobody can deny; at present it must be admitted that withthe great majority of men the money-making incentive is required toget the best out of them. If the process of education produces sogreat a change in the human spirit that men will work as well for thesmall salary of the Civil Service, with a K.C.B. thrown in, as theywill now in order to gain the prizes of industry and finance, thenperhaps, from the purely economic point of view, the Socialisationof banking may be justified. But we are a long way yet from any suchachievement, and if it is the case that the rapid centralisation ofbanking power in comparatively few hands carries with it the dangerof an attempt to nationalise a business which requires, above all,extreme adaptability and sensitiveness to the needs of the momentas they arise, this is certainly a danger which has to be carefullyconsidered by those who are responsible for the development of theseamalgamation processes.

And now another great stone has been thrown into the middle of thebanking pond, causing an ever-widening circle of ripples and provokingthe beginning of a discussion which is likely to be with us for sometime to come. Sir Edward Holden, at the meeting of the London City andMidland Bank shareholders on January 29th, made an urgent demand forthe immediate repeal of the Bank Act of 1844. This Act was passed,as all men know, in order to restrict the creation of credit inthe United Kingdom. In the early part of the last century the mostimportant part of a bank's business consisted of the issue of notes,and banking had been carried on in a manner which the countryconsidered unsatisfactory because banks had not paid sufficientattention to the proportion of cash that they ought to hold in theirtills to meet notes if they were presented. Parliament in its wisdomconsequently ordained that the amount of notes which the banks shouldbe allowed to issue, except against actual metal in their vaults,should be fixed at the amount of their issue at that time. Above thelimit so laid down any notes issued by the banks were to be backed bymetal. In the case of the Bank of England the limit then establishedwas L14,000,000, and it was enacted that if any note-issuing bank gaveup its right to a note issue the Bank of England should be empoweredto increase its power to issue notes against securities to the extentof two-thirds of the power enjoyed by the bank which was giving up itsprivilege. By this process the Bank of England's right to issue notesagainst securities, what is usually called its fiduciary issue, hasrisen to L18,450,000; above that limit every note issued by it has tobe backed by bullion, and is actually backed by gold, though underthe Act one-fifth might be in silver. It was thus anticipated by theframers of the Act that in future any credit required by industrycould only be granted by an increase in the gold held by the issuingbanks. If the Act had fulfilled the anticipations of the Parliamentwhich passed it, if English trade had grown to anything like theextent which it has done since, it could only have done so by theamassing of a mountain of gold, which would have lain in the vaults ofthe Bank of England.
Fortunately, however, the banking community had at its disposal aweapon of which it was already making considerable use, namely, thesystem of issuing credit by means of banking deposits operated on bycheques. Eight years before Peel's Act was passed two Joint StockBanks had been founded in London, although the Bank of Englandnote-issuing monopoly still made it impossible for any Joint StockBank to issue notes in the London district. It is thus evident thatdeposit banking was already well founded as a profitable business whenPeel, and Parliament behind him, thought that they could sufficientlyregulate the country's banking system so long as they controlled theissue of notes by the Bank of England and other note-issuing banks. Itis perhaps fortunate that Parliament made this mistake, and so enabledour banking machinery to develop by means of deposit banking, and soto ignore the hard-and-fast regulations laid upon it by Peel's Act.This, at least, is what has happened; only in times of acute crisishave the strict regulations of Peel's Act caused any inconvenience,and when that inconvenience arose the Act has been suspended by thegranting of a letter of indemnity from the Treasury to the Governor ofthe Bank.

Under Peel's Act the present rather anomalous form of the Bank ofEngland's Weekly Return was also laid down. It shows, as all men know,two separate statements; one of the Issue Department and the other ofthe Banking Department. The Issue Department's statement shows thenotes issued as a liability, and on the assets side Government debtand other securities (which are, in fact, also Government securities),amounting to L18,450,000 as allowed by the Act, and a balance of gold.The Banking Department's statement shows capital, "Rest" or reservefund, and deposits, public and other, among the liabilities, and onthe other side of the account Government and other securities, all thenotes issued by the Issue Department which are not in circulation, anda small amount of gold and silver which the Banking Department holdsas till money.
Sir Edward Holden's proposal is that the Act should be repealedpractically in accordance with the system which has been adopted bythe German Reichsbank. The principles which he enumerates, as those onwhich other national banks of issue work, are as follows:--

1. One bank of issue, and not divided into departments.

2. Notes are created and issued on the securityof bills of exchange and on the cash balance, so thata relation is established between the notes issuedand the discounts.

3. The notes issued are controlled by a fixedratio of gold to notes or of the cash balance to notes.

4. This fixed ratio may be lowered on paymentof a tax.

5. The notes should not exceed three times thegold or cash balance.

By this revolution Sir Edward would abolish all legal restriction onthe issue of notes by the Bank of England. It would hold a certainamount of gold or a certain amount of cash balance against its notes,but in the "cash balance" Sir Edward apparently would include 11millions odd of Government debt, or of Treasury notes. As long as itsnotes were only three times the amount of the gold or of the "cashbalance," and were backed as to the other two-thirds by bills ofexchange, the situation would be regarded as normal, but if, owing toabnormal circumstances, the Bank desired to increase the amount ofnotes issued against bills of exchange only and to reduce the ratio ofits gold or its cash balance to its notes, it would, at any time, beenabled to do so by the payment of a tax, without going through thehumiliating necessity for an appeal to the Treasury to allow it toexceed the legal limit.

At the same time, by the abolition of Peel's Act the cumbrous methodsof stating the Bank's position, as published week by week in the BankReturn, would be abolished. The two accounts would be put together,with the result that the Bank's position would be apparently strongerthan it appears to be under the present system, which makes theBanking Department's Return weak at the expense of the great strengththat it gives to the appearance of the Issue Department. This will beshown from the following statement given by Sir Edward Holden of theReturn as issued on January 16th, and as amended according to hisideas:--

BANK STATEMENT, JANUARY 16, 1918.

ISSUE DEPARTMENT

Notes Issued .. L76,076,000 Gold .................. L57,626,000
Government Debt ....... 11,015,000
Other Securities ...... 7,435,000
----------- -----------
L76,076,000 L76,076,000
Ratio of Gold to Notes Issued = 75.7 per cent.

BANKING DEPARTMENT.

Capital ....... L14,553,000 Government Securities ...... L56,768,000
Rest .......... 3,363,000 Other Securities ........... 92,278,000
Deposits-- Notes .......... L30,750,000
Public L41,416,000 Gold and Silver 1,143,000
Other 121,589,000
----------- 163,005,000 ------------- 31,893,000
Other Liabilities ... 18,000
----------- -----------
L180,939,000 L180,939,000

Ratio of Cash Balance to Liabilities = 19.6 per cent.

RECONSTRUCTED BALANCE-SHEET OF THE BANK,
JANUARY 16, 1918.

Capital L14,553,000
Rest 3,363,000
Notes Issued (circulation) 45,325,000
Deposits 163,005,000
Other Liabilities 18,000
___________
L226,264,000

Gold L58,768,000
Currency Notes 11,015,000
___________ L69,783,000

Government Securities 56,768,000
Other Securities 7,435,000
_________ 64,203,000

Other Securities 92,278,000
___________
L226,264,000

Ratio of Gold to Notes =129.7 per cent.
" " Cash Balance to Liabilities = 33.5 "

It need not be said that these proposals have aroused the liveliestinterest. At the Bank Meetings held since then several chairmenhave been asked by their shareholders to express their views on SirEdward's proposed revolution. Sir Felix Schuster pronounced cautiouslyin favour of the revision of the Bank Act, and said that he hadadvocated it seventeen years ago. Lord Inchcape, at the NationalProvincial Meeting, thought that the matter required carefulconsideration. Most of us will agree with this view. There iscertainly much to be said for a reform of the Weekly Statement of theBank of England, giving, it may be added, a good deal more detailthan Sir Edward's revised balance-sheet affords. But concerning hisproposal to reconstruct our system of note issue on a foreign model,there is certain to be much difference of opinion. In the first place,owing to the development of our system of banking by deposit andcheque rather than by issue and circulation of notes, the note issueis not nearly so important a business in normal times in this countryas it is in Germany and France. Moreover, the check imposed upon ourbanking community by the need for an appeal to the Treasury before itcan extend its note issue beyond a certain point often acts with, asalutary effect, and the view has even been expressed that if thatcheck were taken away from our system it might be difficult, if notimpossible, to maintain the gold standard which has been of suchenormous value in building up the prestige of London as a financialcentre. I do not think there is much weight in this argument, since,under Sir Edward's plan, the note issue could only be increasedagainst discounts, and the Bank, by the charge that it made fordiscounts, would still be able to control the situation. From thepractical point of view of the present moment, a strong objectionto the scheme is that it would open the door to fresh inflation byunrestricted credit-making just when the dangers of this process arebeginning to dawn even on the minds of our rulers.