Banking. The term bank (Fr. banque; Ital. banco, 'a bench,' 'a tradesman's stall,' 'a bank') denotes a building in which the species of financial business now to be described is carried on, and is also applied to corporate bodies conducting that business. A banker is, primarily, a person engaged in that business on his own account and responsibility. In the case of joint-stock companies, the expression is applied to the principal officers in charge of the business. Banking denotes the business itself, which is not specifically either a profession or a trade.
The earliest known bank was the firm of Egibi & Son, who seem, from clay tablets recently discovered near Babylon, to have conducted an important advance, exchange, and general financial business in that city from about 700 to 600 B.C., and subsequently; but it does not appear to have been definitely ascertained how far the character of their business approximated to that of modern banks. The Chinese understood the use of paper-money centuries before the European nations, and are said to have indulged in the practice to excess, and to have established a bank of issue about 1000 A.D. Banking in ancient Greece developed so far as to include deposits at interest and letters of credit, as well as advances. The Romans derived their knowledge of banking from the Greeks. But banking, as now understood, did not commence before the 12th century, when the Bank of Venice was established. Sir John Lubbock thinks that the first real bank was that of Barcelona, founded 1401; and that 'the Bank of Stockholm (1668) was the first bank in Europe to issue bank-notes.7 Other early banks were the Bank of St George at Genoa (1407), and the Bank of Hamburg (1619). The Bank of Amsterdam (1609) was the great warehouse for bullion during the 17th century, taking charge of coin and bullion lodged, for which receipts, transferable from hand to hand, were granted; expenses being met by direct charges and a deduction from the nominal value of the sum credited in the books. But money lying in such banks was unproductive and costly to customers. With the advancement of social economy, improved means of communication, and increased mutual confidence, banks of this class are no longer needed, and have passed away. The era of real modern banking commences with the 18th century.
Banks used to be classed as deposit, discount, and circulation, those just referred to being of the first class originally, and gradually developing the other departments. A more convenient division for the present time is into public, joint-stock, and private, all three conducting every description of banking business, except that many of the two last named do not issue notes. Public banks are established by states to fulfil the functions of centres of credit and holders of the ultimate reserve of legal tender (coin). The medieval public banks were managed by the city corporations, and had no specific capitals; but those of the present time are incorporated companies with more or less close connection with the governments of their respective countries. Joint-stock banks are incorporated banking companies without such connection or responsibility; and private banks are unincorporated partnerships.
A banker lends money at interest, usually for short periods, on satisfactory security, and receives money on deposit, for which he sometimes allows interest and sometimes does not. A banker does not hoard all the money deposited with him; he gives the greater portion out on loan. The advantages accruing to society from the operations of banking are thus immensely increased. A banker receives from all around him sums of money, both small and great, which would otherwise be useless in the coffers of the owners, and lends it to those who can employ it to advantage and could not otherwise obtain it. Capital hitherto lying useless and unproductive becomes through his agency useful and productive. The direct advantages arising from such transactions are considerable. The banker, if the money is allowed to lie with him for some time, will pay the depositor interest upon it, will lend the amount to a borrower who will engage in some business transaction with it and make a profit thereby; and the banker himself will make a profit in the difference between the interest allowed to the depositor and that charged to the borrower. But besides the direct advantages, the indirect advantages are not less important. With the money thus lent out, manufacturers can purchase raw material to be worked up, and procure food and clothing for their workmen; and traders can go into the markets and purchase commodities for resale. Commodities are thus more quickly turned to useful purposes, and a stimulus is given to the production of more. But a banker deals not only with the money of others; he uses money belonging to himself. This is his capital. Few would be found to deposit their money with a person known to possess none of his own. If he should lend deposits to those who fail to repay them—that is, make bad debts—he has the means from his capital of replacing the deposits thus lost.
The services that a banker performs as the cash-keeper of his depositors are very great. In the case of persons not themselves in business, it is quite usual for a banker to make all their money-payments, beyond their small daily expenditure, and to receive the money payable to them. The money transactions of such persons are thus contained in their banker's books. This is effected by the depositor giving cheques or orders on his banker for the sums he has to pay; and by handing to him all the cheques or orders the depositor receives for sums payable to himself. Suppose a person's income derived from dividends on government stock; he may give a power of attorney or authority to his banker to uplift the dividends for him. These are received by the banker as deposits, and are drawn out by the depositor as occasion occurs, by cheques issued by the depositor to those to whom he requires to pay it away. So he may receive money due to him by a cheque given to him by his debtor. This cheque he sends to his banker, who will obtain payment. If both persons deal with the same banker, a simple transfer in his books will carry through the transaction; and if the bankers be different, and each has received, in the course of his business, as is always happening, cheques on the other, there will be a set-off between them; and two payments will be made as well as two deposits, without trouble to the persons concerned, and without the employment of any money. But this mode of managing one's pecuniary transactions is not confined to the case of those not engaged in business; on the contrary, it is followed on a scale out of all proportion greater in carrying through the money transactions of those in business or trade in the principal industrial countries.
Besides thus performing the function of cashiers to their depositors, many banks allow interest on deposited money. The rate allowed is, of course, always less than that received by the banker. Frequently a depositor bargains with the banker not to draw out his deposit without previous notice, longer or shorter as may be agreed on; and in this case the banker will allow a higher rate of interest than when the deposit is repayable on call—that is, at any time, without previous notice. The practice of allowing interest on deposits has prevailed in Scotland since 1729, but in England is of later growth, and not invariable; the rule there being rather to allow interest on fixed deposits only, and to allow no interest on money at call or on current accounts. It has led, of late years, to a great increase in the amount of deposits. Many persons are content with the low rates of interest which banks give, in place of the higher rates which may be obtained from individual borrowers, or the greater return which may be received if they traded on their money; believing their money to be safer and more readily obtainable.
Occasions are always occurring for withdrawing deposits, as well as making them. Traders and commercial men, for example, day by day, deposit with their bankers the drawings or sums of money which they receive in the course of their business; and, on the other hand, day by day, draw out such sums as they require to pay away in purchases of goods, in wages, rent, and other expenditure. A bank, therefore, while continually receiving deposits, is continually repaying deposits; and the amount uncalled for is subject to a daily fluctuation. At one period of the year, or in a certain condition of trade, the amount of deposits may be high; at another, low. As it is a principle, at the very root of banking, that money deposited shall be returned, either on demand, or punctually at the expiry of a stipulated notice, it follows that banks must always have in their coffers as much of the money deposited with them as there is the least likelihood of being called for by depositors. When business is in its ordinary condition, a bank can, after some experience, approximate pretty nearly to the amount of the greatest demand for a return of deposits throughout the year, and provide accordingly. But sometimes the credit of a bank becomes doubted, either from causes peculiar to itself, or on occasions of a panic or general distrust, when all who own money wish to have it in their own possession. In these cases, there is a run on the bank for repayment of its deposits, and the amount called for may be far beyond the maximum demanded in ordinary times. If the bank has not retained in its coffers, or held otherwise, available funds sufficient to meet the demand, it is said to suspend payment; and, as a general rule, it must wind-up its business; the confidence of the public that it will in future restore its deposits on demand being now destroyed. There are two prime rules in safe banking: the one is, that the bank shall lend its deposits only on undoubted and readily realisable securities, however low the profit; and the other is, that the bank shall retain a sufficient amount of its resources—and this is called the banking reserve—to meet the possible demands of the depositors, even in cases of a run, although there may be no reason to expect one; for when a run comes, it seldom casts its shadow before. But it is evident that the greater the reserve of a bank, the less the amount of deposits which it can lend out and draw interest for; hence the temptation which banks lie under of imprudently lending out too great a proportion of their deposits; and it is yielding to this temptation which almost always precipitates the failures of banks.
The reserve of the banking department of the Bank of England is always in coin, or, what is the same thing, in notes against which there is coin lying in what is called the issue department of the Bank. In the case of all other banks in this country, the reserve is only partly in coin; sometimes the proportion of coin is very small. A great portion of the reserve is generally in Bank of England notes (except in Scotland and Ireland), equivalent, of course, to coin. A portion is invested in the shape of government stock. In this way, the banks obtain a return on a portion of their reserve, in the dividends or interest paid by government on the stock—this return being less, indeed, in the usual case, than if the bank had lent out the money in the ordinary course of business, but better than no return at all, as must be when the coin or notes are lying idle. The reason why government stock, in Great Britain, is a safe reserve is, that it is sure to command a purchaser at all times. If there be a run on a bank, it immediately finds a purchaser for the stock, and with the price, whether paid in gold, or in Bank of England notes, the only other legal tender, it meets the demands of its depositors. Sometimes a bank has its reserve in the form of a deposit at the Bank of England; or, if a provincial bank, with some London bank which has its own reserve there. From the Bank of England being the channel through which, directly or indirectly, payments are made and moneys received by other banks, it is more convenient for them to have their reserve lying as a deposit in it, than lying as gold within their own walls. In the case of a demand on their reserve, the banks will draw out their deposits, in notes, or, if gold be in demand, in gold, from the Bank of England. Whether, therefore, the reserve of a bank is invested in government securities, or is deposited in the Bank of England, or is in Bank of England notes, it is from the coin in that bank that the gold comes in the case of a run. It is apparent from this that it is essential to the stability of all banks in this country, so long as they themselves do not keep a sufficient reserve of coin in their coffers, that the Bank of England shall always be possessed of coin, and never be unable, on demand, to pay its depositors in gold, or to give gold in exchange for all its notes that may be presented to it. It may be added, that while banks gain, through the annual dividends, in keeping their reserve in government stock, they run the risk of loss in the event of their requiring to sell in times of panic. For at such a time, when many securities become unsaleable, and all of them suffer depreciation in value, government stock itself falls in price, although less so than the others. Banks often invest portions of their reserve in other stocks than government stock. The higher return thus obtained is, however, outweighed by the greater risk of depreciation in value in times of panic.
Banks make their loans chiefly in the form of discounts—that is, upon bills of exchange. Commodities in the wholesale market are generally sold on credit. The buyer promises to pay the amount at a certain date to the seller, and his promise is contained in a bill of exchange. The seller transfers it to a bank, which, on the faith of it, advances the amount in loan to him, less Discount (q.v.)—that is, interest of the money till the bill be due. This is called discounting. But banks lend on other securities. A holder of government stock, for example, will obtain a loan on the security of his stock; the banker being entitled to sell it, and repay the loan from the price, if the borrower fail to make punctual payment. So also, the holder of stock or debentures in any public company, as a railway, will, where the company is believed to be in a sound condition, or the security is saleable, and no liability attaches to it, obtain a loan from a bank. The owners of commodities lying in a public warehouse may obtain a loan on depositing with the bank the warrants or certificates of ownership. Loans, too, are occasionally made for short periods on the mere note of hand of the borrower, when the banker is satisfied of the ability of the borrower to repay the money. It is seldom in Scotland that banks lend on mortgages over land. Borrowers, in these cases, generally take loans to lie unpaid for a few years; but to have his money locked up in that way does not suit the business of a banker. Where a banker finds the security which he has received to be insufficient, and repayment of the loan is not forthcoming, he will, of course, to avoid making a bad debt, take any other security the debtor can give him—such as a manufactory or a mine. Banks have in this way occasionally become involved in manufacturing and mining transactions, in order to make more money of the securities than they would have done by an immediate sale of them; and have suffered great losses in consequence. It is not to be supposed that banks always abstain from making loans when the security is known to be doubtful; far from it: banks, like other commercial establishments, have been, on many occasions, recklessly managed. In trying to push business, they have made loans on insufficient security; and banks are under strong temptation, when a trader largely indebted to them is approaching bankruptcy, to sustain his credit by additional advances, in the hope that he may retrieve his affairs, and pay in full both the old and the new advances. The result is often the loss of both. Conduct of this kind has been the ruin of many banking establishments in England, of several in Ireland and Scotland, and elsewhere.
We have hitherto been treating of the deposit and loan departments of banking; but many banks also issue notes. In the case of loans from capital, the banker has no greater profit by the transaction than if he had lent out his money in any other way, equally safe, and involving the same amount of trouble. If from deposits, the interest he receives, in so far as it exceeds the interest, if any, paid to the depositors, and a rateable proportion of the expense of carrying on the business of the bank, is pure gain to him. But a banker may give the loan from his own notes, and in that case his gain is still greater. A bank-note is simply a printed promise by the bank issuing it, to pay to the bearer, on demand, a sum of money—that is, in coin of the realm. Of course, the borrower would not accept a loan from a bank in its own notes, unless he believed that it could redeem its promise of paying in coin, and that the public were of the same opinion; for whenever a suspicion arises that the promise will not be made good, the note ceases to pass from hand to hand as freely as coin. But (under a system of free issue) when the loan is accepted in a bank's own notes, it is evident that the interest which the bank draws for the loan of its promises to pay is pure profit, except the rateable proportion—as in the other cases—of the general expenses, the cost of manufacturing the notes, and the government stamp-duty. In other words, a bank whose issue of notes is unrestricted, draws nearly as much income from loans of its promises to pay, as from its loans in legal tender. The motive which a bank has to extend its issues on loans is therefore apparent, so long, of course, as it is not compulsory on it to retain unemployed in its coffers as much in gold as it issues in notes. Unrestricted issues are now, however, a system of the past.
But it does not follow that when a bank makes a loan in its own notes for a definite period, it will really obtain the benefit of the whole of the interest on it for that period; for the borrower does not apply for the notes that he may keep them beside him, but that he may pay them away in making a purchase, or in liquidating a debt, and this, most commonly, on the very day he receives them. If the person to whom the notes are thus paid by the borrower has himself no payment to make, he may return them to the bank that issued them, to lie there on deposit. If the bank pays interest on deposits, as most banks do, then out of the interest drawn by it on the original loan, it will have to pay interest to the depositor of the notes; in other words, the loan is no longer a loan of notes, but a loan from deposits. Or the person receiving the notes from the borrower may immediately present them to the issuing bank for coin, instead of depositing them. Here, too, the loan that was made in notes is converted into a loan of coin, that was in reserve from previous deposits, or that was part of the bank's own capital. In these cases the bank obtains no advantage whatever in having made the loan originally in its notes. It might equally well, so far as profit is concerned, have originally made it in gold from its reserve of deposits or capital. Notes generally find their way back to the issuing bank through other banks, into which they have been paid as deposits, or in repayment of advances. These banks suffer the loss of profit or interest on the amount of the notes thus received by them so long as they keep them; they therefore immediately present them to the issuing bank for payment, that they may get the use of the money represented for the purposes of their own establishments.
There are two checks which prevent a bank issuing notes to any extent it pleases. In the first place, there must be a demand for its notes by borrowers. It is only to people in good credit, and likely to make a profitable use of them, that a bank will lend its notes, and such people will not take an increase of loans unless trade be increasing, and new opportunities be presenting themselves for profitably employing the notes borrowed. True, banks, when imprudently conducted, frequently lend to reckless persons, who overtrade and become bankrupt. But this is not done more through the medium of the notes than otherwise. In the second place, the immediate return of the notes, chiefly through other banks, is a check to its issuing more notes than it has a reserve to meet. This return of notes through banks is called the exchange of notes—the notes issued by a bank being returned to it in exchange for the notes of other banks held by it.
Besides issuing its notes in loans, a bank may issue them in repayment of deposits. In this case, there is the same profit to the bank as in the other case. The bank gets the use of the money which was originally lodged with it, without having to pay interest for it, the deposit having now been repaid in its notes. But here, too, these notes are equally liable to be returned to the issuer as when they are issued on loans.
Of all the notes issued, in whatever way, by banks, a certain amount is not returned to them, but is kept in circulation, being what is required by the necessities of the public for use as money, passing from hand to hand. It is of course on this portion that the banks make their profit; and, in consequence of this profit, they are able to afford banking facilities to the public more cheaply than they could otherwise do. The profit is just the interest on the money represented by the notes in circulation—less expenses and the loss of interest on an unemployed reserve kept from prudence, or by the requirement of law, to meet a return of notes. This interest is paid by the persons who originally borrowed these notes from the banks, and who have not repaid them; or if the banks have repaid deposits with the notes, the interest is paid by those to whom they lent what was originally these deposits. The amount of the bank-notes in circulation varies at different periods of the year; at term-times and quarter-days, when more payments than usual are made, there is a greater quantity of money required by the public than at other times, and the notes in circulation increase in amount. This addition to the circulation is drawn from the banks by depositors or borrowers. After it has served its purpose, this additional quantity gradually returns to the banks as deposits or in repayment of loans. If the credit of an issuing bank is at any time suspected, the holders of notes will present them for gold, just in the same way as its depositors will call for a return of their deposits; and this risk must be provided against by a corresponding increase of its general reserve, on which, of course, it makes no profit. It has been generally imagined that when issuing banks suspend payments on a run, the run is one on the part of their note-holders; but this is only a popular error. In a well-established bank, the amount of its notes in circulation is of little importance compared to its deposits; and though the holders of small sums in notes may be more apt than depositors to take alarm and rush in a panic to the bank for gold for its notes, a small proportion of its depositors suddenly demanding a return of their money in gold as effectually drains a bank of its reserve, as if its whole circulation were to be at once presented to it for gold.
Bankers perform another very important function: they remit money from one place to another. One illustration will serve to explain how this is managed. A debtor in Edinburgh makes a payment to his creditor in London in this way: he pays the money to a banker in Edinburgh, who, for a small charge, called the exchange, gives him a draft for the amount on a banker, his correspondent, in London. The debtor transmits the draft to his creditor, who presents it to the London banker, and receives the money from him. No actual transmission of the money, however, takes place, for there are debtors in London requiring to pay money to creditors in Edinburgh, and these debtors effect the payment by giving the money to the London banker, and obtaining his drafts on the Edinburgh banker. The one set of drafts are thus set off against the other. Not only may remittances between two places be thus made without the use of money, but the payments in both places may also be made without it. The debtors may pay for the drafts by cheques on the banker who grants them, and the creditors may get the drafts placed to their credit, and receive the money by drawing cheques on the banker by whom they are made payable. For another function of banks, see MARGINAL CREDITS.
The large amount of money transactions carried through without the intervention of coin or bank-notes, in a country like England, is inconceivable to those not engaged in business pursuits. The manner in which these transactions may be effected without money, would be at once apprehended, if all persons in the same locality dealt with the same bank, and if all the banks scattered throughout the kingdom were only branches of the same establishment. But in practice matters are so managed as if this were the case. The cheques, bills, or other drafts which come into the hands of a banker, drawn on (that is, payable by) other bankers, are set off and liquidated by drafts, which they have received, drawn on him. The balance or difference only is paid in money. In London, the centre of the money-world, there is an establishment called the Clearing-house (q.v.), of which most of the London banks are members. There, at a fixed hour daily, attendance is given by a clerk from each of these banks, who presents all the drafts immediately payable which his bank holds on the others; the balance or difference, on the whole, for or against each bank is ascertained; and the bank which holds a less amount of drafts on others than they hold on it, pays the difference by cheques on the Bank of England. For the twenty-five years 1869-93, the total amounts per annum averaged between £5,000,000,000 and £6,000,000,000; the lowest annual total was £3,626,396,000 in 1869; the highest, £7,801,048,000 in 1890. There are similar clearing-houses in some provincial towns.
Bank of England.—This bank, the most important in the world, was projected by William Paterson (q.v.), and was incorporated July 27, 1694. It was constituted as a joint-stock association, with a capital of £1,200,000, which was lent at 8 per cent. interest to the government of William and Mary, at the time in a state of embarrassment. At its very outset, therefore, the Bank of England was a servant of government; and it has retained this character, but in a diminishing degree, through all the stages of its subsequent history. At first, the charter of the bank was for eleven years only; but in consequence of the great services of the institution to government, its charter has been at various times renewed. The last renewal was in 1844, and the charter of that year still subsists, its terms being subject to modification or revocation by the legislature at pleasure. By the Act or charter of 1844, the Bank was divided into two departments—the issue and the banking. What led to the division was this: it was supposed that, when a foreign drain of gold from England set in, it would, if the currency or circulation in this country had been purely metallic, have produced a contraction of the circulation, and a consequent fall of prices, and, as an ultimate result, the cessation of the drain. It was further supposed that banks could issue their notes to any extent they pleased; that their excessive issues increased the currency, and therefore increased prices, which in their turn led to foreign drains; and that, on the occasions of these drains, the continued issues prevented the natural and desirable contraction of the circulation, and aggravated the commercial convulsions occurring at such periods. The object of the Act of 1844 was to prevent issues of notes beyond a certain amount, unless against an equal amount of gold held by the issuing bank, so that the mixed currency of notes and coin might thus expand and contract like a self-acting metallic currency. Experience, however, has shown, that when these foreign drains occur, the gold exported is taken chiefly from the reserves in the Bank of England, being payments of deposits or loans by the Bank; and that the amount of notes in the hands of the public has not been affected by the legislation of 1844. In practice, whenever there are signs of a foreign drain, and the reserve of the Bank is diminishing, the Bank counteracts the tendency to a drain by raising the rate of discount and restricting its loans; the purchasing power of the public is thereby limited, and prices kept down; and, at the same time, gold is attracted to this country for investment. The circulation is in reality not interfered with. It was also intended by the Act of 1844 to add to the security of bank-notes by insuring a supply of gold to meet the payment of them at all times. But the solvency of the Bank of England is undoubted; and its notes would at any time be taken as gold. This intended effect of the Act of 1844, and the supplementary Act of 1845, has in the case of the notes of other banks been hitherto inappreciable.
In the issue department of the Bank of England, the sole business is to give out notes to the public. Before the separation of the departments, the government was due to the bank £11,015,100. This sum was declared to be a debt due to the issue department, and for the issues of notes to that amount, no gold requires to be held by it. This was just the same thing as if the Bank had originally lent £11,015,100 of its notes to government, and these notes had found their way into circulation. The Bank was also allowed to issue additional notes on securities—that is, to lend them to a limit which of late years has amounted to upwards of £5,000,000, and this without holding gold. The amount of notes which may thus be issued, without gold being in reserve against it, is £16,200,000. All notes issued above that amount can be issued only in exchange for gold. At the passing of the Act in 1844, the limit of notes to be issued against the government debt and securities was fixed at £14,000,000—past experience having shown that there was no risk of there being at any time less than that amount of Bank of England notes in the hands of the public. The addition of the £1,750,000 is an extra issue, authorised by the act, in consequence of certain issuing banks having since ceased to issue. The Bank has to account to government for the net profit of this extra issue of notes, and the profit the Bank derives from its issue department is the interest received on the £14,000,000 of government debt and securities, which, at 3 per cent., is £420,000 yearly. But out of this the Bank pays to government, for its banking privileges, and in lieu of stamp-duties, £180,000. If we assume the expense of the issue department to be £160,000, the net profit upon it would be £80,000. The Bank also makes a profit upon gold bullion and foreign coin, averaging £15,000 a year. These are brought to the Bank for notes; they are worth £3, 17s. 10½d. per ounce; but the Bank is obliged by its charter to purchase them at £3, 17s. 9d. The holders prefer taking this price to having their gold coined, free of charge, at the public mint, as the delay in the coining is equal to a loss of interest of 1½d. per ounce. The amount of notes in the hands of the public averages about £25,000,000; but the amount issued by the issue department is greater. The difference is the amount lying in the banking department, and represents the reserve of gold of that department; that is to say, the banking department retains only about three-fourths of a million of coin, and transfers the bulk of its reserve to the issue department, in exchange for notes. We therefore require to regard the reserve of the banking department as gold, though lying in the shape of notes issued by the other department.
Viewed in its banking department, the Bank differs from other banks in having the management of the public debt, and paying the dividends on it; in holding the deposits belonging to government, and in making advances to it when necessary; in aiding in the collection of the public revenue, and in being the bank of other banks. For the management of the public debt, the Bank receives about £247,000 a year, against which there has to be set £124,000 of charges. The remaining profits of the Bank are derived from its use of its deposits, on which it allows no interest, and of its own capital. The capital was originally £1,200,000; in 1816 it reached £14,553,000—the present amount. There is besides a rest of about £3,200,000. Public deposits vary from £3,500,000 to £20,000,000; private deposits from £20,000,000 to £30,000,000. In October 1893 the public deposits were £6,532,895; the private, £29,872,867.
In 1797 the Bank found itself likely to be obliged to suspend payments, and its notes were declared by law a legal tender, although no longer convertible into coin. This state of matters continued till 1821. The notes during this interval not having been convertible into coin on demand, there was no check upon the Bank in the amount of its issues; and the currency became depreciated—that is, a £5 note would not exchange for five sovereigns; and every man to whom £5 was due, was thus obliged to accept payment in a £5 note, not worth £5. It is, however, said that the value of gold at the time was enhanced owing to absorption by hoarding and by military chests, and that the depreciation was more apparent than real. The export of gold following on a rise of prices occasioned by an issue of bank or government notes is unlimited, except by exhaustion, if these notes are not payable in coin on demand, and are issued without any check from without or self-imposed. But as prices estimated in these notes rise, the price of bullion, like other commodities, rises too, and the price of coin which can be converted into bullion, or be used abroad at its previous purchasing power, rises also. Since 1821 the Bank has been oftener than once on the verge of a suspension of payments, owing to foreign drains of gold. The separation of the Bank into two departments is regarded by many as having a tendency to produce a suspension in times of panic, when the reserve is reduced by withdrawals to supply a foreign drain, or to meet an internal run. Before the separation, the Bank, in the case of withdrawals of gold, had the whole amount of gold within the Bank to meet them; but now it loses the command of all the gold in the issue department. It cannot get that gold unless in exchange for notes, but, its reserve being reduced or exhausted, it has none to spare. The restriction of credit consequent upon the approach to an exhaustion of the reserve of the banking department, is so great, that the fear of it occasions a panie. In 1847, 1857, and 1866, on the possible suspension of payments by the banking department, owing to a reduction of its reserve, being apparent, the government of the day took the responsibility of authorising the Bank to lend additional notes, not represented by gold. This was an indirect way of giving borrowers the use of the gold in the issue department. In 1857 it was found necessary to take the benefit of this authorisation.
The Bank of England is situated in the centre of
London; but it has a branch in the west end, and nine branches in the provinces.
Joint-stock Banks in England and Wales.—In 1893 there were 118 of these banks, of which 36 in the provinces were entitled to issue notes to the amount of £2,003,435 without its being compulsory to hold any gold against them. But as they are prohibited from exceeding their authorised issue, the amount of notes actually in the hands of the public is always somewhat less. The deposits of the 11 joint-stock banks in London which may be considered London banks, and excluding the National Provincial Bank of England, and other provincial and Scottish banks, which, although they carry on business in London, have the great bulk of their business elsewhere, amount to about £105,000,000, and the acceptances granted by them to about £12,000,000. Their paid-up capital is £13,005,000. Under the Companies Acts, 1879 and 1880, most of the principal joint-stock banks have become limited liability companies. They usually allow interest upon money deposited to remain for some time.
Private Banks in England and Wales.—Of these there were in 1893 in all 190, of which 74 were in London. Of the provincial banks 98 had an authorised issue of £4,425,479.
Banks in Scotland.—The earliest banking institution in North Britain was the Bank of Scotland, instituted by an Act of the Scots parliament in 1695. The original capital was £1,200,000 Scots, or £100,000 sterling. In 1774 the amount of stock was extended to £200,000 sterling; now it is £1,875,000, of which £1,250,000 is paid up. In 1727 a new and similar establishment was constituted by royal charter under the title of the Royal Bank of Scotland, whose advanced capital is now £2,000,000. In 1746 another association was formed, and incorporated by royal charter, with the title of the British Linen Company. From £100,000, its capital has increased to £1,000,000. Besides those three banks, there are in Scotland other seven joint-stock banking companies, with capitals varying from £1,000,000 to £150,000. There are now no private banks. The amount of deposits is over £80,000,000, on which interest is allowed. Their authorised issue of notes is £2,676,350, but their actual issue is more than double that amount. The Western Bank, with a capital of £1,500,000, a circulation of above £400,000, having 1300 shareholders, and about 100 branches, suspended payments in 1857, owing to reckless management. The shareholders, however, being under unlimited liability (see COMPANY), neither the depositors nor the note-holders sustained any loss. In October 1878 the City of Glasgow Bank, with 133 branches, suddenly suspended payments; the liabilities amounting to £12,400,000, and the estimated assets, £6,300,000, leaving a probable deficiency of £6,100,000, including the capital. It was found that for three years before the stoppage, the states of the bank's affairs, issued annually to the shareholders, had been falsified, and that advances had been made to four firms against utterly inadequate securities, to the enormous sum of nearly £6,000,000. The directors and the manager were tried for and convicted of uttering false balance-sheets, and sentenced to imprisonment. It was arranged to wind up the bank by liquidation; and though the calls made upon the shareholders involved large numbers of them in utter ruin, in four years the liquidation was complete, after a payment of £13,644,856. The Caledonian Bank temporarily suspended payments. In 1882 the five non-chartered Scottish banks, and the two whose charters involved limited liability, became limited liability companies.
In consequence of allowing interest on deposits, the banks in Scotland may be said to hold the whole capital of the country, minus only the money passing from hand to hand. This system of depositing is aided by branches from the parent banks, and these branches are found in every small town. The entire number of branch-banks in Scotland in 1892 was 997. At these branch-banks, the agent discounts bills within certain limits, issues letters of credit, and pays out notes, and also gives cash on demand for them; though, strictly, the notes of a bank are only payable on demand at the head-office. By a strict system of supervision, Scottish branch-banks are usually well conducted, and are of great service in every department of trade. Forgeries of Scottish bank-notes are now very unusual.
The banks in Scotland, like those in Ireland, but unlike the provincial banks in England, are allowed to issue notes beyond their fixed issues, on holding gold equal in amount to the extra issue. But the gold thus retained is, like the other gold in reserve, liable for the deposits and general liabilities, as well as for the note circulation. Thus the security of the notes is increased only in a small degree by this arrangement, which, apart from the loss of profit to the bank on the gold unemployed, is attended with inconvenience at those seasons when the circulation is extended, as gold has then to be brought from London for the temporary purpose of covering the extension of issues. In Scotland, and Ireland also, banks can issue one-pound notes; the English banks are not permitted to circulate notes of less value than £5.
Besides employing money in discounting bills, the Scottish banks grant loans of fluctuating amount, called cash-accounts or cash-credits. By this system an individual is entitled to draw out sums as required, to a stipulated amount, and by an implied condition to make deposits at his convenience towards the liquidation of the same. On entering into this arrangement, he finds security to the bank that he will repay to the bank, whenever called on, the balance of sums drawn out, less those paid in, with the interest that may be due. These accounts are balanced yearly like current or deposit accounts. The only difference between the latter and a cash-account on the face of them is, that if the credit allowed on the cash-account is being made use of, the balance is in favour of the bank; whereas, on the other kind of accounts, the balance is in favour of the bank's customer.
Banks in Ireland.—There are nine joint-stock banks, having 560 branches and sub-branches. Their authorised issue is £6,354,494; of which £3,738,428 is that of the Bank of Ireland. It is a national bank, lending £2,630,769 of its capital to government. It was established in 1783, with privileges resembling those of the Bank of England. Its capital is £3,000,000 Irish currency, or £2,769,230, 15s. 5d. sterling, and its rest £1,034,000. The capitals of the other banks vary from £142,766 to £1,500,000, and the total capital of the joint-stock banks in Ireland is £6,901,996. Six are banks of issue. The amount of deposits in the joint-stock banks in Ireland averages about £35,900,000. All the joint-stock banks are limited companies. Interest is allowed on money deposited for a stated period, but not on money at call, or as a rule on current accounts. There are also three private banking firms in Dublin.
Savings-banks are the subject of a separate article.
Foreign and Colonial Banks.—There are on the continent of Europe public or national banks, joint-stock and private banks. The national banks are, more or less, government establishments, managing the public debts and finances, and, unlike the Bank of England, subject to government influence and interference. The Bank of France was estab- lished in 1803 under Napoleon, by the amalgamation of three local firms. It is directed jointly by representatives of the state and of the proprietors; and has a capital of £7,223,958, public liabilities to the extent of £145,000,000 (of which about £112,000,000 are notes), and 94 branches, with 112 subsidiary offices. Its discounts are enormous in number, but small in average amount. The Imperial Bank of Germany (Reichsbank) resembles the Bank of France in constitution, and was established in 1875 as a reorganisation of the Bank of Berlin. Its capital is £6,000,000, with a reserve fund of £1,067,800; its other liabilities amount to about £55,000,000 (of which £35,000,000 are notes); and it has 210 branches. There are many other issuing banks throughout the empire.
There are 60 foreign and colonial banks in London, of which 34 are British companies. Besides these, 132 are represented by London bankers. In India and the British colonies there are joint-stock banks and private banks. In Australasia especially, banking has assumed large and solid proportions.
United States.—In the United States the functions of the banker are essentially the same as in Great Britain, and the many experiments that have been made in banking since the settlement of the country afford an interesting study for the financier. As early as 1652, in the colony of Massachusetts Bay, the subject of the establishment of a bank was discussed, and 34 years later (1686) permission was given to a company to issue bills of credit on the security of real and personal estate. About 1712 an institution known as the Land Bank came into existence in the same colony, and in spite of the fierce opposition of governors and councils it prospered for many years. Several other banking schemes were projected in the different colonies, but in general they appear to have met with little success. At length the breaking out of the revolutionary war led to the establishment, by recommendation of congress, of the 'Bank of North America,' which was chartered by several of the states simultaneously, and which, though a state institution, rendered the general government efficient assistance during the war.
In 1791, at the instance of Alexander Hamilton, congress established the first 'United States Bank,' with branches in several states, its capital being fixed at 10,000,000, one-fifth of which belonged to the government. From the outset this scheme met with much opposition, particularly from Mr Jefferson and his political adherents, and at the expiration of the twenty years for which the charter was granted, congress refused to renew it, and the institution went out of existence. Five years later (1816) a second United States Bank was chartered with a capital of 35,000,000. This bank was the depository of the government funds until the accession of General Jackson to the presidency, when they were arbitrarily removed, and an act of congress rechartering the institution vetoed by the president.
Meanwhile, numerous state banks had sprung up, but their issues as a circulating medium were at times subject to a heavy discount as compared with gold; and the high rates of exchange between the various sections of the Union, though affording a profit to dealers in funds, were a source of great annoyance in mercantile transactions. Various attempts were made to obviate these inconveniences, such as the establishment of a bank of redemption in Boston, which was expected to receive deposits of the issues of distant banks in exchange for its own notes; the establishment of a safety-fund system in some of the states (a virtual insurance against loss by the holders of the issues of the banks doing business under the laws of the respective states); and finally the free banking system, under which speculation ran riot, and financial disasters followed each other with alarming frequency. In the panic of 1857 occurred an almost universal suspension of specie payments.
The occurrence of the civil war (1861-65) necessitated, in the opinion of the secretary of the treasury (Mr Chase), the creation of a national banking system; and although his suggestion met with some opposition from the state banks, an act was finally passed authorising the issue of 300,000,000 in bank-notes (afterwards increased to 354,000,000) based on United States interest-bearing bonds, to be purchased by the banking institutions, and held by the government as security for the redemption of the funds furnished to the former for circulation. On the outset new associations were for the most part organised to conduct this business, but subsequently nearly all of the old state banks reorganised under the national system, and the result has been to furnish a stable currency of uniform value throughout the Union.
See Lawson, History of Banking (1855); Gilbert, History and Principles of Banking (2 vols. 1881); Hutchison, The Practice of Banking (3 vols. 1880-1887); Palgrave, Notes on Banking (1873); Agar, Questions on Banking (1885); Kerr, History of Banking in Scotland (1884); Rae, The Country Banker (1885).