Lombard Street: A Description of the Money Market Part 13

1175. [Mr. Hankey.] Is there not this clear distinction between returning a bill on which you have made an advance and discounting a bill, that if you have discounted a bill your liability continues upon the bill until that bill has come to maturity?--Yes.

1176. In the other case you have no further liability whatever?--Certainly.

1177. Should you not consider that a very important distinction?--I think it is an important distinction. Take this case: suppose a party comes to us and borrows 50,000 L., and we lend it him, and when the loan becomes due we take our money back again. Surely that is not a discount on our part.

1178. Is there not this distinction, that if you re-discount you may go on pledging the liability of your bank to an almost unlimited amount, whereas in the other case you only get back that money which you have lent?--Undoubtedly.

1179. [Mr. Cayley.] The late Chancellor of the Exchequer stated before the adjournment, in a speech in the House of Commons, that during the Monday, Tuesday, Wednesday, and Thursday of the panic, the Bank was almost, if not entirely, the only body that discounted commercial bills; how can you reconcile that with what you have said, that you gave as much accommodation as usual to your customers?--I am not responsible for what the Chancellor of the Exchequer said; I am responsible for what I am now stating as to the course of our bank, that our advances to our customers on the 31st of December were nearly 500,000 L. higher than they were on the 1st of October. With regard to our not discounting for other parties, it was in consequence of the discredit which prevailed, that it was necessary we should hold a portion of our deposits in order that they should be available in case persons called for them; a certain number of persons did so; in the month of November we had a reduction of our deposits, and if we had gone on discounting for brokers we should have had to go into the market ourselves to raise money on our Government securities, but we avoided that by not discounting, and leaving our money at the Bank of England.

1180. Then you did not discount as much as usual for your customers during that period?--Yes, we did, and more.

1181. But not to strangers?--Not to strangers; I make a distinction between our transactions with our customers, who of course expect us to give accommodation, and discounts for brokers, which is entirely voluntary, depending upon our having money to employ.

1182. How would it have been if the letter had not issued at the last moment? That is a question which I can hardly answer.

1183. What do you mean by that general expression of yours?--It is impossible to predicate what may happen in time of panic and alarm.

A great alarm prevailed certainly amongst the commercial world, and it could never have been alleviated, except by some extraordinary means of relief. We might probably have been in the state in which Hamburg was, where they have no bank-notes in circulation.

1184. [Mr. Spooner.] What did you mean by the expression, 'the last moment'? You said that the letter came out at the last moment; the last moment of what?--It was late in the day; it was a day of great distress. For two days there was a great deal of anxiety, and everybody expected that there would be some relief; and it was when expectation, I suppose, was highly excited that the letter came, and it gave relief.

1185. Cannot you tell us what your opinion would have been, if that last moment had happened to have elapsed, and the letter had not come?--It is very difficult to say; it is too much to say that it could not have been got over. There can be no doubt whatever that what created the difficulty existed out of London, and not in it; and therefore it is much more difficult for me to give an opinion. I believe that the banking interest, both private and joint stock, was in a perfectly sound condition, and able to bear any strain which might have been brought upon it in London.

1186. [Mr. Hankey.] Can you give the Committee any idea as to what proportion of deposits you consider generally desirable to keep in reserve?--You must be very much guided by circ.u.mstances. In times of alarm, when there are failures, of course all bankers strengthen their reserves; our reserve then is larger. In times of ordinary business we find, both as regards our deposits at interest as well as those which are not at interest, that there is a constant circulation; that the receipts of money very nearly meet the payments.

1187. You probably keep at all times a certain amount of your deposits totally unemployed; in reserve?--Yes.

1188. In a normal state of commercial affairs, is there any fixed proportion, or can you give the Committee any idea of what you would consider about a fair and desirable proportion which should be so kept unemployed?--I think the best idea which I can give upon that subject is to give our annual statement, or balance sheet, for the 31st of December.

1189. Does that show what amount of unemployed money you had on that day?--Yes. I will put in a statement, which perhaps will be the best means of meeting the question, showing the cash in hand on the 30th of June and the 31st of December in every year, as shown by our published accounts, together with our money at call and our Government securities; that will be perhaps the best and most convenient way of giving the information you desire to have. (See Table below.)

1190. Do you consider that when your deposits are materially on the increase it is necessary to keep a larger amount of money in reserve than you would keep at other times?--I may say that, as a general rule, our reserve would always bear some proportion to our deposits.

_Total Lodgments with London and Westminster Bank; also Amount of Cash in Hand, Moneys with Bill-Brokers at Call, and Government Securities held by the Bank._

DATE Deposits Cash Money Government TOTAL.

in Hand at Call Securities L L L L L 31 December 1845 3,590,014 563,072 628,500 1,039,745 2,231,317 31 December 1846 3,280,864 634,575 423,060 938,717 1,996,352 31 December 1847 2,733,753 7,231,325 350,108 791,899 1,863,332 30 June 1848 3,170,118 588,871 159,724 1,295,047 2,043,642 31 December 1848 3,089,659 645,468 176,824 1,189,213 2,011,505 30 June 1849 3,392,857 552,642 246,494 964,800 1,763,936 31 December 1849 3,680,623 686,761 264,577 973,691 1,224,029 30 June 1850 3,821,022 654,649 258,177 972,055 1,884,881 31 December 1850 3,969,648 566,039 334,982 1,089,794 1,990,815 30 June 1851 4,414,179 691,719 424,195 1,054,018 2,169,932 31 December 1851 4,677,298 653,946 378,337 1,054,018 2,080,301 30 June 1852 5,245,135 861,778 136,687 1,054,018 2,122,483 31 December 1852 5,581,706 855,057 397,087 1,119,477 2,371,621 30 June 1853 6,219,817 904,252 499,467 1,218,852 2,622,571 31 December 1853 6,259,540 791,699 677,392 1,468,902 2,937,993 30 June 1854 6,892,470 827,397 917,557 1,457,415 3,202,369 31 December 1854 7,177,244 694,309 486,400 1,451,074 2,631,783 30 June 1855 8,166,553 722,243 483,890 1,754,074 2,960,207 31 December 1855 8,744,095 847,856 451,575 1,949,074 3,248,505 30 June 1856 11,170,010 906,876 601,800 1,980,489 3,489,165 31 December 1856 11,438,461 1,119,591 432,000 2,922,625 4,474,216 30 June 1857 13,913,058 967,078 687,730 3,353,179 5,007,987 31 December 1857 113,889,021 2,226,441 1,115,883 3,582,797 6,923,121

1191. Do you employ your money in the discounting of bills for other persons than your own customers?--Discount brokers.

1192. Only to discount brokers? Yes.

1193. Not to strangers who are in the habit of bringing you in bills; commercial houses?--I should say generally not. We have one or two houses for whom we discount who have not accounts with us as bankers, but generally we do not discount except for our customers or for bill-brokers.

1194. Do you consider that any advantage can arise to the public by the Bank of England advancing to a greater extent than can be considered strictly prudent on the soundest principle of banking, under the idea of their affording aid to the commercial world?--As I said before, as long as there are good bills in circulation, that is, bills about which there would be no doubt of their being paid at maturity, there should be some means by which those bills could be discounted.

1195. And do you think that it is part of the functions of the Bank of England to discount a bill for anybody, merely because the party holding the bill wishes to convert it into cash?--As I said before, the Bank of England will have great difficulty in getting rid of that inconvenient idea which there is in the mind of the public, that the Bank of England is something more than an ordinary joint stock bank. I think it must depend very much upon circ.u.mstances whether you can or cannot refuse the discount of good bills which are offered to you.

Note C.

Statement of Circulation and Deposits of the Bank of Dundee at Intervals of Ten Years between 1764 and 1864.

Year Circulation Deposits L L 1764 30,395 -- 1774 27,670 -- 1784 56,342 -- 1794 50,354 -- 1804 54,096 157,821 1814 46,627 445,066 1824 29,675 343,948 1834 26,467 563,202 1844 27,504 535,253 1854 40,774 705,222 1864 41,118 684,898

The Bank did not begin to receive deposits until 1792, in which year they amounted to 35,944 L.

Note D.

Meeting of the Proprietors of the Bank of England.

September 13, 1866.

(From 'Economist,' September 22, 1866.)

A General Court of the Bank of England was held at the Bank at twelve o'clock on the 3th instant, for the purpose of declaring a dividend for the past half-year.

Mr. Launcelot Holland, the Governor of the Bank, who presided upon the occasion, addressed the proprietors as follows: This is one of the quarterly general courts appointed by our charter, and it is also one of our half-yearly general courts, held under our bye-laws, for the purpose of declaring a dividend. From a statement which I hold in my hand it appears that the net profits of the Bank for the half-year ending on the 31st of August last amounted to 970,014 L.

17s. 10d.; making the amount of the rest on that day, 3,981,783 L.

18s. 11d.; and after providing for a dividend at the rate of 6 L.

10s. per cent, the rest will stand at 3,035,838 L.. 18s. 11d. The court of directors, therefore, propose that a half-yearly dividend of interest and profits, to the amount of 6 L. 10s. per cent, without deduction on account of income tax, shall be made on the 10th of October next. That is the proposal I have now to lay before the general court; but as important events have occurred since we last met, I think it right I should briefly advert to them upon this occasion. A great strain has within the last few months been put upon the resources of this house, and of the whole banking community of London; and I think I am ent.i.tled to say that not only this house but the entire banking body acquitted themselves most honourably and creditably throughout that very trying period. Banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year. But the manner in which the banking establishments generally of London met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. This house exerted itself to the utmost--and exerted itself most successfully--to meet the crisis. We did not flinch from our post. When the storm came upon us, on the morning on which it became known that the house of Overend and Co. had failed, we were in as sound and healthy a position as any banking establishment could hold; and on that day and throughout the succeeding week, we made advances which would hardly be credited. I do not believe that any one would have thought of predicting, even at the shortest period beforehand, the greatness of those advances.

It was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the Bank should have gone to the Chancellor of the Exchequer and requested the Government to empower us to issue notes beyond the statutory amount, if we should think that such a measure was desirable. But we had to act before we could receive any such power, and before the Chancellor of the Exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret. But we could not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and I am not aware that any legitimate application for a.s.sistance made to this house was refused. Every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house. I have perhaps gone a little more into details than is customary upon these occasions, but the times have been unusually interesting, and I thought it desirable to say this much in justification of the course adopted by this house of running its balances down to a point which some gentlemen may consider dangerous. Looking back, however, upon recent events, I cannot take any blame to this court for not having been prepared for such a tornado as that which burst upon us on the 11th of May; and I hope the court of proprietors will feel that their directors acted properly upon that occasion, and that they did their best to meet a very extraordinary state of circ.u.mstances. I have now only to move that a dividend be declared at the rate of 6 L. 10s. per cent for the past half-year.

Mr. Hyam said that before the question was put he wished to offer a few observations to the court. He believed that the statement of accounts which had just been laid before them was perfectly satisfactory. He also thought that the directors had done their best to a.s.sist the commercial cla.s.ses throughout the late monetary crisis; but it appeared to him at the same time that they were in fault in not having applied at an earlier period to the Chancellor of the Exchequer for a suspension of the Bank Act. It was well known that the demand on the Bank was materially lessened in the earlier part of the day, in consequence of a rumour which had been extensively circulated that permission to overstep the limits laid down in the Act had been granted. That concession, however, had only been made after the most urgent representations had been addressed to the Chancellor of the Exchequer at a late hour in the night, and if it had then been refused he felt persuaded that the state of affairs would have been much worse on the Sat.u.r.day than it had been on the Friday. The fact was that the Act of 1844 was totally unsuited to the present requirements of the country, which since that period had tripled or quadrupled its commerce; and he was sorry to know that the measure seemed to meet with the approval of many of their directors. Any one who read the speeches made in the course of the discussion on Mr. Watkins' motion must see that the subject called for further inquiry; and he trusted that the demand for that inquiry would yet be conceded.

Mr. Jones said he entirely dissented from the views with respect to the Bank Act entertained by the hon. proprietor who had just addressed the court. In his opinion the main cause of the recent monetary crisis was that, while we had bought 275,000,000 L. worth of foreign produce in the year 1865, the value of our exports had only been 165,000,000 L., so that we had a balance against us to the amount of 110,000,000 L. He believed that the Bank acted wisely in resisting every attempt to increase the paper currency, and he felt convinced that the working cla.s.ses would be the people least likely to benefit by the rise in prices which would take place under such a change.

Mr. Moxon said he should be glad to know what was the amount of bad debts made by the Bank during the past half-year. It was stated very confidently out of doors that during that period the directors had between 3,000,000 L. and 4,000,000 L. of bills returned to them.

The Governor of the Bank.--May I ask what is your authority for that statement? We are rather amused at hearing it, and we have never been able to trace any rumour of the kind to an authentic source.

Mr. Moxon continued--Whether the bad debts were large or small, he thought it was desirable that they should all know what was their actual amount. They had been told at their last meeting that the Bank held a great many railway debentures; and he should like to know whether any of those debentures came from railway companies that had since been unable to meet their obligations. He understood that a portion of their property was locked up in advances made on account of the Thames Embankment, and in other ways which did not leave the money available for general banking and commercial purposes; and if that were so, he should express his disapproval of such a policy. There was another important point to which he wished to advert. He was anxious to know what was the aggregate balance of the joint stock banks in the Bank of England. He feared that some time or other the joint stock banks would be in a position to command perhaps the stoppage of the Bank of England. If that were not so, the sooner the public were full & informed upon the point the better. But if ten or twelve joint stock banks had large balances in the Bank of England, and if the Bank balances were to run very low, people would naturally begin to suspect that the joint stock banks had more power over the Bank of England than they ought to have. He wished further to ask whether the directors had of late taken into consideration the expediency of paying interest on deposits. He believed that under their present mode of carrying on their business they were foregoing large profits which they might receive with advantage to themselves and to the public; and he would recommend that they should undertake the custody of securities after the system adopted by the Bank of France. In conclusion, he proposed to move three resolutions, for the purpose of providing, first, that a list of all the proprietors of Bank stock should be printed, with a separate entry of the names of all those persons not ent.i.tled to vote from the smallness of their stock, or from the shortness of time during which they held it; secondly, that a copy of the charter of the Bank, with the rules, orders, and bye-laws pa.s.sed for the good government of their corporation, should be printed for the use of the shareholders; and thirdly, that auditors should be appointed to make detailed audits of their accounts.

Mr. Gerstenberg recommended that the directors should take some step for the purpose of preventing the spread of such erroneous notions as that which lately prevailed on the Continent, that the Bank was about to suspend specie payments.

Mr. W. Botly said he wished to see the directors taking into their consideration the expediency of allowing interest on deposits.

Mr. Alderman Salomons said he wished to take that opportunity of stating that he believed nothing could be more satisfactory to the managers and shareholders of joint stock banks than the testimony which the Governor of the Bank of England had that day borne to the sound and honourable manner in which their business was conducted.

It was mainfestly desirable that the joint stock banks and the banking interest generally should work in harmony with the Bank of England; and he sincerely thanked the Governor of the Bank for the kindly manner in which he had alluded to the mode in which the joint stock banks had met the late monetary crisis.

The Governor of the Bank said--Before putting the question for the declaration of a dividend, I wish to refer to one or two points that have been raised by the gentlemen who have addressed the court on this occasion. The most prominent topic brought under our notice is the expediency of allowing interest on deposits; and upon that point I must say that I believe a more dangerous innovation could not be made in the practice of the Bank of England. The downfall of Overend and Gurney, and of many other houses, must be traced to the policy which they adopted of paying interest on deposits at call, while they were themselves tempted to invest the money so received in speculations in Ireland or in America, or at the bottom of the sea, where it was not available when a moment of pressure arrived.

Mr. Botly said he did not mean deposits on call.

The Governor of the Bank of England continued--That is only a matter of detail; the main question is whether we ought to pay interest on deposits, and of such policy I must express my entire disapproval.

Mr. Moxon has referred to the amount of our debts, but, as I stated when I took the liberty of interrupting him, we could never trace the origin of any rumour which prevailed upon that subject. As far as it can be said to have ever existed it had its origin most probably in the vast amount advanced by the Bank. It must, however, be remembered that we did not make our advances without ample security, and the best proof of that is the marvelously small amount of bad debts which we contracted. It has never been a feature of the Bank to state what was the precise amount of those debts; but I believe that if I were to mention it upon the present occasion, it would be found to be so inconsiderable that I should hardly obtain credence for the announcement I should have to make. I am convinced that our present dividend has been as honestly and as hardly earned as any that we have ever realised; but it has been obtained by means of great vigilance and great anxiety on the part of each and all of your directors; and I will add that I believe you would only diminish their sense of responsibility, and introduce confusion into the management of your business, if you were to transfer to auditors the making up of your ac counts. If your directors deserve your confidence they are surely capable of performing that duty, and if they do not deserve it you ought not to continue them in their present office. With regard to the supposed lock-up of our capital, I must observe that, with 14,000,000 L. on our hands, we must necessarily invest it in a variety of securities; but there is no ground for imagining that our money is locked up and is not available for the purpose of making commercial advances. We advanced in the s.p.a.ce of three months the sum of 45,000,000 L.; and what more than that do you want? It has been recommended that we should take charge of securities; but we have found it necessary to refuse all securities except those of our customers; and I believe the custody of securities is becoming a growing evil. With regard to railway debentures, I do not believe we have one of a doubtful character. We have no debentures except those of first-cla.s.s railway companies and companies which we know are acting within their Parliamentary limits. Having alluded to those subjects, I will now put the motion for the declaration of the dividend.

The motion was accordingly put and unanimously adopted.

The chairman then announced that that resolution should be confirmed by ballot on Tuesday next, inasmuch as the Bank could not, under the provisions of its Act of Parliament, declare otherwise than in that form a dividend higher than that which it had distributed during the preceding half-year.