Readings in Money and Banking Part 43

Nov. 30, 1915 June 30, 1914.

Gold and subsidiary coin--

In Canada $41,831,732 $28,948,841 Elsewhere 29,527,921 17,160,111 ----------- ----------- Total $71,359,653 $46,108,952 Dominion notes 140,751,331 92,114,482 Deposit with Min. of Finance for security of note circulation 6,770,645 6,667,568 Deposit in central gold reserves 15,100,000 3,050,000 Due from banks 169,429,330 123,608,936 Loans and discounts 881,101,540 925,681,966 Bonds, securities, etc. 121,953,898 102,344,120 Call and short loans in Canada 83,203,787 67,401,484 Call and short loans elsewhere than in Canada 135,530,562 137,120,167 Other a.s.sets 76,993,424 71,209,738 -------------- -------------- Total $1,702,194,170 $1,575,307,413

LIABILITIES

Capital authorized $188,866,666 $192,866,666 Capital subscribed 114,422,866 115,434,666 Capital paid up 113,987,275 114,811,775 Reserve fund 112,718,473 113,368,898 ------------ ------------ Circulation 124,153,685 99,138,029 Government deposits 36,001,548 44,453,738 Demand deposits 538,764,279 458,067,832 Time deposits 714,219,286 663,650,230 Due to banks 30,973,072 32,426,404 Bills payable 5,081,059 20,096,365 Other liabilities 14,007,918 12,656,085 -------------- -------------- Total, not including capital or reserve fund $1,463,200,847 $1,330,488,683

NOTE.--Owing to the omission of the cents in the official reports, the footings in the above do not exactly agree with the totals given.

FOOTNOTES:

[147] Adapted from Joseph French Johnson, _The Canadian Banking System_, Publications of the National Monetary Commission, Senate Doc.u.ment No.

583, 61st Congress, _2d Session_.

[148] W. W. Swanson. _The Revision of the Canadian Bank Act_, American Economic Review, Vol. 3, December, 1913, pp. 993-998.

[149] _The Commercial and Financial Chronicle_, Vol. 102, January 1, 1916, p. 13.

CHAPTER XXII

THE ENGLISH BANKING SYSTEM

FOUNDATION AND GROWTH OF THE BANK OF ENGLAND

[150]About the year 1691 the Government of William and Mary experienced considerable difficulty in raising the necessary funds to prosecute the war with France; but "the hour brings the man." The man on this occasion was William Paterson, a merchant of Scotland, who had been educated for the Church, but had led a varied and adventurous life. The scheme he presented for the consideration of the Government for the relief of the situation was the foundation of a public joint-stock bank; which, in return for certain powers and privileges to be conferred, should advance money to the Government....

... the bill establishing the Bank of England was successfully carried through Parliament, and obtained the royal a.s.sent on the 25th April, 1694.

The basis of the bill was that 1,200,000 should be voluntarily subscribed by the public, and that the subscribers should be incorporated into a body, to be known as "The Governor and Company of the Bank of England."

The whole of the sum forming the capital of the bank was to be lent to the Government, for which the bank was to receive interest at the rate of 8 per cent. per annum, together with an allowance of 4,000 per annum for management and expenses; making in all 100,000 per annum. It was also provided that the sum of 300,000 was to be raised by public subscription, for which the contributors were to receive certain terminable annuities.

By its first charter, which was for ten years only, the Bank of England was not allowed to borrow or owe more than the amount of its capital; which meant that it could issue notes to the extent of its capital and no more. If this amount were exceeded the members were liable for such excess, in their private capacities, in proportion to their holding of stock.

The capital of the bank was subscribed in a few days, and when duly paid up, the agreed sum of 1,200,000 was handed in to the Exchequer....

The charter originally granted to the bank was for ten years only, as we have already seen; but this charter has from time to time been renewed, and also varied--sometimes in favour of the bank and sometimes curtailing its privileges. The monopoly of joint-stock banking was not granted to the bank by its first charter, but this monopoly was practically conferred on it in 1708. The act pa.s.sed in that year provides:

That during the continuance of the said corporation of the Governor and Company of the Bank of England, it shall not be lawful for any body politic or corporate whatsoever, created or to be created (other than the said Governor and Company of the Bank of England), or for any other persons whatsoever, united or to be united in covenants or partnership, exceeding the number of six persons, in that part of Great Britain called England, to borrow, owe, or take up any sum or sums of money on their bills or notes, payable at demand, or at a less time than six months from the borrowing thereof....

We pa.s.s on now to the end of the eighteenth century, when the country was plunged into the throes of war and financial difficulty. Up to this time the bank, since its foundation, had succeeded in meeting its notes when presented; but in the year 1796 a steady drain on the reserve of the bank commenced, owing to the fear of invasion. This drain began to a.s.sume a very serious aspect in the early part of 1797, and it appeared probable that the bank would be subjected to the danger and humiliation of a temporary stoppage. The directors, fully aware of this danger ahead of them, laid the position before the Government, and left the solution of the difficulty in its hands. After due consideration, an Order in Council was issued on the 26th February, 1797, requiring the bank not to pay its notes in gold.... It was not until 1823 that the restriction was entirely withdrawn, although as a matter of fact the bank really resumed paying in cash on demand on May 1, 1821, deeming it then safe to do so.

Although a period of safety and prosperity then appeared to have dawned, the bank was not quite clear of its troubles. The very prosperity of the times led imperceptibly to another period of distress and danger, culminating in the panic of 1825....

In 1826 the Bank of England, by arrangement with the Government, agreed to establish branches in various parts of the country, and gave up their monopoly of joint-stock banking, except within a radius of sixty-five miles of London.

The year 1833, however, saw a further restriction in the powers of the bank, when, after protracted negotiations, and in return for a further renewal of its charter, the bank surrendered its monopoly of joint-stock banking entirely, provided that no bank having more than six partners might issue notes within the sixty-five-mile limit of London.

It is a curious point that the charter of the bank never did restrict joint-stock banking in its present accepted form, but only the issue of notes by joint-stock bankers or banks having more than six partners. Up to this time the issue of notes by a bank had been thought to be its main business; so much so, that it was believed to be useless to attempt to conduct a bank without power of issue, and consequently no joint-stock bank had been founded. But about this time the need of such inst.i.tutions began to be felt, and the presumed monopoly of the Bank of England was called in question--largely by Mr. Gilbart, the founder of the London and Westminster Bank. The bank tried to a.s.sert their monopoly, but without success, and in order to settle the matter effectually, the following clause was inserted in the act pa.s.sed in 1833 dealing with the bank charter:

Be it therefore declared and enacted, that any body politic or corporate, or society, or company, or partnership, although consisting of more than six persons, may carry on the trade or business of banking in London, or within sixty-five miles thereof, provided that such body politic or corporate, or society, or company, or partnership, do not borrow, owe or take up in England, any sum or sums of money on their bills or notes payable on demand, or at any less time than six months from the borrowing thereof, during the continuance of the privileges granted by this Act to the said Governor and Company of the Bank of England.

It may be noted that this act of 1833 const.i.tuted Bank of England notes a legal tender, except by the bank itself or its branches....

PEEL'S ACT OR THE BANK CHARTER ACT OF 1844, AND ITS SUSPENSIONS

[151]After the renewal of the charter in 1833, the directors of the Bank of England laid down as a principle on which their future operations were to be guided, that one-third of their liabilities should be kept in cash and bullion, and the remaining two-thirds in securities. If this principle had been acted on, the bank would have been saved from many of the troubles which shortly a.s.sailed it; but though the intentions of the directors were good, circ.u.mstances were too strong for them, and the actual proportions of cash and securities to liabilities, respectively, often differed materially from the standard laid down. This was notably the case during the periods of financial pressure which were experienced in the years 1836 and 1837.

In the year 1839 matters a.s.sumed a very serious aspect. In the early part of this year the amount of cash held by the bank was about one-third of the amount of securities, but during the year the amount invested in securities increased at the expense of the amount held in cash; and by September we find that securities stood at nearly 29,000,000, while the cash was reduced to a tenth of that figure, and stood at 2,936,000 only. In order to avert a calamity which appeared to be impending, the bank arranged loans in Paris and Hamburg to the extent of between three and four millions.

This manifest exhibition of weakness on the part of the bank led to the appointment of a committee of the House of Commons to inquire into the matter. The committee condemned the principles on which the bank was working, but were powerless to effect any alteration, owing to the charter of the bank not expiring till 1844.

On the expiry of the charter, however, Sir Robert Peel brought forward his famous act for remodelling the bank, and regulating the issues of the country banks throughout. England and Wales.

The act was pa.s.sed on the 19th July, 1844, and continues without alteration to the present day. The main provisions enacted thereby, briefly stated, are as follows:

I. The issue department and the ordinary banking department of the Bank of England were to be entirely separated as from the 31st August, 1844.

II. On such separation taking place, securities to the value of 14,000,000 (including the [book] debt due to the bank from the Government) were to be transferred to the issue department, together with so much gold coin and bullion that the total so transferred should equal the total amount of notes then outstanding. Thereafter (with the exception noted below) the issue department must not issue any notes in excess of a total of 14,000,000 except in exchange for gold coin or bullion.

III. The issue department might not at any time hold more silver than one-fourth part of the gold held. As a matter of fact the issue department holds no silver.

IV. Notes might be demanded from the issue department by any person in exchange for gold at the rate of 3 17_s._ 9_d._ per standard ounce.

V. If any banker having the power of issue on the 6th May, 1844, should relinquish such issue, the issue department may be authorised to increase its issue of notes against securities to the extent of two-thirds of the issue so relinquished; but all the profits on such increased issue against securities were to belong to the Government.

VI. The bank must issue a weekly statement of the position of both its issue and banking departments, in a prescribed form.

VII. Bankers having the right to issue their own notes on the 6th May, 1844, might continue such issue under certain conditions, and to an agreed amount; but no provision was made compelling such bankers to keep any reserve either in cash or securities against their issues. If any issue lapsed, from any cause, it could not be resuscitated; and no inst.i.tutions could acquire the right of issue in the future.

VIII. Banks consisting of more than six partners, though within the sixty-five-mile radius of London, might draw, accept, or endorse bills of exchange not being payable to bearer on demand.

The first return issued by the bank in accordance with the regulations of the new act was that of the 7th September, 1844, and was as follows:

ACCOUNT OF THE LIABILITIES AND a.s.sETS OF THE BANK OF ENGLAND

For the Week ending 7th September, 1844

DR. ISSUE DEPARTMENT CR.

Notes issued 28,351,295 Government debt 11,015,100 Other Securities 2,984,900 Gold coin and bullion 12,657,208 Silver bullion 1,694,087 ----------- ----------- 28,351,295 28,351,295