Readings in Money and Banking Part 48

Q. If I were to go to you to-day with a ninety-day trade bill, the acceptor known to you as good, and also with a loan secured by Pennsylvania Railroad bonds, my loan to mature in ninety days, what rate would you charge me on those separate items?

A. The bank rate to-day is 2-1/2 per cent. You are a good customer, and I should charge you 2-1/2 per cent. for discounting that trade bill, and I might charge you 3 per cent., or even perhaps 3-1/2 per cent. on the Pennsylvania Railroad collateral for this reason, that one is not as realisable as the other. When the bill becomes due it has to be paid, or I give it back to my customer, and say "Give me the money for that." I can not quite say the same to him about his collateral.

Q. What per cent. of earnings on your capital did you show last year?

A. Roughly, our net earnings were 20 per cent. It cost us 50 per cent.

of our gross earnings to run the business.

Q. What taxes do you have to pay?

A. We pay income tax on all our earnings, and deduct from our gross profits. We are ent.i.tled to deduct, roughly speaking, our expenses, and then upon the remainder we have to pay the income tax, or whatever it is, at 1 shilling in the pound, for instance, now.

Q. Would you say that the Bank of England is a popular banking inst.i.tution among other banks in England?

A. Yes, I should say so decidedly. Its popularity goes to this extent, that it is absolutely indispensable to them. Some of them may grumble at this proceeding or that proceeding, but they have one and all to own that the Bank of England is indispensable to them.

Q. As a matter of fact, if you had presented to the Bank of England last fall some bills which had been negotiated through you which appeared to be finance bills, do you not think they might have gently hinted that it was not agreeable to them to have you negotiate any more finance bills?

A. I may say they have that recourse, and they might say to me if I gave them any just cause for doing it, just the same as anybody else.

Q. In other words, the Bank of England has such a commanding position here among the financial inst.i.tutions which control all the finances of Great Britain that they dominate it when they choose to?

A. When they choose.

Q. It is the custom of the bank to co-operate very cordially with the other banks, is it not?

A. Oh, yes; we are as free as free can be. There is very little conference, or anything of the kind; we are all pretty good friends all round.

FOOTNOTES:

[150] F. Straker, _The Money Market_, pp. 7-16. Methuen and Company.

London. 1904.

[151] _Ibid._, pp. 28-40.

[152] [The fourth suspension occurred August 6, 1914.]

[153] Adapted from Hartley Withers, _The English Banking System_, Publications of the National Monetary Commission, Senate Doc.u.ment No.

492, 61st Congress, _2nd Session_, pp. 3-64.

[154] James H. Simpson, _Some Leading Features of the London Money and Discount Markets_, an address delivered at the annual banquet of the bankers of the city of New York, Jan. 19, 1914. (In Banking and Currency at Home and Abroad, Distributed with the Compliments of the National City Bank.)

[155] Adapted from _Interviews on Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy_, Publications of the National Monetary Commission, Senate Doc.u.ment No.

492, 61st Congress, _2nd Session_, pp. 7-29.

[156] _Ibid._, pp. 34-55.

[157] _Ibid._, pp. 60-91.

CHAPTER XXIII

THE SCOTCH BANKS

[158]The functions performed by the eight Scotch banks and their 1,245 branches[159] are essentially similar to those already described as being carried out by their English brethren. The differences between the currency systems of the two countries are in degree rather than in essence. In Scotland the note issue has made a harder fight for its existence than in England, owing no doubt to the fact that the Bank of England's monopoly did not extend to Scotland and that the great Scotch joint-stock banks therefore extended the system of using notes as currency, while the development of joint-stock banking in England was necessarily opposed to it, since joint-stock banks in England with an office in London were unable to issue notes. Nevertheless, even in Scotland the advantages of the cheque have told in its favour, and, as will be seen below, liabilities of Scotch banks under note issue are now much smaller than those under deposit as current accounts.

DEMOCRACY OF SCOTCH BANKING

The Scotch note circulation increased from 5,332,000 in 1872 to 7,173,000 in 1908. This increase, when compared with the fact that the note issues of the English country banks have during the same period diminished almost to vanishing point, shows that the bank note is much more tenacious of life north of the Tweed. This is partly owing to the fact that in Scotland notes may be issued of the denomination of 1, whereas in England the smallest allowed is of 5, so that the note was thus circulated more easily among the poorer cla.s.ses in Scotland and so gained and retained a hold upon a much wider circle of the community. In this respect, as in others, Scotch banking is more democratic than English, and provides its facilities for a poorer and lower cla.s.s of the community, though this distinction between the banking systems of the two countries is being rapidly diminished. Especially in its early days it laid itself out much more readily to the encouragement of the small capitalist and borrower, often granting him facilities against security, or an absence of security, which would have been only regarded as feasible under quite exceptional circ.u.mstances in England. A very interesting system was at one time fairly general in Scotland, and is even now by no means obsolete. It was the system described as that of cash credits, by which borrowers were able to go to banks and obtain advances against the joint personal security of themselves and one, or two, or three friends. By this means, in which a kind of co-operative responsibility was recognised as a security by the Scotch bankers, very poor borrowers were enabled to obtain banking facilities, and many instances are recorded in which by a loan of this kind, of quite small importance from the banking point of view, foundations of fortunes have been laid and the general commercial prosperity of the community has been furthered in a very satisfactory manner. And even now the essential difference between Scotch and English banking is this readiness of the former to take into consideration the personal standing of the applicant rather than the stuff or paper which he brings to it as security for an advance.

USE OF NOTES AS "TILL MONEY" IN RELATION TO THE ESTABLISHMENT OF BRANCHES

Banking by branches in Scotland has proceeded even more rapidly than in England, and the percentage of branches per head of the population is higher in the northern part of the Kingdom. This wide diffusion of banking facilities in Scotland has been largely brought about by the fact that its banks, having the privilege of note issue, were able to hold their own notes as "till money," so economising in the matter of cash. The following pa.s.sage is from a work ent.i.tled _Scottish Banking, 1865-1896_, by A. W. Kerr, author of a _History of Banking in Scotland_:

Were it not for the power to issue notes, and the readiness with which the public receive them, the banks could never have afforded to open a third of the branches which have been established. The reason for this is a very simple one.

Without the right of issue a bank must, at every one of its offices, hold the whole of its balance of cash in the shape of coin, or of notes of other banks, which, as far as it is concerned, are as unprofitable as coin. Such balances entail a complete loss of interest which can only be borne where the amount of business is of considerable extent. There are probably not above 100 (at most 200) localities in Scotland that would satisfy such conditions. When, however, a bank can hold its till money in the shape of notes, it is enabled to extend its operations into districts which would otherwise be quite inaccessible....

The authority of a practical Scotch banker is equally emphatic on the point. Mr. Robert Blyth, general manager of the Union Bank of Scotland, read a paper at the thirty-first annual convention of the American Banking a.s.sociation, in October, 1905, on the subject of Scottish banking. In the course of this very interesting paper he made the following statement: "It is in another quarter altogether that the Scotch banks find the value of the 1 note. It is the unissued notes in the tills of the branch offices, forming the till money at more than a thousand branches, wherein the real value lies. Without them the banks would require to keep 8,000,000 or 10,000,000 of gold coin, not as a reserve but as till money. It is these 1 notes which have enabled branch offices to be planted in every part of the country."

It thus appears, from the highest possible authority, that the Scotch banks are enabled by their right of note issue to economise gold to the extent of 8,000,000 or 10,000,000, and it is amusing to observe how the objects aimed at by Peel's legislation with regard to note issue have thus been defeated even more completely in Scotland than in England. In England banking turned the flank of Peel's Act by developing the use of cheques, which superseded the note as the common form of payment in daily transactions. In Scotland, banking evaded the spirit of Peel's regulations, which were intended to insure that every addition to currency should be secured on an addition to the bullion held by it, by actually economising bullion to the extent of 8,000,000 or 10,000,000.

EVASION OF PEEL'S ACT

Scotland used the same weapons as England, namely, the cheque and the development of deposit banking. The eight Scotch banks have, according to their latest balance sheets, 7,000,000 of notes outstanding, and 108,000,000 of liability on deposits and drafts. With regard to the latter item Peel's regulations had nothing to say, and since ordinary banking prudence demanded that some cash should be held against it, and since the gold held against notes was not specially earmarked as such, Scotch banking was able to treat its cash against deposits as the basis both of its notes and deposits and so produce the economy which is boasted of by its champions. The law says nothing concerning cash to be held against deposits, and the metallic basis of these is probably extremely slender, if the cash held against notes is set on one side; but it is impossible to detect its actual amount, since the Scotch banks include with their cash their balances at the Bank of England, etc. And the net result is, that when the proportion of its cash to its total liabilities on notes and deposits is worked out it is found to be decidedly low, even when compared with English practice. For the eight banks taken together, gold and silver coin, notes of other banks, cash at Bank of England, and cheques in course of transmission represent almost exactly 10 per cent. of their note and deposit liabilities.

It should be observed that the notes which the Scotch banks hold as till money do not appear in their statements, for until they are issued they are not a liability, and though they are treated by the banks in practice as an a.s.set, they can not figure as such in a balance sheet.

That they are practically treated as such is witnessed by Mr. Blyth, as quoted above, when he says that without them the banks would require to keep 8,000,000 or 10,000,000 of gold coin. And it is, of course, this habit of regarding unissued notes as a banking a.s.set in the shape of till money that accounts for the low reserve of actual cash that the Scotch banks show.

DEFECTS

Scotch banking is so generally regarded as one of the highest achievements of the banking intelligence that some hesitation is natural in criticising the system by which, according to its own evidence, it has obtained most of its success. At the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a banking a.s.set. Mr. Blyth points out that these unissued notes are "not a reserve but till money," but the distinction between till money and reserve is one upon which it is possible to lay too much stress. In a.s.sessing the strength of a bank it is usual to compare the amount of its cash in hand, as a whole, with the amount of its liability to the public on deposit and current account, etc., and note circulation if any. The cash in hand, as a whole, consists of the till money and cash reserve. If the till money consists to any extent of the bank's own promises to pay, it follows that the bank's cash reserve as a whole is to that extent weakened, for it need not be said that in case of serious trouble, which is a contingency of which all provident bankers have at all times to beware, a bank's own promises to pay would be of little service to it.

If a bank's credit were doubted, these promises to pay would not be available for it in meeting demands upon it. At such periods the public requires from its bankers not promises to pay but physical gold. In Scotland the confidence of the public in its bankers is so great, and the readiness with which it circulates their promises to pay appears to be so ingrained in the national character, that the contingency of the demand of the public for gold seems to be extremely remote. The criticism therefore which detects a weak point in this a.s.set upon which Scotch banking prides itself so highly may be said to be merely academic. Nevertheless, when we examine Scotch banking by the test of figures, we find that it does actually work, as indeed would be expected from the statement of its exponents, on a cash basis which is decidedly narrow.

Though the functions that they perform are practically the same as those of the English bankers, Scotchmen have succeeded in avoiding the excessive compet.i.tion in carrying them out which is a weakness of English banking. In Scotland, on the other hand, cohesion and co-operation among the banks are carried to an extreme of which the mercantile community frequently complains. The banks are few and stand together like a close corporation; they agree absolutely and arbitrarily among themselves as to the rates they will allow to depositors, the rates at which they will advance or discount, and the terms and commissions for which they will do business for customers. The extent to which this regulation of the price of the product that they turn out is carried, is almost incredible from the English point of view, and though it is contended by the champions of the Scotch system that it encourages that wholesome democratic influence in Scotch banking which is in favor of the small borrower of limited resources, who is thus able to obtain accommodation on the same terms as much larger and more important customers, yet it must be obvious that the Scotch banks, by making these hard and fast agreements among themselves as to the price of the accommodation that they will give, and maintaining it in every case, are in fact putting the same price upon a very different article. The result of it is beginning to tell upon them a little in these days, since, when the big Scotch merchants and manufacturers find that their local bankers charge them the same rates for accommodation as the small tradesmen of the towns, they are naturally impelled to make arrangements to provide themselves with monetary facilities somewhere south of the Tweed, where rates are ruled by the circ.u.mstances of each case, and compet.i.tion and higgling often in times of monetary ease deliver the bankers into the hands of the borrowers. As it is, the Scotch banks in regular conclave fix their rates in accordance with those current in the London money market or the Bank of England's official minimum, and, having fixed them, stick to them. The system is very profitable to themselves, and their customers certainly can not complain on the whole of the facilities with which they provide them. Nevertheless, the cast-iron rigor with which they work hand in hand in combination appears to be an excessive development of banking unity, and an ideal banking system would seem to lie somewhere in the middle between the excessive compet.i.tion of the English bankers and the cast-iron combination of their Scotch brethren. Finally, it may be added that it is a little inaccurate to speak of a Scotch banking system, if the phrase be taken to imply that Scotch banking stands by itself and works on its own resources. In fact, it is only an appendage of the English system and relies habitually on drawing gold from the Bank of England, as its centre and the keeper of its reserve.

BANK OF SCOTLAND

INTERVIEW WITH SIR GEORGE ANDERSON, GENERAL MANAGER[160]

Q. When was the Bank of Scotland founded?