Undoubtedly such a permanent official should be a trained banker. There is a cardinal difference between banking and other kinds of commerce; you can afford to run much less risk in banking than in commerce, and you must take much greater precautions. In common business, the trader can add to the cost price of the goods he sells a large mercantile profit, say 10 to 15 per cent; but the banker has to be content with the interest of money, which in England is not so much as per cent upon the average. The business of a banker therefore cannot bear so many bad debts as that of a merchant, and he must be much more cautious to whom he gives credit. Real money is a commodity much more coveted than common goods: for one deceit which is attempted on a manufacturer or a merchant, twenty or more are attempted on a banker. And besides, a banker, dealing with the money of others, and money payable on demand, must be always, as it were, looking behind him and seeing that he has reserve enough in store if payment should be asked for, which a merchant dealing mostly with his own capital need not think of. Adventure is the life of commerce, but caution, I had almost said timidity, is the life of banking; and I cannot imagine that the long series of great errors made by the Bank of England in the management of its reserve till after 1857, would have been possible if the merchants in the Bank court had not erroneously taken the same view of the Bank's business that they must properly take of their own mercantile business. The Bank directors have almost always been too cheerful as to the Bank's business, and too little disposed to take alarm. What we want to introduce into the Bank court is a wise apprehensiveness, and this every trained banker is taught by the habits of his trade, and the atmosphere of his life.
The permanent Governor ought to give his whole time to the business of the Bank. He ought to be forbidden to engage in any other concern. All the present directors, including the Governor and Deputy-Governor, are engaged in their own business, and it is very possible, indeed it must perpetually have happened, that their own business as merchants most occupied the minds of most of them just when it was most important that the business of the Bank should occupy them. It is at a panic and just before a panic that the business of the Bank is most exacting and most engrossing. But just at that time the business of most merchants must be unusually occupying and may be exceedingly critical. By the present constitution of the Bank, the attention of its sole rulers is most apt to be diverted from the Bank's affairs just when those affairs require that attention the most. And the only remedy is the appointment of a permanent and influential man, who will have no business save that of the Bank, and who therefore presumably will attend most to it at the critical instant when attention is most required. His mind, at any rate, will in a panic be free from pecuniary anxiety, whereas many, if not all, of the present directors must be incessantly thinking of their own affairs and unable to banish them from their minds.
The permanent Deputy-Governor must be a director and a man of fair position. He must not have to say 'Sir' to the Governor. There is no fair argument between an inferior who has to exhibit respect and a superior who has to receive respect. The superior can always, and does mostly, refute the bad arguments of his inferior; but the inferior rarely ventures to try to refute the bad arguments of his superior. And he still more rarely states his case effectually; he pauses, hesitates, does not use the best word or the most apt illustration, perhaps he uses a faulty illustration or a wrong word, and so fails because the superior immediately exposes him. Important business can only be sufficiently discussed by persons who can say very much what they like very much as they like to one another. The thought of the speaker should come out as it was in his mind, and not be hidden in respectful expressions or enfeebled by affected doubt. What is wanted at the Bank is not a new clerk to the directors—they have excellent clerks of great experience now—but a permanent equal to the directors, who shall be able to discuss on equal terms with them the business of the Bank, and have this advantage over them in discussion, that he has no other business than that of the Bank to think of.
The formal duties of such a permanent officer could only be defined by some one conversant with the business of the Bank, and could scarcely be intelligibly discussed before the public. Nor are the precise duties of the least importance. Such an officer, if sound, able, and industrious, would soon rule the affairs of the Bank. He would be acquainted better than anyone else, both with the traditions of the past and with the facts of the present; he would have a great experience; he would have seen many anxious times; he would always be on the watch for their recurrence. And he would have a peculiar power of guidance at such moments from the nature of the men with whom he has most to deal. Most Governors of the Bank of England are cautious merchants, not profoundly skilled in banking, but most anxious that their period of office should be prosperous and that they should themselves escape censure. If a 'safe' course is pressed upon them they are likely to take that course. Now it would almost always be 'safe' to follow the advice of the great standing 'authority'; it would always be most 'unsafe' not to follow it. If the changing Governor act on the advice of the permanent Deputy-Governor, most of the blame in case of mischance would fall on the latter; it would be said that a shifting officer like the Governor might very likely not know what should be done, but that the permanent official was put there to know it and paid to know it. But if, on the other hand, the changing Governor should disregard the advice of his permanent colleague, and the consequence should be bad, he would be blamed exceedingly. It would be said that, 'being without experience, he had taken upon him to overrule men who had much experience; that when the constitution of the Bank had provided them with skilled counsel, he had taken on himself to act of his own head, and to disregard that counsel;' and so on ad infinitum. And there could be no sort of conversation more injurious to a man in the City; the world there would say, rightly or wrongly, 'We must never be too severe on errors of judgment; we are all making them every day; if responsible persons do their best we can expect no more. But this case is different: the Governor acted on a wrong system; he took upon himself an unnecessary responsibility:' and so a Governor who incurred disaster by disregarding his skilled counsellor would be thought a fool in the City for ever. In consequence, the one skilled counsellor would in fact rule the Bank. I believe that the appointment of the new permanent and skilled authority at the Bank is the greatest reform which can be made there, and that which is most wanted. I believe that such a person would give to the decision of the Bank that foresight, that quickness, and that consistency in which those decisions are undeniably now deficient. As far as I can judge, this change in the constitution of the Bank is by far the most necessary, and is perhaps more important even than all other changes. But, nevertheless, we should reform the other points which we have seen to be defective.
First, the London bankers should not be altogether excluded from the court of directors. The old idea, as I have explained, was that the London bankers were the competitors of the Bank of England, and would hurt it if they could. But now the London bankers have another relation to the Bank which did not then exist, and was not then imagined. Among private people they are the principal depositors in the Bank; they are therefore particularly interested in its stability; they are especially interested in the maintenance of a good banking reserve, for their own credit and the safety of their large deposits depend on it. And they can bring to the court of directors an experience of banking itself, got outside the Bank of England, which none of the present directors possess, for they have learned all they know of banking at the Bank itself. There was also an old notion that the secrets of the Bank would be divulged if they were imparted to bankers. But probably bankers are better trained to silence and secrecy than most people. And there is only a thin partition now between the bankers and the secrets of the Bank. Only lately a firm failed of which one partner was a director of the London and Westminster Bank, and another a director of the Bank of England. Who can define or class the confidential communications of such persons under such circumstances?
As I observed before, the line drawn at present against bankers is very technical and exclusively English. According to continental ideas, Messrs. Rothschild are bankers, if any one is a banker. But the house of Rothschild is represented on the Bank direction. And it is most desirable that it should be represented, for members of that firm can give if they choose confidential information of great value to the Bank. But, nevertheless, the objection which is urged against English bankers is at least equally applicable to these foreign bankers. They have, or may have, at certain periods an interest opposite to the policy of the Bank. As the greatest Exchange dealers, they may wish to export gold just when the Bank of England is raising its rate of interest to prevent anyone from exporting gold. The vote of a great Exchange dealer might be objected to for plausible reasons of contrary interest, if any such reasons were worth regarding. But in fact the particular interest of single directors is not to be regarded; almost all directors who bring special information labour under a suspicion of interest; they can only have acquired that information in present business, and such business may very possibly be affected for good or evil by the policy of the Bank. But you must not on this account seal up the Bank hermetically against living information; you must make a fair body of directors upon the whole, and trust that the bias of some individual interests will disappear and be lost in the whole. And if this is to be the guiding principle, it is not consistent to exclude English bankers from the court.
Objection is often also taken to the constitution of the Committee of Treasury. That body is composed of the Governor and Deputy-Governor and all the directors who have held those offices; but as those offices in the main pass in rotation, this mode of election very much comes to an election by seniority, and there are obvious objections to giving, not only a preponderance to age, but a monopoly to age. In some cases, indeed, this monopoly I believe has already been infringed. When directors have on account of the magnitude of their transactions, and the consequent engrossing nature of their business, declined to fill the chair, in some cases they have been asked to be members of the Committee of Treasury notwithstanding. And it would certainly upon principle seem wiser to choose a committee which for some purposes approximates to a committee of management by competence rather than by seniority.
An objection is also taken to the large number of Bank directors. There are twenty-four directors, a Governor and a Deputy-Governor, making a total court of twenty-six persons, which is obviously too large for the real discussion of any difficult business. And the case is worse because the court only meets once a week, and only sits a very short time. It has been said, with exaggeration, but not without a basis of truth, that if the Bank directors were to sit for four hours, there would be 'a panic solely from that.' 'The court,' says Mr. Tooke, 'meets at half-past eleven or twelve; and, if the sitting be prolonged beyond half-past one, the Stock Exchange and the money market become excited, under the idea that a change of importance is under discussion; and persons congregate about the doors of the Bank parlour to obtain the earliest intimation of the decision.' And he proceeds to conjecture that the knowledge of the impatience without must cause haste, if not impatience, within. That the decisions of such a court should be of incalculable importance is plainly very strange.
There should be no delicacy as to altering the constitution of the Bank of England. The existing constitution was framed in times that have passed away, and was intended to be used for purposes very different from the present. The founders may have considered that it would lend money to the Government, that it would keep the money of the Government, that it would issue notes payable to bearer, but that it would keep the 'Banking reserve' of a great nation no one in the seventeenth century imagined. And when the use to which we are putting an old thing is a new use, in common sense we should think whether the old thing is quite fit for the use to which we are setting it. 'Putting new wine into old bottles' is safe only when you watch the condition of the bottle, and adapt its structure most carefully.
CHAPTER IX
The Joint Stock Banks.
The Joint Stock Banks of this country are a most remarkable success. Generally speaking the career of Joint Stock Companies in this country has been chequered. Adam Smith, many years since, threw out many pregnant hints on the difficulty of such undertakings—hints which even after so many years will well repay perusal. But joint stock banking has been an exception to this rule. Four years ago I threw together the facts on the subject and the reasons for them; and I venture to quote the article, because subsequent experience suggests, I think, little to be added to it.
'The main classes of joint stock companies which have answered are three:—1st. Those in which the capital is used not to work the business but to guarantee the business. Thus a banker's business—his proper business—does not begin while he is using his own money: it commences when he begins to use the capital of others. An insurance office in the long run needs no capital; the premiums which are received ought to exceed the claims which accrue. In both cases, the capital is wanted to assure the public and to induce it to trust the concern. 2ndly. Those companies have answered which have an exclusive privilege which they have used with judgment, or which possibly was so very profitable as to enable them to thrive with little judgment. 3rdly. Those which have undertaken a business both large and simple—employing more money than most individuals or private firms have at command, and yet such that, in Adam Smith's words, "the operations are capable of being reduced to a routine or such an uniformity of method as admits of no variation."
'As a rule, the most profitable of these companies are banks. Indeed, all the favouring conditions just mentioned concur in many banks. An old-established bank has a "prestige," which amounts to a "privileged opportunity"; though no exclusive right is given to it by law, a peculiar power is given to it by opinion. The business of banking ought to be simple; if it is hard it is wrong. The only securities which a banker, using money that he may be asked at short notice to repay, ought to touch, are those which are easily saleable and easily intelligible. If there is a difficulty or a doubt, the security should be declined. No business can of course be quite reduced to fixed rules. There must be occasional cases which no pre-conceived theory can define. But banking comes as near to fixed rules certainly as any existing business, perhaps as any possible business. The business of an old-established bank has the full advantage of being a simple business, and in part the advantage of being a monopoly business. Competition with it is only open in the sense in which competition with "the London Tavern" is open; anyone that has to do with either will pay dear for it.
'But the main source of the profitableness of established banking is the smallness of the requisite capital. Being only wanted as a "moral influence," it need not be more than is necessary to secure that influence. Although, therefore, a banker deals only with the most sure securities, and with those which yield the least interest, he can nevertheless gain and divide a very large profit upon his own capital, because the money in his hands is so much larger than that capital.
'Experience, as shown by plain figures, confirms these conclusions. We print at the end of this article the respective profits of 110 banks in England, and Scotland, and Ireland, being all in those countries of which we have sufficient information—the Bank of England excepted. There are no doubt others, but they are not quoted even on local Stock Exchange lists, and in most cases publish no reports. The result of these banks, as regards the dividends they pay, is—
No. of Companies Capital
L
Above 20 per cent 15 5,302,767
Between 15 and 20 per cent 20 5,439,439
" 10 and 15 per cent 36 14,056,950
" 5 and 10 per cent 36 14,182,379
Under 5 per cent 3 1,350,000
—–
110 40,331,535
that is to say, above 25 per cent of the capital employed in these banks pays over 15 per cent, and 62 1/2 per cent of the capital pays more than 10 per cent. So striking a result is not to be shown in any other joint stock trade.
'The period to which these accounts refer was certainly not a particularly profitable one—on the contrary, it has been specially unprofitable. The rate of interest has been very low, and the amount of good security in the market small. Many banks—to some extent most banks—probably had in their books painful reminiscences of 1866. The fever of excitement which passed over the nation was strongest in the classes to whom banks lent most, and consequently the losses of even the most careful banks (save of those in rural and sheltered situations) were probably greater than usual. But even tried by this very unfavourable test banking is a trade profitable far beyond the average of trades.
'There is no attempt in these banks on the whole and as a rule to divide too much—on the contrary, they have accumulated about 13,000,000 L., or nearly 1/3 rd of their capital, principally out of undivided profits. The directors of some of them have been anxious to put away as much as possible and to divide as little as possible.
'The reason is plain; out of the banks which pay more than 20 per cent, all but one were old-established banks, and all those paying between 15 and 20 per cent were old banks too. The "privileged opportunity" of which we spoke is singularly conspicuous in such figures; it enables banks to pay much, which without it would not have paid much. The amount of the profit is clearly proportional to the value of the "privileged opportunity." All the banks which pay above 20 per cent, save one, are banks more than 25 years old; all those which pay between 15 and 20 are so too. A new bank could not make these profits, or even by its competition much reduce these profits; in attempting to do so, it would simply ruin itself. Not possessing the accumulated credit of years, it would have to wind up before it attained that credit.
'The value of the opportunity too is proportioned to what has to be paid for it. Some old banks have to pay interest for all their money; some have much for which they pay nothing. Those who give much to their customers have of course less left for their shareholders. Thus Scotland, where there is always a daily interest, has no bank in the lists paying over 15 per cent. The profits of Scotch banks run thus:
Capital Dividend
L
Bank of Scotland 1,500,000 12
British Linen Company 1,000,000 3
Caledonian 125,000 10
Clydesdale 900,000 10
Commercial Bank of Scotland 1,000,000 13
National Bank of Scotland 1,000,000 112
North of Scotland 280,000 10
Union Bank of Scotland 1,000,000 10
City of Glasgow 870,000 8
Royal Bank 2,000,000 8
—–
9,675,000
Good profits enough, but not at all like the profits of the London and Westminster, or the other most lucrative banks of the South.
'The Bank of England, it is true, does not seem to pay so much as other English banks in this way of reckoning. It makes an immense profit, but then its capital is immense too. In fact, the Bank of England suffers under two difficulties. Being much older than the other joint stock banks, it belongs to a less profitable era. When it was founded, banks looked rather to the profit on their own capital, and to the gains of note issue than to the use of deposits. The first relations with the State were more like those of a finance company than of a bank, as we now think of banking. If the Bank had not made loans to the Government, which we should now think dubious, the Bank would not have existed, for the Government would never have permitted it. Not only is the capital of the Bank of England relatively greater, but the means of making profit in the Bank of England are relatively less also. By custom and understanding the Bank of England keep a much greater reserve in unprofitable cash than other banks; if they do not keep it, either our whole system must be changed or we should break up in utter bankruptcy. The earning faculty of the Bank of England is in proportion less than that of other banks, and also the sum on which it has to pay dividend is altogether greater than theirs.
'It is interesting to compare the facts of joint stock banking with the fears of it which were felt. In 1832, Lord Overstone observed: "I think that joint stock banks are deficient in everything requisite for the conduct of the banking business except extended responsibility; the banking business requires peculiarly persons attentive to all its details, constantly, daily, and hourly watchful of every transaction, much more than mercantile or trading business. It also requires immediate prompt decisions upon circumstances when they arise, in many cases a decision that does not admit of delay for consultation; it also requires a discretion to be exercised with reference to the special circumstances of each case. Joint stock banks being of course obliged to act through agents and not by a principal, and therefore under the restraint of general rules, cannot be guided by so nice a reference to degrees of difference in the character of responsibility of parties; nor can they undertake to regulate the assistance to be granted to concerns under temporary embarrassment by so accurate a reference to the circumstances, favourable or unfavourable, of each case."
'But in this very respect, joint stock banks have probably improved the business of banking. The old private banks in former times used to lend much to private individuals; the banker, as Lord Overstone on another occasion explained, could have no security, but he formed his judgment of the discretion, the sense, and the solvency of those to whom he lent. And when London was by comparison a small city, and when by comparison everyone stuck to his proper business, this practice might have been safe. But now that London is enormous and that no one can watch anyone, such a trade would be disastrous; at present, it would hardly be safe in a country town. The joint stock banks were quite unfit for the business Lord Overstone meant, but then that business is quite unfit for the present time.
This success of Joint Stock Banking is very contrary to the general expectation at its origin. Not only private bankers, such as Lord Overstone then was, but a great number of thinking persons feared that the joint stock banks would fast ruin themselves, and then cause a collapse and panic in the country. The whole of English commercial literature between 1830 and 1840 is filled with that idea. Nor did it cease in 1840. So late as 1845, Sir R. Peel thought the foundation of joint stock banks so dangerous that he subjected it to grave and exceptional difficulty. Under the Act of 1845, which he proposed, no such companies could be founded except with shares of 100 L. with 50 L.; paid up on each; which effectually checked the progress of such banks, for few new ones were established for many years, or till that act had been repealed. But in this, as in many other cases, perhaps Sir R. Peel will be found to have been clear-sighted rather than far-sighted. He was afraid of certain joint stock banks which he saw rising around him; but the effect of his legislation was to give to these very banks, if not a monopoly, at any rate an exemption from new rivals. No one now founds or can found a new private bank, and Sir R. Peel by law prevented new joint stock banks from being established. Though he was exceedingly distrustful of the joint stock banks founded between 1826 and 1845, yet in fact he was their especial patron, and he more than any other man encouraged and protected them.
But in this wonderful success there are two dubious points, two considerations of different kinds, which forbid us to say that in other countries, even in countries with the capacity of co-operation, joint stock banks would succeed as well as we have seen that they succeed in England. 1st. These great Banks have not had to keep so large a reserve against their liabilities as it was natural that they should, being of first-rate magnitude, keep. They were at first, of course, very small in comparison with what they are now. They found a number of private bankers grouped round the Bank of England, and they added themselves to the group. Not only did they keep their reserve from the beginning at the Bank of England, but they did not keep so much reserve as they would have kept if there had been no Bank of England. For a long time this was hardly noticed. For many years questions of the 'currency,' particularly questions as to the Act of 1844, engrossed the attention of all who were occupied with these subjects. Even those who were most anxious to speak evil of joint stock banks, did not mention this particular evil. The first time, as far as I know, that it was commented on in any important document, was in an official letter written in 1857 by Mr. Weguelin, who was then Governor of the Bank, to Sir George Lewis, who was then Chancellor of the Exchequer. The Governor and the Directors of the Bank of England had been asked by Sir George Lewis severally to give their opinions on the Act of 1844, and all their replies were published. In his, Mr. Weguelin says:
'If the amount of the reserve kept by the Bank of England be contrasted with the reserve kept by the joint stock banks, a new and hitherto little considered source of danger to the credit of the country will present itself. The joint stock banks of London, judging by their published accounts, have deposits to the amount of 30,000,000 L. Their capital is not more than 3,000,000 L., and they have on an average 31,000,000 L., invested in one way or another, leaving only 2,000,000 L. as a reserve against all this mass of liabilities.'
But these remarkable words were little observed in the discussions of that time. The air was obscured by other matters. But in this work I have said so much on the subject that I need say little now. The joint stock banks now keep a main part of their reserve on deposit with the bill-brokers, or in good and convertible interest-bearing securities. From these they obtain a large income, and that income swells their profits. If they had to keep a much larger part than now of that reserve in barren cash, their dividends would be reduced, and their present success would become less conspicuous.
The second misgiving, which many calm observers more and more feel as to our largest joint stock banks, fastens itself on their government. Is that government sufficient to lend well and keep safe so many millions? They are governed, as every one knows, by a board of directors, assisted by a general manager, and there are in London unrivalled materials for composing good boards of directors. There are very many men of good means, of great sagacity and great experience in business, who are obliged to be in the City every day, and to remain there during the day, but who have very much time on their hands. A merchant employing solely or principally his own capital has often a great deal of leisure. He is obliged to be on the market, and to hear what is doing. Every day he has some business to transact, but his transactions can be but few. His capital can bear only a limited number of purchases; if he bought as much as would fill his time from day to day he would soon be ruined, for he could not pay for it. Accordingly, many excellent men of business are quite ready to become members of boards of directors, and to attend to the business of companies, a good deal for the employment's sake. To have an interesting occupation which brings dignity and power with it pleases them very much. As the aggregation of commerce in great cities grows, the number of such men augments. A council of grave, careful, and experienced men can, without difficulty, be collected for a great bank in London, such as never could have been collected before, and such as cannot now be collected elsewhere.
There are facilities, too, for engaging a good banker to be a manager such as there never were before in the world. The number of such persons is much on the increase. Any careful person who is experienced in figures, and has real sound sense, may easily make himself a good banker. The modes in which money can be safely lent by a banker are not many, and a clear-headed, quiet, industrious person may soon learn all that is necessary about them. Our intricate law of real property is an impediment in country banking, for it requires some special study even to comprehend the elements of a law which is full of technical words, and which can only be explained by narrating its history. But the banking of great cities is little concerned with loans on landed property. And all the rest of the knowledge requisite for a banker can easily be obtained by anyone who has the sort of mind which takes to it. No doubt there is a vast routine of work to be learned, and the manager of a large bank must have a great facility in transacting business rapidly. But a great number of persons are now bred from their earliest manhood in the very midst of that routine; they learn it as they would learn a language, and come to be no more able to unlearn it than they could unlearn a language. And the able ones among them acquire an almost magical rapidity in effecting the business connected with that routine. A very good manager and very good board of directors can, without unreasonable difficulty, be provided for a bank at present in London.