Lombard Street: A Description of the Money Market Part 12

(2) BANK of FRANCE (FEBRUARY, 1873).

Liabilities Circulation L 110,000,000 Deposits L 15,000,000 ------------- Total liabilities L 125,000,000 =============

Reserve of Cash.

Coin and bullion in hand L 32,000,000

Making proportion of cash reserve to liabilities to the public about 25 per cent.

(3) BANKS OF GERMANY (JANUARY, 1873).

Liabilities

Circulation L 63,000,000 Deposits L 8,000,000 Acceptances and Indors.e.m.e.nts L 17,000,000 ------------ Total liabilities L 88,000,000 ============

Reserves of Cash

Cash in Hand L 41,000,000 ============

Making proportion of cash reserve to liabilities to the public about per cent.

(4) NATIONAL BANKS OF UNITED STATES (OCTOBER 3, 1872).

Liabilities

Circulation L 67,000,000 Deposits L 145,000,000 ------------- Total liabilities L 212,000,000 =============

Reserve of Cash

Coin and legal tenders in hand L 26,000,000 ============

Making proportion of cash reserve to liabilities to the public about 12.3 per cent.

SUMMARY

Liabilities Cash held Proportion of cash to the public to liabilities per cent Bank of England and London Joint Stock Banks 20,000,000 13,500,000 11.2 Bank of France 125,000,000 32,000,000 25.0 Banks of Germany 88,000,000 41,000,000 47.0 National Banks of United States 212,000,000 26,000,000 12.3

Note B.

Extract from Evidence Given by Mr. Alderman Salomons before House of Commons Select Committee in 1858.

1146. [Chairman.] The effect upon yourselves of the pressure in November was, I presume, to induce you to increase your reserve in your own hands, and also to increase your deposits with the Bank of England?--Yes, that was so; but I wish to tell the Committee that that was done almost entirely by allowing the bills of exchange which we held to mature, and not by raising any money, or curtailing our accommodation to our customers. Perhaps it may be interesting to the Committee to know that on the 11th of November we held discounted bills for brokers to the amount of 5,623,000 L. Out of those bills, 2,800,000 L. matured between the 11th of November and the 4th of December, and 2,000,000 L. more between the 4th of December and the 31st. So that about 5,000,000 L. of bills matured between the 11th of November and the 31st of December; consequently we were prepared, merely by the maturing of our bills of exchange, for any demands that might possibly come upon us.

1147. I understand you to say that you did not withdraw your usual accommodation from your own customers, but that you ceased to have in deposit with the bill-brokers so large a sum of money as you had before?--Not exactly that; the bills which we had discounted were allowed to mature, and we discounted less; we kept a large reserve of cash.

1148. That is to say, you withdrew from the commercial world a part of that accommodation which you had previously given, and at the same time you increased your deposits with the Bank of England?--Yes, our deposits with the Bank of England were increased. We did not otherwise withdraw accommodation.

1149. [Mr. Weguelin.] Had you any money at call with the bill-brokers?--A small amount; perhaps about 500,000 L. or less, which we did not call in.

1150. [Chairman.] What I understand you to say is, that the effect of the commercial pressure upon you was to induce you upon the whole to withdraw from commerce an amount of accommodation which in other times you had given, and at the same time to increase your deposits with the Bank of England?--So far only as ceasing to discount with strangers, persons not having current accounts with us.

1151. Or to give the same amount to the bill-broker?--For a while, instead of discounting for brokers and strangers, we allowed our bills to mature, and remained quiescent with a view to enable us to meet any demand that might be made on ourselves.

1152. Except what you felt bound to your own customers to continue to give, you ceased to make advances?--Quite so; perhaps I might say at the same time, that besides a large balance which we kept at the Bank of England, which of course was as available as in our own tills, we increased our notes in our tills at the head office and at all the branches.

1153. I suppose at that time large sales of public securities were made by the London joint stock banks, which securities were purchased by the public?--It is understood that some joint stock and other banks sold, but I believe it is quite certain that the public purchased largely, because they always purchase when the funds fall.

1154. Are you prepared to give the Committee any opinion of your own as to the effect, one way or the other, which the system of the joint stock banks may have produced with regard to aggravating or diminishing the commercial pressure in the autumn of last year?--I should state, generally, that the joint stock banks, as well as all other banks, in London, by collecting money from those who had it to spare, must of necessity have a.s.sisted, and could not do otherwise than a.s.sist commerce, both then and at all other times.

1155. You say that your discounts, either at your own counter or through the bill-brokers, are ordinarily very large, but that at the time of severest pressure you contracted them so far as you thought was just to your own immediate customers?--Yes; but the capital was still there, because it was at the Bank of England, and it was capable of being used for short periods; if we did not want it, others might have used it.

1156. [Mr. Weguelin.] In fact, it was used by the Bank of England?-- Undoubtedly; I should suppose so; there is no question about it.

1157. You, of course, felt quite certain that your deposits in the Bank of England might be had upon demand?--We had no doubt about it.

1158 You did not take into consideration the effect of the law of 1844, which might have placed the Banking Department of the Bank of England in such a position as not to be able to meet the demands of its depositors? I must say that that never gave us the smallest concern.

1159. You therefore considered that, if the time should arrive, the Government would interfere with some measure as they had previously done to enable the Bank to meet the demands upon it?--We should always have thought that if the Bank of England had stopped payment, all the machinery of Government would have stopped with it, and we never could have believed that so formidable a calamity would have arisen if the Government could have prevented it.

1160. [Chairman.] The notion of the convertibility of the note being in danger never crossed your mind?--Never for a moment; nothing of the kind.

1161. [Mr. Weguelin.] I refer not to the convertibility of the note, but to the state of the Banking Department of the Bank of England?--If we had thought that there was any doubt whatever about it, we should have taken our bank-notes and put them in our own strong chest. We could never for a moment believe an event of that kind as likely to happen.

1162. Therefore you think that the measure taken by the Government, of issuing a letter authorising the Bank of England to increase their issues of notes upon securities, was what was generally expected by the commercial world, and what in future the commercial world would look to in such a conjunction of circ.u.mstances?--We looked for some measure of that nature. That, no doubt, was the most obvious one. We had great doubts whether it would come when it did, until the very last moment.

1163. Have you ever contemplated the possibility of the Bank refusing to advance, under circ.u.mstances similar to those which existed in November, 1857, upon good banking securities?--Of course I have, and it is a very difficult question to answer as to what its effect might be; but the notion appears to me to be so thoroughly ingrained in the minds of the commercial world, that whenever you have good security it ought to be convertible at the Bank in some shape or way, that I have very great doubt indeed whether the Bank can ever take a position to refuse to a.s.sist persons who have good commercial securities to offer.

1164. [Mr. Cayley.] When you say that you have come to some fresh arrangement with regard to your allowance of interest upon deposits, do you speak of yourselves as the London and Westminster Bank, or of some of the other banks in combination with yourselves?--I think all the banks have come to an understanding that it is not desirable, either for their proprietors or for the public, to follow closely at all times the alterations of the Bank. I believe it is understood amongst them all that they do not intend following that course in future.

1165. Is that from a feeling that it is rather dangerous under particular circ.u.mstances?--I cannot admit as to its being dangerous, but there can be no doubt of this, that there is a notion in the public mind which we ought not to contend against, that when you offer a high rate of interest for money, you rather do it because you want the person's money, than because you are obeying the market rate; and I think it is desirable that we should show that if persons wish to employ their money, and want an excessive rate, they may take it away and employ it themselves.

1166. You think that there is now a general understanding amongst the banks which you have mentioned, to act upon a different principle from that on which they acted during last October and November?--I think I may say that I know that to be the case.

1167. Was not it the fact that this system of giving so high a rate of interest upon money at call commenced very much with the establishment of some banks during the last year or two, which, instead of demanding 10 days' or a month's notice, were willing to allow interest upon only three days' notice; did not that system begin about two years ago?--I do not think it began with the new banks; I think it began with one of the older banks; I know that as regards my own bank, that we were forced into it; I forgot to say, that with regard to ourselves in taking money on deposit, the parties must leave the money a month, or they lose interest. We do not take money from any depositor at interest unless upon the understanding and condition that it remains a month with us; he may withdraw it within the month, but then he forfeits interest; it will not carry interest unless it is with us a month, and then it is removable on demand without notice.

1168. Is it or is it not a fact that some of the banks pay interest upon their current accounts?--Yes, I think most of the new banks do so; and the Union Bank of London does it.

1169. At a smaller rate than upon their deposits, I presume?--I think at a smaller rate, but I believe it is a fixed rate on the minimum balance for some period, either six months or one month, I do not exactly know the period. I think I ought to add (and I believe it is the case with all the banks) that the London and Westminster Bank, from the day of its first inst.i.tution until the present day, has never re-discounted a bill. No bill has ever left our bank unless it has been for payment.

1170. Is not that generally the case with the London joint stock banks?--I believe it is the case.

1171. [Mr. Weguelin.] But you sometimes lend money upon bills deposited with you by bill-brokers?--Yes.

1172. And you occasionally call in that money and re-deliver those securities?--Yes; but that we do to a very small extent.

1173. Is not that equivalent to a re-discount of bills?--No; the discount of a bill and the lending money on bills are very different things. When we discount a bill, that bill becomes our property; it is in our control, and we keep it and lock it up until it falls due; but when brokers come to us and want to borrow, say 50,000 L. on a deposit of bills, and we let them have the money and afterwards return those bills to them and we get back our money, surely that is not a re-discount.

1174. When you want to employ your money for a short period, do you not frequently take bills of long date, and advance upon them?--But that is not a re-discount on our part. Very often brokers in borrowing money send in bills of long date, and afterwards we call in that loan; but that is no more a re-discount than lending money upon consols and calling in that money again. It is not an advance of ours; we do not seek it; they come to us and borrow our money, and give us a security; when we want our money we call for that money, and return their security. Surely that is not a re-discount.