STATE MONOPOLY IN BANKING

August, 1918

Bank Fusions and the State--Their Effects on the Bank of England--MrSidney Webb's Forecast--His Views of the Benefits of a BankMonopoly--The Contrast between German Experts and BritishAmateurs--Bankers' Charges as affected by Fusions--The Effects ofMonopoly without the Fact--The "Disinterested Management" Fallacy--TheProposal to split Banking Functions--A Picture of the State inControl.

A few months ago, writing in this Journal on the subject of bankingamalgamations, I referred to one of the objections against them, thatthey tended towards the creation of monopoly, and so encouraged hopeon the part of those who would like to see all forms of industrymanaged by the State, that the banking business might sooner or laterbe taken over and worked as a State monopoly. At that time this dangerof monopoly seemed to be still fairly remote, but since then theprogress of amalgamations has brought it appreciably nearer, andso has vigorously stimulated both the hopes and fears of those whoconsider that it tends to bring nearer the seizure of banking businessby the State. The fear is expressed by Sir Charles Addis, manager ofthe Hongkong Bank and director of the Bank of England, in the Julynumber of the Edinburgh Review in a very interesting article on the"Problems of British Banking." Sir Charles observes that:

"It may even be questioned whether the gigantic size they have already attained does not constitute a menace to the predominant position which the Bank of England has hitherto enjoyed as the bankers' bank. How will the Bank of England be able to maintain its supremacy and control the money market, surrounded by banks individually greater and more powerful than itself, especially when the object in view is by raising the rate of interest to prevent an internal or external drain upon our gold reserve? It is even conceivable that the finance of the State may be threatened, and it is probably for this reason that in Germany the Prussian Minister is said to be considering a State monopoly of banking. Nor can the psychological effect of these great aggrandisements of capital in the hands of a few banks be ignored. They are virtually Government-guaranteed institutions. The insolvency of one of the great banks would involve such widespread disaster that no Government could stand aside. They would be compelled to make use of the national resources in order to guarantee the solvency of private banks. From Government guarantee to Government control is but a step, and but one step more to nationalisation. We are playing into the hands of Mr Sidney Webb and the Socialists."

As it happens, in the July number of the Contemporary Review, MrSidney Webb was developing the same theme, namely, the inevitabilityof banking monopoly and the necessity, as he conceives it, ofdefeating private monopoly for the sake of profit, by State monopolyto be worked, as he hopes, in the public interest. His article isheaded by the rather misleading title, "How to Prevent BankingMonopoly," for, as has been said, Mr Webb very much wants monopoly,says that it cannot be helped, and sees the fulfilment of some of hispet Socialistic dreams in the direction of it by the bureaucrat whomhe regards as the heaven-sent saviour of society. His very interestingargument is most easily followed by means of a series of quotations.

"We are, it is said, within a measurable distance of there being--save for unimportant exceptions--only one bank, under one general manager, probably a Scotsman, whose power over the nation's industry would be incalculable. Even in the crisis of the war the matter is receiving the attention of the Government.

"In the opinion of the present writer, the amalgamation of banks in this country, which has been going on continuously for a century, though at varying rates, and is being paralleled in other countries, notably in Germany, and latterly in the Canadian Dominion, is an economically inevitable development at a certain stage of capitalist enterprise, and one which cannot effectively be prevented."

Mr Webb considers that there is no economic limit to this policy ofamalgamation, and that the gains it carries with it are obvious. Hedilates upon these as follows:--

"It may be worth pointing out:
"(a) That apart from the obvious economies in the cost of administration, common to all business on a large scale, there is, in British banking practice, a special advantage in a bank being as extensive and all-pervasive as possible. Where distinct banks co-exist, there can be no assurance that the periodical shifting of business, the perpetual transformations in industrial organisation, the rise and fall of industries, localities or firms, the changes of fashion and the ebb and flow of demand, and even a relative diminution of reputation may not lead to a shrinking of the deposits and current account balances of any one bank, or even of each bank in turn. Accordingly, every bank has to maintain an uninvested, or, at least, a specially liquid, reserve to meet such a possible withdrawal. The smaller, the more numerous, the more specialised by locality or industry are the competing banks, the larger must be this reserve. On the other hand, if all the deposit and current accounts of the nation were kept at one bank, even if it has innumerable branches, as the experience of the Post Office Savings Bank shows, no such shifting of business would affect it; no mere transfers from firm to firm or from trade to trade would involve any shrinking of its aggregate balances; and it would need only to have in hand, somewhere, sufficient currency to replenish temporarily a local drain on its 'till money.' The nearer the banks can approach to this condition of monopoly, not only the lower will be their percentage of working expenses, but also the greater will be the financial stability, and the smaller the amount that they will need to keep uninvested in order to meet possible withdrawals.

"(b) That the process of amalgamation has involved an ever-increasing elimination, from the British banking business, of the typical profit-maker, first as partner in a private bank, then as a director in a Joint Stock bank, representing a large personal holding of shares; and the gradual transfer of practically the whole conduct of the business to what may be called 'disinterested management'--that is to say, management by trained, professional officers serving for salaries, whose remuneration bears no relation to the profit made on each piece of business transacted. The part played in the business by the directors themselves seems to be, with every increase in the magnitude and scope of the concern, steadily diminishing; and these directors, moreover, come to be chosen, more and more, not because of their large holdings of shares, or because of their ancestral or personal connection with banking, but because of their reputation or influence, commercial, social or political. The result is that, along with the process of amalgamation, there has been going on a transfer of the whole management of banking to the hierarchy of salaried officials; whilst the supreme decisions on financial policy are in the hands, in practice, of a very small group of salaried general managers, only partially in consultation with an equally small group of chairmen of boards of directors, themselves usually drawing not inconsiderable salaries."

It seems to me that Mr Webb exaggerates in rather a dangerous degreethe reduction, through amalgamation, of the necessity which obligesa bank to keep a considerable reserve of cash. It is quite true thatunder normal circumstances cash withdrawn from one bank finds its wayin due course to another, and that with regard to these mere "tillmoney" transfers there might be a considerable reduction in the amountof cash required if all the banking of the country were in the handsof one business, so that what was withdrawn from one branch wouldbe paid into another. But this fact would not alter the need whichcompels a bank to keep considerable reserves in cash in order toprovide against the possibility of a run. A State bank, if the publictakes it into its head that it prefers to have a larger proportion ofcurrency in its own pocket rather than in its bank, may find itselfpulled at for cash just as vigorously as a bank managed by privateenterprise. This was shown in August, 1914, when very large sums werewithdrawn from the Post Office Savings Bank during the crisis whichthen impelled many members of the public to hoard money, or compelledthem to take it out of their banks because they did not find that theordinary system of payment by cheques was working with its usual ease.

Moreover, Mr Webb's point about what he calls disinterestedmanagement--that is to say, the management of banks by officers whoseremuneration bears no relation to the profit made on each piece ofbusiness transacted--is one of the matters in which English bankingseems likely at least to be modified. Sir Charles Addis, in thearticle already referred to, calls attention in a very strikingpassage to the efficiency of the administration of German and Englishbanks, and makes a comparison between the remuneration given to thebanking boards of the two countries. The passage is as follows:--

"Scarcely second in importance to the financial strength of a bank is the efficiency of its administration. The German board of direction is composed, to an extent unknown in England, of men possessed of professional and technical knowledge. No one who has been present at a meeting of German bank directors in Berlin, when some foreign enterprise has been under consideration, can have failed to be impressed by the animation with which it was discussed, and by the expert and comparative knowledge displayed by individual directors of the enterprise itself and of the conditions prevailing in the foreign country in which it was proposed to undertake it. He may have been led to reflect ruefully upon the different reception his project met with in his own country. He will recall the meeting of the London board; the difficulty of withdrawing its members even temporarily from their country pursuits and their obvious anxiety to lose no time in returning to them; most of them old men, many of them long retired from business; some of them ex-Government officials and the like, who have never been in business; a few ornamental titled persons; only one or two here and there who have no train to catch and are willing to discuss the matter in hand with attention, and, it may be, with understanding.

"It would be idle to pretend that a board of this kind constitutes anything like the nexus between industry and finance which obtains in Germany, and which is very much to be desired in this country. It may be that we do not pay our men enough. A London director has to be content with an honorific position, a fee of a few hundred pounds a year, and, it must be added, a very exiguous degree of responsibility. That is not enough to attract men in the prime of life with expert or technical knowledge of industry and finance, who would have to submit to a reduction in the large incomes they are earning by the exercise of their special abilities if they were to accept a seat on the board of a bank. There are two things which a good man, in the business sense of the term, will not do without--pay and responsibility. Give him sufficient of the former, and you may saddle him with as much of the latter as you like. You may not always get good men by offering them good pay, but you will certainly not get them without doing so. Apparently shareholders are content so long as their profits are not reduced by more than nominal directors' fees. At a recent meeting of a bank with deposits of over L200,000,000 the proposal to increase the directors' fees to L1000 a year was met by the rejoinder from one of the shareholders present that he did not know what the directors would do with such a sum.

"They manage these things differently in Germany. In the three banks to which we have already referred, after payment by the Deutsche Bank of 5 per cent. of the net profits to reserve, and of the ordinary dividend of 6 per cent., and by the Disconto-Gesellschaft and the Dresdner Bank of 4 per cent., the directors receive respectively 7 per cent., 7-1/2 per cent., and 4 per cent. (the Disconto's personally liable partners receive 16 per cent.) out of the remainder. The directors are bound by law to supervise all the details of the bank's business, and to keep themselves well informed as to its general policy and methods of management. They are bound by law to exercise the caution of a careful business man, and are liable to be sued for damages arising out of the crime or negligence of their employees. If cases of this kind are seldom brought to public notice, it is not because they do not occur, but because the directors, as a rule, prefer to pay up for the laches of their employees, as they can well afford to do out of their profits, rather than be haled before the Court."

When Mr Webb comes to the question of the dangers resulting frommonopoly, he finds that they lie chiefly in a restriction offacilities, and in raising the price exacted for them, and that inboth respects the danger appears to be great. There is, he says, everyreason to expect that the banker, as the nearest approach to the"economic man," will take the opportunity of raising his chargeseither by increasing the frequency and the rate of the commissionexacted for the keeping of a small account, or by reducing the rate ofinterest allowed on balances, or adopting the common London practiceof refusing it altogether. "The banker, who is not in business for hishealth, may be expected, on this side of his enterprise, to pursue thepolicy of 'charging all that the traffic will bear.' It would probablypay the banker actually to refuse small accounts, and to penalise theemployment of cheques for small sums. This would be a social loss."
With regard to the other side of his business, lending to theborrowers, Mr Webb thinks it need not be assumed that the monopolistbanker will actually lend less, because he will seek at all times toemploy all the capital or credit that he can safely dispose of, but MrWebb thinks that he is likely, as the result of being relieved of thefear of competition; to feel free to be more arbitrary in his choiceof borrowers, and therefore able to indulge in discrimination againstpersons or kinds of business that he may dislike; that he will raisehis charges generally for all accommodation, again, theoreticallyto "all that the traffic will bear"; and, finally, that in times ofstress with regard to all applicants, and at all times with regard toany applicant who was "in a tight place," that he will extort as theprice of indispensable help a theoretically unlimited ransom.

Such are the effects which Mr Webb fears from the process which hasalready put the control of the greater part of the banking facilitiesof England into the hands of five huge banks. He thinks that thesethings may happen long before it is a question of an absolute monopolyin one hand. A monopoly, he says, may be more or less complete, andthe economic effects of monopoly may be produced to a greater or lessdegree at a point far below a complete monopolisation in a singlehand. There is much truth in this contention of his. Amalgamation hasnow come to such a point that every new one not only brings absolutemonopoly more closely in sight, but increases the ease with whichagreements among the huge banks might suffice to produce the effectsof monopoly without further amalgamations. Mr Webb goes on toargue that it is impossible to stop by legislative prohibition orrestriction the progress towards economic monopoly where such progressis financially advantageous to those concerned, and that the onlyremedy ultimately by which the community can be protected from thedangers which he sees threatening it is for the community to take themonopoly into its own hands, and so to get rid, not of the monopoly,which, from the standpoint of national organisation, he thinks isadvantageous, but of the motives leading to extortion. If, he says,"no shareholders are in control with their perpetual and insatiabledesire for profit, there is no inducement to take advantage of theneeds or helplessness of the customers by restricting service orraising prices." In this sentence, of course, he begs the wholequestion between the advantage of private enterprise and ofSocialistic organisation. Private enterprise works for profit, andtherefore makes as much profit as it can out of its customers. It is,therefore, according to Mr Webb's argument, probable that if privateenterprise in banking is able to establish monopoly it will squeezethe public to the point of restricting banking facilities and makingthem dearer. No one can deny that there is some truth in thiscontention, but, on the other hand, it may very fairly be argued thatmodern business has perceived the great advantages of a big turnoverand small profits on each transaction. The experience of the greatinsurance companies, and of great catering companies, and of enormousprivate organisations such as the Imperial Tobacco Company, has shownthe enormous advantage of providing cheap facilities to the largestpossible number of customers; so that fears of natural restriction ofbanking facilities, through monopoly, if they cannot be set altogetheraside, are not by any means a certain consequence even of the establishment of monopoly in private enterprise.

Still weaker is Mr Webb's assumption that if the interests of theshareholders with "their perpetual and insatiable desire for profit"were eliminated, cheap and plentiful banking facilities wouldinevitably result from bureaucratic management. The contrary hasbeen shown to be the case in the examples of the Post Office, of theTelephone Service, and the London Water Supply. In the case of thetelegraph and the telephones, the Government took over prosperous businesses, and has managed them at a loss. In the matter of the PostOffice it is not possible to compare the Government with individualenterprise, but it will generally be admitted that the TelephoneService has by no means been improved since the Government took itover. Mr Webb points out that nationalisation, whether of banks or ofother forms of enterprise, does not necessarily mean government undera Minister by a branch of the Civil Service. But it is impossible toignore the fact that as soon as nationalisation takes place those whoare responsible for the management of the enterprise are practicallycertain to develop the qualities and idiosyncrasies of civil servants,which are so unlikely to tend to elasticity, rapidity and efficiencyin business management.

In fact, Mr Webb practically grants this point by the very interestingdevelopment he suggests by which the two chief functions of bankingshould be differentiated, and one of them should be nationalisedand the other should remain in the hands of private enterprise. Hedevelops this truly ingenious suggestion as follows:--

"Just as we have (except for some obsolescent survivals) separated the function of issuing paper money from that of keeping current accounts, so we shall separate the function of keeping current accounts from that of money-lending. The habit of the British banker of combining in one and the same concern (a) the essentially routine business of keeping current accounts or receiving deposits; and (b) the much more difficult and hazardous business of lending capital to private traders, is not a necessary characteristic of banking organisation; and, whilst possibly the most profitable to the profit-seeking banker, this combination may not be the most advantageous from the standpoint of the community.

"It may accordingly be suggested that the business of banking, as understood in this country, is destined to be further divided into two parts, one of which is ripe for immediate nationalisation, and need no longer be carried on for private profit, whilst the other should be the sphere of a number of separate and diversely specialised organisations catering for particular needs. The whole of the deposit and current account side of banking--with its services in the way of keeping securities, collecting dividends, meeting calls, making regular payments, and carrying through the purchase and sale of securities--ought to be united with the Post Office and Trustee Savings Banks and the money order and other postal remittance business, and run as a national service for the receipt and custody of cash, for the utmost possible development of the cheque system, and for the cheapest possible organisation of remittances. There is no longer any reason why this important branch of social organisation should be abandoned to the profit-maker, should be made the instrument of levying an unnecessarily heavy toll on the customers for the benefit of shareholders, and should now be exposed to the imminent danger of monopoly.

"If the receipt and custody of deposits and the keeping of current accounts were made a public service the Government might invest the funds thus placed at its disposal in a variety of ways. A certain proportion, perhaps corresponding to what is now held as savings, would be invested, as at present, in Government securities--not Consols, but such as are repayable at par at fixed dates, including Treasury Bills and Terminable Annuities; and any increase in this amount would, in effect, release so much capital for other uses, by paying off part of the National Debt. But the bulk of the amount, corresponding with the proportion of their resources that the bankers now lend for business purposes, might be advanced, for terms of varying duration, partly to Government Departments and local authorities for all their great and rapidly extending enterprises, formerly abandoned to the profit-maker; and partly to a series of financial concerns, whose business it should be to discount the bills and satisfy the requests for loans of those profit-makers who now appeal to the bankers. But these financial concerns should be organised, it is suggested, very largely by trades and industries, specialising in particular lines, and devoted, so far as possible, to meeting the business needs of the different occupations. Whether they should be financial concerns, owned and directed by shareholders, and ran for their profit; or whether they might not, in some cases, be owned and directed by the great industrial associations and combinations that the Government is now promoting in the various industries, and be run for the advantage of the industries as wholes, may be a matter for consideration and possible experiment. In either case, the concerns to which the Government would lend its capital would, of course, have to be of undoubted financial stability to be secured, it may be, by large uncalled capital, or by the joint and several guarantees of a numerous membership; coupled, possibly, with a charge on the assets."

At first sight this proposal to differentiate the functions of bankingis somewhat startling, and one wonders whether it could possiblywork. On consideration, however, there seems to be nothing actuallyimpracticable about the scheme. The Government would presumably takeover all the offices and branches of the banks of the country, andwould therein accept money on deposit and current account, makingitself liable to pay the money out on demand or at notice, as thecase may be, just as is done by the existing banks; it would holdthe necessary cash reserve, and it would apparently itself invest acertain proportion of the money in Government securities, as the banksdo at present. The more difficult part of the banking business, theadvancing of money to borrowing customers, it would hand over tofinancial institutions, created for this purpose presumably out of theashes of the nationalised banking business. These institutions wouldmake themselves responsible for the lending side of banking, and wouldobviously, and naturally, be allowed to make a profit on this side ofthe business. In this differentiation Mr Webb's ingenuity is seen atits very best. He reserves for the State that part of banking which ispurely a matter of routine, and he leaves to private enterprise thatpart of it which requiries the elasticity and judgment and quicknessin which the average bureaucrat is most likely to fail. A certainamount of friction may easily arise from this differentiation. Theinterest that the State would be enabled to allow to depositors wouldclearly depend to a great extent on the interest which it would beable to receive from the financial institutions engaged in lendingthe money. These institutions could naturally pay the State interestaccording to the rate which they were able to charge their borrowingcustomers, leaving themselves a margin for profit and for protectionagainst the risk that their business would involve. It is obvious thatthere might at times be considerable difficulty in adjusting these twodifferent points of view, and anybody who knows anything about thelength of time and argument involved in inducing officials to make uptheir minds can only fear that occasional jarring in this connectinglink between the two sides of banking might sometimes produce effectswhich would be awkward for the industry of the country.

But apart from this obvious difficulty, can we contemplate withequanimity the prospect of the State monopoly of the ordinary bankingfacilities as they present themselves to the man in the street,namely, the provision of bank branches, the use of the cheque book,the custody of securities and any other articles that the customerwishes to leave with his bank? At present the ease and quickness withwhich these routine matters of banking are carried out in England aredeveloped to a point which is the envy of foreign visitors. How wouldit be if every cashier of every bank were converted by the process ofnationalisation from the kindly, businesslike human being as we knowhim into the kind of person who ministers to our wants behind thecounters of the Post Office? As it is, we go into our bank, to presenta cheque in order to provide ourselves with cash for the dailypurposes of life; the cashier looks at the signature, recognisesthe customer, hands him over the money. If that cashier becamea Government official how long would it take him to verify thesignature, to see whether the customer really had a balance to hiscredit, and finally furnish him with what he wanted? It is obviousthat the change suggested by Mr Webb, though it might work, couldonly work to the detriment of the convenience of the public, and hishopeful view that the elimination of the profits of the shareholderswould mean that these profits would go into the pockets of thecommunity in the form of cheapened facilities for banking customersis an ideal largely based on the assumption, that has so often beenproved to be incorrect, that the State can do business as well and ascheaply as private enterprise. It is much more likely that after afew years' time the public would find the business of paying in andgetting out its money a very much more tedious and irritating processthan it is at present, and that the expenses of the matter wouldhave grown to such an extent that the taxpayer might be called uponannually to make good a considerable loss.