BANKING ETC. LOS DOS PRINTED BT 8POTTI 8WOODE AKD CO. NEW-STREET SQUARE A PEACTICAL TEEATISE ON BANKING, CURRENCY, AND THE EXCHANGES BY AETHUE CEUMPET3 I! BANK MANAGER FORMERLY OF THE BANK OF ENGLAND > LONDON LONGMANS, GKEEN, AND CO. 1866 PREFACE. ' Une science ne fait de v6ritables progres que lorsqu'on est parvenu a bien determiner le champ ou peuvent s'etendre ses recherches et 1'objet qu'elles doivent se proposer; autrement on saisit 93, et la un petit nombre de y^rites sans en connaitre la liaison, et beaucoup d'erreurs sans en pouvoir d^couvrir la faussete.'* I VENTURE to submit the present volume for the approval of the public, in the hope that its perusal more especially by the rising members of the profession, whose daily occupation is practical banking may awaken a livelier interest in, and lead to a more general study of these subjects ; and it will, I trust, not prove uninstru- mental in inducing them to bring what experience they may have had to assist in the discussion * Trait^ d'Economie Politique, par Jean-Baptiste Say. M 9551 vi PREFACE. of any measures of banking reform that may be proposed from time to time. It would seem not only desirable but necessary that when suggestions are thrown out for the improvement of methods and systems, practical bankers should be the recognised authorities, by virtue of their closer acquaintance with the practice of their craft. The study of the theory and practice of banking no doubt suffers considerable neglect by reason of there being no special qualifications demanded of those who are elected into the service of banking institutions. A student seldom takes a deep interest in any subject until he has removed much of that elementary matter which forms the exterior crust of all sciences, and which requires diligent application to succeed in penetrating ; after which the interest becomes more and more engaged. The career of a banker's clerk for the first few PREFACE. Vll years is comparatively a waste of time, so far as any progress in the science of his profession is concerned. There can be no reasons given why men should not be compelled to pass a commercial examination previous to engaging in business of any kind business that cannot be termed exactly trade any more than for medicine or the army ; and if such a system were introduced, there can be little doubt that in many instances men would be induced to continue the study of financial and banking questions, and thereby materially assist in elucidating some of the points which are so frequently brought forward for discussion, and let drop again without any satisfactory solution having been arrived at. We see occasionally brilliant attacks made upon this or that part of our commercial machinery, as it proves unequal to the strain ; but from the intricacy and wide spread of all the practical details, which must be thoroughly examined before any reform of one Vlll PREFACE, part can be carried through without injury to another, it is necessary that the attention of those who are daily in the habit of practically dealing with such matters, should be aroused to consider and deliberate upon any proposed change, so that the persons whose habits of thought lie in the groove in which we require amelioration, should be brought to interest themselves more, and assist in perfecting the means at our disposal. The present volume will be found to contain information gathered from various sources, the advantage of which in a condensed form has occurred to me during my banking career, and I trust, beyond being useful so far as it goes, it will stimulate to further research. If the perusal of this humble effort may lead my fellow- workers to profit however little by what they may glean here, and push on farther into the depths of the subjects which will yet be produc- tive of a rich store, I shall consider myself re- PREFACE. ix warded in the thought that I have aroused some attention to questions which, as a rule, are much neglected by the rising members of the banking profession. I must, in conclusion, offer my sincere thanks to my friend Mr. John Douglas Farrell, of the Bank of England, for his valuable advice and assistance during the compilation of this volume, more espe- cially with reference to the chapter on ' Notes.' A. C. CONTENTS. CHAPTER I. PAGE PART I. THE ORIGIN AND USES OF BANKS . . i II. 12 CHAPTER II. Two CLASSES OF BANKS 39 PERNICIOUS EFFECTS OF TOO MUCH COMPETITION IN COMMERCE AND BANKING PROPOSED CHECK . . 50 CHAPTER in. OF BANKING ACCOUNTS As to choosing a Banker . .... . . 72 Of opening an Account . . 74 Of the different sorts of Accounts 75 General Observations 77 CHAPTER IV. CHEQUES 86 What is a Cheque .87 How it should be drawn . .... 87 Xll CONTENTS. CHEQUES continued. PAGE As to Stamps 88 Post-dating Cheques 89 Crossing Cheques 89 Indorsement 90 Presentation 91 Bankers bound to pay Cheques 93 Exceptions . . . 93 To whom the Banker is liable for negligent dishonour . 93 Forgeries 94 Cheque not a legal tender . . . . . 95 Cheque in payment of Bill of Exchange .... 95 Cheque as evidence 95 CHAPTEK V. BILLS OF EXCHANGE The Use of a Bill of Exchange . . . . . 97 The Form of drawing 99 Eespecting Alterations . -. . . . . . 106 Agreement of Body with Figures . . . . . 108 Bills of Exchange drawn in Sets . . . . .109 Presentation at Maturity ; before Maturity ; after Ma- turity 110 Mode of Proceeding with Dishonoured Bill . . . 112 Notation of Protest; Necessity for, and Security of . 113 Acceptance . . . 117 Acceptance contrary to Tenor . . . . . 119 Stamps Inland and Foreign * . . . . . 120 Indorsements 121 Bankruptcy of Acceptor . . . . . . 127 Statute of Limitations as affecting Bills of Exchange . 128 Payment . ... . .; . . . . 129 Cases in which a Banker is justified in refusing Payment of a Bill or Note . . . . - . - . ... 133 Discounting Bills . . .. . . . . ;-r . . ' .. 134 Indications in case of need . .>"...;,'... . . .j. 137 The Copy of a ' First ' Bill . . . . . .137 CONTENTS. Xlll CHAPTER VI. PAGE BILLS OF LADING . 139 CHAPTER VII. OF THE EXCHANGES ....... Hi CHAPTER VIII. OF CURRENCY . 158 CHAPTER IX. ON BANK-NOTES . . . ' . . . . .177 Historical Memoir from the Establishment of the Bank of England 177 Suspension of Cash Payments, 1793 .... 181 Resumption of Cash Payments, 1821 . . . . 182 Panic of the Year 1825 . ... 184 Renewal of the Bank Charter, 1833 .... 193 Bank Acts of 1844 and 1845 195 Clauses of the Act of 1844 relating to Bank of England Notes 196 Clauses of the Act of 1844 relating to Country Bank Notes 199 Effects of the Act on the Country Note Issues . . 204 Irish and Scotch Bank Acts 205 Present State of the Fixed Issues 205 Remarks on the Regulation of Bank Note Issues . . 206 CHAPTER X. OF COINS . . . . . 218 XIV CONTENTS. PAGE TABLE OF CARDINAL NUMBERS AND COMMERCIAL TERMS IN ELEVEN LANGUAGES 240 CHAPTER XL OF THE RATE OF INTEREST 242 APPENDIX 253 BANKING ETC. CHAPTER I. PART I. THE ORIGIN AND USES OF BANKS. THE WORD 'BANK' is derived from the Italian word e banco,' a bench, which was erected in the market-place, where it was customary to exchange money. The Lombard Jews were the first to practise this system, the first bench having been established in Italy A.D. 808. Some authorities assert that the Lombard merchants commenced the business of money-dealing employing bills of exchange as remittances about the beginning of the thirteenth century ; and that such a practice was also known in the south of France about the same period. Other authorities give these benches the name of cambii, informing us that they were 2 B.ANKING. * ' ' ' placet! 'before the clmroh doors for the purpose ofi/^itdaJUDt|TOg'^^ii . . . 1695 France . . 1716 Copenhagen '" i'" . ,, 1736 Berlin . .. ; . 1765 Caisse d'Escompte, France . . 1776 Bank of Ireland . . . 1783 St. Petersburg . . 1786 Bank in the East Indies . . 1787 North America 1791 Branch banks were commenced in England in the year 1828. Between the dates of the establishment of the bank at Rotterdam and that at Stockholm, Mr. Francis Child started a bank on the eastern side THE ORIGIN AND USES OF BANKS. 7 of Temple Bar, London. He had for many years previously adopted the armorial bearings of the Lombards, and pursued the respectable vocation of a goldsmith, or what we understand to be a pawnbroker. This business he merged into a banking-house, which is still in existence. The banking firm of Child & Co. still carries on busi- ness under the same name ; and as a proof of how people will adhere to ancient customs, it is only within the last few years that printed cheques have been in use in that establishment. The banking-house of Child & Co. was established in 1663, Hoare & Co. about 1675, and Snow & Co. 1680 ; this last having had thirteen years' experi- ence before the Bank of England was established. The Bank of Scotland was established one year later, and it was not till 1783 that the Bank of Ireland commenced operations at St. Mary's Abbey, Dublin. Concerning the invention of Venetian banks, there appear to be several opinions. Some say the first was contrived in 1150, others 1157. There was no doubt a sort of bank established at one or other of these dates for the purpose of assisting in arranging a loan for the Venetians, and that this institution was called the ' Chamber 8 BANKING. of Loans ; ' but the Bank of Venice was not founded till 1171. There can be little doubt that the word bank- ing ' was a term originally applied to the business of those persons whose chief trade was to lend out their own money, and that the back-bone of their establishments did not consist of the money of other people, which was intrusted to them in the form of deposits. In this opinion most writers appear to agree. That such a business would develop itself into what we find in modern institu- tions is only natural ; as simply time would be required to prove that other people's money could be employed by the banker to the advantage of both himself and the depositor. When the practice of lending money at interest was originated is not known, but from the pro- gress made in other sciences without it being necessary to ascertain the date we may safely presume that such a practice was adopted from the earliest times. We learn that money-lending was carried on very extensively after the return from the cap- tivity; that the poor obtained money from the rich by mortgaging their lands, houses, &c. The parable of the talents distinctly indicates THE ORIGIN AND USES OF BANKS. 9 that money, as the representative of capital, was not to be allowed to lie idle. We find also that the Athenians, as early as B.C. 146, converted their temples into banks of deposit, from which they were in the habit of. lending to the public at interest. Mr. Macleod tells us in his first volume of c The Theory and Practice of Banking,' that the busi- ness of banking at Athens was in full vigour in the time of Demosthenes, and that the rate of interest was left absolutely free by Solon. Solon also had the extreme good sense, even at that early period, to see the absurdity of imprisonment for debt, and took away the right. Further on he tells us that c the first mention of banking at Rome is in the year B.C. 352, when the Plebeians were in deep distress, and had to borrow money from new creditors to pay off the principal and interest of their old debts, and so got deeper and deeper into debt.' ' Another class of bankers, who were a permanent institution, were named mensularii or numularii, who both acted for the State, and also received the deposits of private individuals. They were also authorised by the State to act as exchangers, and give Eoman coins for foreign ones at a fixed rate of exchange. 10 BANKING. Those who were entirely private bankers were called argentarii. These private bankers trans- acted their business very much as many modern ones do ; they kept their customers' accounts, and they introduced one of the greatest conveniences in the system of banking, viz. making payments by means of cheques. A cheque was called attributio or prescriptw. They also made use of promissory notes.' The progress, however, in the science of banking attained to but a feeble growth either among the Greeks or Romans, and it was left to countries whose commercial prosperity has reached that of England or France, to push to their present per- fection the banking facilities which are now aiforded to those engaged in commerce, &c. The bank next in European importance to the one established by the magistrates at Barcelona in 1401 was the Bank of St. George at Genoa, which, like the Bank of England, came into existence through the necessities of the State large sums of money having been borrowed from the citizens from time to time, the interest of which was paid out of the revenue. It became at length too extensive an affair to be properly conducted unless under the management of an efficiently organised THE ORIGIN AND USES OF BANKS, 11 administration ; which, having been established, the creditors' claims were consolidated to form a capital, with which the Bank of St. George commenced its career. The Austrians pillaged the Bank of St. George in 1746, from which it never recovered. The Bank of Amsterdam was established in 1609, adopting the same course as the Venetians receiving the clipped and worn coins at a value equal to their weight in bullion, with the deduction for management and the expenses of recoinage. This Bank of Amsterdam appears to have set an example worthy of all praise, for it received the coins of all nations for the purpose of encouraging the bullion trade. The bank, by this means, prevented for the time the wear and tear of the coins by keeping them in their vaults, whilst the bank receipts circulated as notes, giving the bank the right to dispose of the bullion if not redeemed after a certain period of time had elapsed. The citizens of Hamburg established a bank ten years later. It granted loans upon the security of precious stones among other peculiarities, and has even now a reputation attaching to it of adhering to antiquated and cumbrous systems, which one would hardly expect in a city which has reached 12 BANKING. that high degree of commercial importance which Hamburg may be said justly to have attained. PART II. In reviewing the progress made by banks, as they were established in different parts of the world, we must of necessity keep before us the commercial standing of the countries in which these banks were created. Those nations which, from their geographical position, are shut out of the principal lines of commercial traffic, will be less likely to advance in that direction in which the facilities of banking are suggested by necessity although commerce (from the Latin commutatio mercium) has existed since one commodity was exchanged for another, and, as Mr. M'Culloch says, c is coeval with the first dawn of civilisation.' The perfection of our present system of banking which in many respects is yet far from quite perfect could never have been brought about in the absence of that enormous trade, and the consequent necessity for economy of time and means, which the existing inhabitants of Great Britain have lived to see. It is not our intention to introduce the THE OKIGIN AND USES OF BANKS. 13 figures by which England has for so long a period dwarfed the efforts of every other country, in respect of either exports or imports. It is simply our intention to show that banking, as a great part of the machinery by which commercial transactions are conducted, could only have been advanced to its present state of perfection by the strain which has been constantly brought to bear upon old and cumbrous systems, until they have been gradually swept away by the genius and labour of a hard- working, practical, and enlightened people, whose mercantile prosperity has caused them to seek by degrees for improved methods. No definite records having been handed down to us which throw any light upon the question as to whether written documents were used or not, we may presume that the commerce which is said to have flourished in Arabia, Egypt, and among the Phoenicians, in the earliest ages, was but a simple system of barter.' Later on, we find that commercial relations existed A.D. 1241, by a confederation of maritime cities over the continent of Europe. The enterprise of the Portuguese and Dutch, added to the discoveries of Columbus, con- siderably enlarged the sphere of commerce; and this, we are informed, induced England to engage 14 BANKING. extensively in its pursuit. England's first com- mercial treaty was entered into with the Flemings, 1 Edw. I., 1272, nearly four centuries before the firm of Messrs. Child & Co. was established as a bank. The second was with Spain and Portugal, 2 Edw. II., 1308. So long a period having elapsed before the great facilities afforded to commerce by banking establishments were suggested to so practical a people as the English, will sufficiently explain the very slow progress made by other nations, which are not celebrated for their practical superiority. The Romans were accustomed to keep banking accounts, and the system of book- keeping by double entry is said to have been taken from them.* We are surprised that neither the Greeks nor the Romans advanced further than they did especially the latter, who, we are told, were people of decidedly commercial tendencies. To the Romans must be allowed, without doubt, the invention of transferring a debt by a written docu- ment, without the intervention of coined money. The innumerable changes which have been in- troduced into the various systems invented for facilitating commercial transactions, adopted by * Article Argentarii, Smith's 'Die. Greek and Roman Antiquities.' THE ORIGIN AND USES OF BANKS. 15 different nations during their passage through a period of seven centuries of time, demonstrate the enormous difficulties that have to be overcome in improving and advancing science, which are over- turned on their march by revolutions, wars, and innumerable conflicting interests incessantly at work. The eager interest with which the mer- chants of all the commercial cities of the world in these times gather together at fixed days in each week at their Exchange institutions ; the enormous amount of wealth which is always floating upon the seas, forming the basis upon which bills of exchange are drawn, to the extent of hundreds of millions sterling,* which are circulated into every corner of the globe, convey an idea of the intricacy of commerce not forgetting the different values and kinds of money which nations have adopted and brings forcibly home to us the importance of well-organised banks. The first public institution in England par- taking at all of the nature of a bank was founded by William I., which he called the Exchequer, from * It is recorded that in the year 1825, so famous for disastrous speculations in bubble companies, 400 millions of pounds sterling were represented by bills of exchange in circulation ; such state- ments, however, are not much to be relied upon. 16 BANKING. e scaccum,' a chess-board a chequered cloth being used with squares upon it resembling those upon a chess-board ; so that, when counting the money, the different squares were understood to represent figures corresponding to the amounts placed upon them. With certain modifications, which an exist- ence of 800 years would not fail to produce, it still remains. The Exchequer was originally called c Scaccarium.' The English and Irish Exchequers were consolidated in 1816. The various mints which existed prior to the Norman Conquest, and which, in the absence of other places of security, were used as banks of deposit, caused much unnecessary fluctuation in the currency, on account of the removal of these mints from one place to another, according to the caprice of the reigning monarch. Monasteries were considered safe places of deposit, the sacred- ness of the soil being considered proof against fraud. These mints, with few exceptions, were concentrated by Elizabeth into one, in the Tower of London, which was also used as a depository for cash, in the absence of bankers' strong rooms. This system continued in operation without inter- ruption during the reign of James I. ; but Charles I. laid violent hands on the money, and so destroyed THE ORIGIN AND USES OF BANKS. 17 the credit of the Mint in 1640 for ever. The city merchants and traders were compelled after this to seek other places of safety, and ultimately deposited their money with the goldsmiths, who had settled in Lombard Street, and who possessed iron safes for their valuables. This was the origin of banking in England. Before proceeding to examine the merits of any particular class of banking institutions such as we see in the present day, it will perhaps be in better order to enquire as to the real use of a bank, and what are the advantages such establishments afford to the community generally ; and whether the latest period if we may so term it of banking- houses consists of corporations which have been established with a view honestly to earn their profits by legitimate banking business. The use of properly organised^and well-managed banks, and the important position they have held for so long a period, well justify the remark that ' banking is the hand-maid of commerce ; ' and it is by the introduction of such institutions that the resources of a country are developed and econo- mised by bringing merchants and traders to settle their mutual indebtedness without the intervention of coin. c 18 BANKING. A bank best serves its own interests, and most rapidly gains a substantial footing with the public, by doing everything within reasonable bounds to facilitate commercial operations, and save the time and trouble of those persons who transact their business with it. The use of a bank is principally to take charge of people's money ; the first condition being, that the sum deposited for safe custody be returned when agreed upon, and secondly, without deduction. We may take it for granted that interest was allowed by banks for money deposited with them in comparatively early times, as we find the word ' interest ' in an Act of Parliament passed in the 21st James I., 1623, where it was meant to signify a just compensation for money lent. This Act fixed the rate at 8 per cent, per annum. It was lowered by the Common- wealth to 6 per cent, in 1650, and in 1714, 13th Queen Anne, was reduced to 5 per cent. The restraint of a fixed rate, however, was soon found altogether prejudicial to commerce, and the Acts were repealed by 17 & 18 Viet. c. 90, 1854. Aristotle is said to have stated that as money did not produce money, no equitable claim could be made for interest by the lender. We are told Calvin, the great reformer, was among the first to THE ORIGIN AND USES OF BANKS. 19 show the absurdity of such notions. The founder of the French Credit Mobilier, M. Pereire, has been accused of supporting the theory of a fixed rate of interest. It is high time, however, that every thinking man discarded such a notion once for all. Every day that sees mankind become more enlightened in the science of political economy, diminishes the number of believers in the possibility of having a fixed price for that particular commodity by which the value in exchange of corn, iron, or coal, is measured. The use of a bank, then, is not only to take care of people's money, but to give them something for the use of it. It would, no doubt, seem natural when society was not so respectful to the laws of the country, and people were not characterised by such a high degree of honesty and integrity, that capitalists were glad to have their gains safely taken care of by persons who had iron safes and strong rooms built for the express purpose, and perhaps, in some cases, were not unwilling to pay for the secure custody. Large sums are always lying at the Bank of England idle even at this period of our history mirabile dictu no interest being allowed by that institution for money that is placed there upon deposit. c 2 20 BANKING. In the most enlightened seats of commerce money fluctuates in price like any other article that is in general use, that is influenced by the laws of supply and demand, and those who have any of it can obtain a price according to the market rate. Banks are the institutions which buy and sell money, and, like corn, or iron, or coal merchants, know the current rate when you apply to them. If you wish to leave money with them, they give you a higher or lower rate of interest per cent, according to circumstances. As a rule, more is allowed for long periods of fixed deposit than short ; but some institutions will not allow so much per cent, for a long period as for a short, such rate depending upon the appearance of the market at the moment. There are many different circumstances which influence the price of money, and there are always agencies at work which tend to raise or lower it. The use of banks is to go hand in hand with commerce. They take the money of those who do not know how to employ it, and lend it to those who do, to the advantage of all three classes, and so what before remained idle is now made profitable. Like a thousand little rivulets which run into one mighty stream, and float the commercial navy THE ORIGIN AND USES OF BANKS. 21 of England from London to the sea and distant climes ; so the small depositors make one mighty sum, that can be employed in agriculture, rail- ways, and a hundred different enterprises by which all classes are benefited, and the poor man can approach nearer to the privileges enjoyed by the rich. The profession of a banker, then, is to employ the money of other people, as we have before stated, to the advantage of those more immediately interested, and for the improvement of the community generally. The next great function of a bank, after pro- perly utilising the metallic currency of a country, is to provide a cheaper and more agreeable form of currency in the shape of bank-notes. The great power for good or for evil which is placed in the hands of banks by allowing them a paper issue, demonstrates the necessity of some impar- tial supervision, and we naturally look to the State as the highest in authority, and therefore carrying the greatest weight, both moral and physical to control the amount of paper cur- rency which may be put in circulation by banks. Mr. Bicardo says, p. 214, ' After the establishment of banks, the State has not the sole power of coining or issuing money. The currency may as 22 BANKING. effectually be increased by paper as by coin; so that if a State were to debase its money and limit its quantity, it could not support its value, because the banks would have an equal power of adding to the whole quantity of circulation.' Again, farther on, Mr. "Ricardo's opinion of the import- ance of banks as regards their office as paper- issuers to the public is conveyed in the following paragraph: 'A. currency is in its most perfect state when it consists wholly of paper money, but of paper money of an equal value with the gold which it professes to represent. The use of paper instead of gold substitutes the cheapest in place of the most expensive medium, and enables the country, without loss to any individual, to ex- change all the gold which it before used for this purpose for raw materials, utensils, and food, by the use of which both its wealth and its enjoy- ments are increased.' There are many who object to the State having anything to do with controlling the operation of banks or their paper issues ; but it must be borne in mind that there is a wide differ- ence between the State being the issuer and the State controlling the issues of others. The State is the highest power that exercises control over public affairs, and is the motive power so to THE ORIGIN AND USES OF BANKS. 23 speak of the empire, acting in obedience to the people's will. It is, therefore, reasonable to sup- pose that the Government, who are furnished with every assistance in the shape of legal advice, &c., should be the most competent power to con- trol the operations of those institutions which are intrusted to an unlimited extent by the people. Hear Mr. M'Culloch in his ' Commercial Dic- tionary,' p. 67, Necessity of insuring the conversion of bank-notes into coin : ' The taking of measures to insure the convertibility of bank-notes into coin is a matter which cannot be safely left to the dis- cretion or judgment of individuals, but which must be settled by Government. No bank-notes should be permitted to circulate about the equivalency of which to the coins they profess to represent there can be the smallest room for doubt. It is alleged, indeed, that in this, as in most other things, we may safely trust to the prudence and sagacity of those who deal with banks ; and that, if left to themselves, the public will very rarely be deceived. But the widest experience shows that but little if any dependence can be placed on this doctrine. The public is very apt to be misled, in the first instance, in giving confidence to or taking the paper of individuals or associations ; and though 24 BANKING. that were not the case, the condition of an indivi- dual or company may change, from bad or expensive management, improvident speculation, unavoidable losses, and fifty other things of which the public know nothing, or nothing certain. The fact that any particular banker who issues paper enjoys the public confidence is at best a presumption merely, and no proof that he really deserves it.' f There have unfortunately been innumerable instances in which it has turned out that bankers who have long been in the highest credit, and whose notes had been unhesitatingly accepted by the public, have been found to be, on the occurrence of any- thing to excite suspicion, quite unable to meet their engagements.' From a report on the Exten- sion of the Privilege of the Bank of France, in 1840, we find the following : 6 Le droit d'eniettre des billets est tres avantageux ; mais aussi il est si dangereux que 1'Etat doit ou s'en reserver 1'exercice ou le regler de maniere a en prevenir les abus.' Mr. Bicardo, at p. 408, remarks, ' But if the public require protection against the infe- rior money which might be imposed upon them by an undue mixture of alloy, and which is obtained by means of the Government stamp when metallic money is used, how much more THE ORIGIN AND USES OF BANKS. 25 necessary is such, protection when paper money forms the whole, or almost the whole, of the circu- lating medium of the country ? Is it not incon- sistent that Government should use its power to protect the community from the loss of one shilling in a guinea, but does not interfere to protect them from the loss of the whole twenty shillings in a one-pound note ? In the case of the Bank of England notes, a guarantee is taken by the Govern- ment for the notes which the bank issues, and the whole capital of the bank, amounting to more than eleven and a half millions, must be lost before the holders of their notes can be sufferers from any imprudence they may commit, &c. &c.' And again, c Though I am by no means disposed to judge uncharitably of those who have occasioned so much ruin and distress to the middle and lower classes of the people, yet it must be allowed by the most indulgent, that the true business of banking must be very much abused before it can be necessary for any bank possessing the most moderate funds, to fail in their engagements ; and I believe it will be found, in by far the major part of these failures, that the parties can be charged with offences much more grave than those of mere imprudence and want of caution.' M. J. B. Say 26 BANKING. also agrees that the interference of Government is justifiable in two cases ; first, to prevent fraud, and secondly, to certify a fact. (' Economic Politique,' Book I., chap. xvii. See also Sir I. B. Byles on the 'Law of Bills of Exchange, &c.,' Preface, p. xi.) The ruin and disaster that can be brought about by an absence of proper control over banks of issue whether exercised by the State or a distinct corporation is proved by the crash which took place among the American banks in 1857, when all the banks in the Union stopped payment, from the Gulf of Mexico to the frontiers of Canada. The kind of security which was demanded of the American issuing banks may be judged of from the following extract from a letter of the sub- secretary of the treasury of the United States, dated November 27, 1854, which we quote from Mr. M'Culloch's ' Commercial Dictionary : ' ( The policy of many of the State governments has of late years consisted in encouraging the issue of small notes, by sanctioning the establishment of what are popularly called " free banks," with de- posits of stocks and mortgages for the " ultimate " security of their issues. This "ultimate" security is, it may be admitted, better than no security at THE OKIGIN AND USES OF BANKS. 27 all. The mischief is, that it is least available when most wanted. The ver,y causes which prevent the banks from redeeming their issues promptly cause a fall in the value of the stocks and mortgages, on "the ultimate security" of which their notes have been issued. The " ultimate security" may avail something to the broker who buys them at a dis- count, and can hold them for months or years ; but the labouring man who has notes of these " State security banks " in his possession finds, when they stop payment, that the " ultimate security " for their redemption does not prevent his losing 25 cents, 50 cents, or even 75 cents in the dollar. In a circulating medium we want something more than "ultimate security" we want also "imme- diate" security; we want security that is good to-day and will be good to-morrow and the next day, and for ever after. This security is found in gold and silver, and in these only.' If, therefore, banks of issue generally are to be compelled to keep a stock of the precious metals as security against the paper money they issue, there must be a controlling power of the very highest order that will keep a constant check upon all banks, and guarantee the community against any loss from the confidence they may place in such institutions* 23 BANKING. Good banks add to the wealth, of society. A first-class merchant, instead of lending money, gives his name upon paper, which circulates as so much more capital until it is retired. The advan- tages to be gained by such a process led to the formation of banks of issue, who coined so to speak their own credit. The wealth which such banks have amassed is quite inconsiderable as com- pared with the benefit which has been derived by the community generally, by the addition of so much more capital with which various enterprises have been carried out. The issue of bank-notes forms an entirely distinct increase of capital, be- yond that which is furnished by the paper money which is termed bills of exchange and promissory notes ; and there is a wide difference between the two classes of paper. The bank-note is circulated entirely upon the faith of the issuing bank, with- out redress should the bank fail. If it could be proved that a note had been received from A, and that the bank had stopped payment before the recipient B had time to present it, using ordinary diligence, B could legally recover from A ; but we believe, in practice, such has seldom succeeded. The bill of exchange is almost always drawn pay- able at some distant period, and each person hand- THE ORIGIN AND USES OF BANKS. 29 ing a bill of exchange to another has to indorse it, thereby making himself responsible for the amount, unless his indorsement be 'without re- course.' Some pass them on immediately; others retain them for the sake of the interest that accrues upon them. On the other hand, the note possesses the advantage of commanding cash at a moment's notice. The bill, if of first class, may also do the same, with deduction of interest ; but there is no certainty. Payment by a bill of ex- change does not extinguish a debt in the same way that payment by a bank-note does ; until the bill has arrived at maturity, and has been duly honoured, all parties to it are liable. Banks being the great depositories for cash, are naturally always in possession of large numbers of bills of exchange ; but it does not follow that when they discount these bills if they be asked to do so that they pay, in cash. English bankers, as n rule, only discount for people who keep their current accounts with them; and in this manner credit is still further coined. The amount of the discounted bills, minus the interest, is placed to the customer's credit, who draws a cheque for it; this cheque is circulated as cash through various channels, and returns to the banker who discounted the bills, never having 30 BANKING. been converted into cash at all. Very many banks have branches in various parts of the country and abroad, and all banks have agencies at most cities of importance. By this means payments may be made simply by the agency of paper all over the world. A payment of any reasonable sum may now be made to a bank in London, with orders to hand it over to a certain firm in Stockholm, and the whole transaction be completed in three hours. The use of an English bank, besides affording the before-mentioned facilities to the public, is to take care of valuable documents, deeds, and such like ; to collect the money for all documents a customer may desire to have realised and credited to his account. The public are disposed also to look upon their banker as useful in recommending them good investments. This, however, we are of opinion a banker should not allow himself to go too far in, as no banker can keep himself sufficiently ' posted up' in such matters as to make his advice worth having ; and he may have been ill-informed as to the nature of this or that security, which will be sure to cause unpleasantness if his advice be acted upon. The four principal sources from which a bank derives its profit, and in return for which it renders THE ORIGIN AND USES OF BANKS. 31 important services to the public, are the following : 1. The employment of the capital subscribed by the partners, and upon which the establishment is based. 2. The current and fixed deposits. 3. The amount of paper it is able to keep in circulation in the form of notes. 4. The sum of money which is constantly in transitu, and which, when the busi- ness of the bank becomes very large, constitutes a considerable standing balance. All the money, therefore, which the bank can obtain by either of these means, and by all, is employed for discount- ing, loans, investment in securities which can be immediately realised in case of urgent pressure for funds, and cash credits, excepting what must be kept in the 'till' for immediate use. The amount required for such purpose can only be judged of from hour to hour, as the bank works ; and this is one of the most important features in management, and which requires much experience, depending upon the nature of the business, and many pecu- liarities which must be dealt with by the manager himself. The real usefulness of a bank has been carried farther in Scotland than in any other country, so much encouragement having been given to the poorer classes to place their small earnings upon 32 BANKING. deposit ; sums as small as ten pounds having been for many years received by Scotch banks a system which competition at last introduced into England. The Scotch bankers have from the beginning been able to afford greater facilities to the lower classes than the English bankers, as they have derived so much profit from the issue of their notes, whereas the London bankers do not enjoy this privilege. The use of a bank consists in its keeping money constantly moving, driving it into every possible channel where it is required, and by this means stimulating production. There can be no better instances than those of banks which have been established in parts of the country where industry was at a complete stand- still for want of money, and which have been worked for some time at a dead loss, until the stimulus was given time to work its effect, when the return gradually came, and the bank received back its own with interest, and subsequently be- came a nourishing concern. This has taken place in Scotland, and has been cited in support of an argument in favour of the issue of small notes, before a committee of the House of Commons. The use of a bank is made particularly appa- rent to persons travelling. Almost any bank will THE ORIGIN AND USES OF BANKS. 33 change the circular notes of another well-known and respectable bank without any advice pro- vided all appears in order. Large mercantile houses have, up to the present time, carried on a system of letters of credit to other merchants in all parts of the world ; but it is evident that such business will be better attended to by an insti- tution organised for that purpose, among others ; and it is quite evident that all such business is by degrees being absorbed by the banks. Merchants are not in the habit of placing a semi-annual or even annual statement of their position before the public. Banks, for their own sakes, are obliged to do this; and, although much may be concealed that would injure them, if brought to light, they can seldom if ever fail with such disastrous effect as a merchant. The facilities afforded to travel- lers in the present day by the complete net-work of banks over almost the whole world, signally illustrates not only the necessity of advancing banking as a science, but the importance of its universal extension as an essential wheel in the machinery by which the entire commercial system is kept moving. The use of a bank has been increased beyond mea- sure by the aid of the telegraph. Bills unprovided 34 BANKING. . for through the failure of one or other who should have made provision may be retired in distant parts of the earth in a few hours, although on the verge of casting a cloud over the maker's credit. Banks in London, with their foreign branches, under a system of telegraphic signals, may be the means of staying a crisis ; for many of these popular panics might have been avoided had the foolish terror of people not been aroused by rumours of expected failure, which in many cases have been brought about by the thoughtless rapidity with which people have demanded the return of money lent. The use of a banker to his client is, that he will always willingly act as a referee, should it be necessary to establish your respectability in the inind of a person to whom you are unknown. Your banker will collect the money for any and all documents that may come into your hands, and place the proceeds to your account. You draw cheques upon him for any bills you wish to settle, and so he saves you the trouble of counting your money. He pays your subscription to your club, and the premiums for your life and fire policies ; undertakes the investment of your surplus funds. If a person wishes to obtain information of an- THE ORIGIN AND USES OF BANKS. 35 other person who keeps a banking account, he finds immediately that such is impossible from the banker, unless he keeps an account himself, which enables him to get the information through his own banker. It is a custom among London bankers, and no doubt will become universal in course of time, to give each other such information imme- diately. Such a system affords to the public an inestimable advantage, as by such means a dis- honest trader soon becomes known, and so got rid of. A banker's pass-book affords a complete history of the expenditure for the year; and those who have not business habits will find this a great assistance in controlling their expenditure, at all events in the aggregate. By keeping a banker, one has a right to ask of him or his subordinates a variety of questions with regard to the best means of remitting money to distant places, and other matters, which otherwise might cause much trouble in obtaining. The use of a bank assists most materially in dispelling the notion that wealth consists in money. This idea has existed for an incredible period in the minds of men, who by a little reflection could have so easily got rid of it. Adam Smith destroyed D 2 36 BANKING* it in the minds of all men who were willing to study his arguments; and now the question no longer even causes a dispute. The gold which lies still in the bank is of no more use than the ore from which it is coined ; it only becomes wealth when it is circulated, and by such circulation assists production. Much gold lies always still in the vaults of the Bank of England. It may be thought that this fact upsets our argument ; but if a certain amount of specie forms the pivot around which twice as much in paper circulates, it is more productive by the proportion, than if it were in active circulation itself leaving out of the calculation the loss caused by using so costly a material. Gold is the chosen representative of wealth; that commodity by which the value in exchange of everything else is measured, by reason of its being more suitable than any other sub- stance, for more reasons than because it varies so little in cost of production, and, consequently, in value in exchange, and also presents the greatest worth in a more convenient form than any other product of the earth. This representative of wealth it is the object of banks to keep constantly moving, which is more and more productive just in proportion as it is kept in circulation without THE OEIGIN AND USES OF BANKS. 3? ceasing. As the maxim among shopkeepers is, small profits and quick returns, so for a bank to combine profit with safety, it should keep what- ever funds it may have for employment always on the move; never out beyond reach for too long periods at a time. Doctor Adam Smith says, that the advantages to be derived from the establishment of banks may be compared to the profit which would be obtained from converting our highways into corn fields, and procuring a road through the air. The most important addition to the facilities which banking institutions have invented for themselves, to enable them to adjust their mutual indebtedness without the trouble of presenting separately for payment the cheques or bills which one bank may hold payable at another bank, was the Clearing-house, which was established by the principal bankers in London in the year 1775. The system pursued is so simple that, suffice it to say, when the clerks of two different banks wish to exchange the cheques one may have upon the other, the balance in whosesoever favour it may be is paid by a cheque on the Bank of Eng- land, where every banker has an account. In the beginning the banks with the aid of the Clearing- 38 BANKING. house were enabled to adjust several millions sterling of mutual indebtedness, employing only a few hundred thousand pounds ; the mode of settle- ment, however, has now become so simplified that neither notes nor coin is required at all. It is only quite lately that the Bank of England entered the Clearing-house. TWO CLASSES OF BANKS. CHAPTER II. TWO CLASSES OF BANKS. BANKS may be divided into two classes private banks, and joint-stock banks with, and without, limited liability. Formerly private banks could not have more than six partners. By the Act of Parliament 39 & 40 Geo. III. c. 28, section 15, no bank was allowed to be established whose partners should exceed six in number, ' to borrow, owe, or take up any sum or sums of money, on their bills or notes, payab]e on demand, or at any less time than six months from the borrowing thereof.' Later on, in the year 1826, an Act of Parliament, of 7 Geo. IV. c. 46, was passed, which allowed banking corporations to be established consisting of more than six persons ; but they were not allowed to transact their business within sixty- five miles of London, and were prohibited from having any branch establishment in the city of London. Every member of a banking corporation 40 BANKING. established under this Act was responsible for every and all its acts and deeds. There are many provisions still unrepealed which affect banking corporations which have not been registered under the Joint- Stock Companies Acts of 1857 or 1862, or have not been incor- porated by letters patent under the 7 & 8 Yict. c. 113. This last Act was passed in the year 1844, and gave permission to banks whose corporations consisted of more than six persons, and which had been established before May 6, to apply for letters patent, by which they could be incorporated under this Act. The 7 & 8 Viet. c. 113, gave to banking companies established within sixty-five miles of London, and incorporated on and after May 6, 1844, the great privilege of suing and being sued in the names of their public officers, provided they complied with the Act in other respects, by mak- ing the returns required. In 1857, however, the Act was repealed, and not till 1862 were the pro- visions for the banks suing and being sued in the names of their public officers re-enacted. The latest Act of Parliament, that of 1862, affecting the establishment of banks, makes the following prohibitions in section 4 : 1. No partnership of more than ten persons is TWO CLASSES OF BANKS. 41 to be formed for banking purposes, unless it is registered under the Act, or is formed under some other Act of Parliament or letters patent ; and, 2. No partnership of more than twenty persons is to be formed for the acquisition of gain, unless it is registered under the Act, or is formed under an Act of Parliament or letters patent, or unless it is formed for working mines within the juris- diction of the stannaries ; in fact, a cost-book mining company. Banking corporations established under the 7 & 8 Yict. c. 113, who neglected to register before January 1, 1858, might be sued, but were unable to sue either in equity or at law. Managers and directors were subject to a penalty of 5. for every day that elapsed after the registra- tion should have been made, and the shareholders could receive no dividend. The above omissions, however, did not make the bank illegal. Banking corporations registered under 20 & 21 Yict. c. 49, were required to register under the Companies Act of 1862, except the liability of their shareholders was limited by letters patent or Act of Parliament. Not having complied with the demands of the Act 20 & 21 Viet. c. 49, laid them open to the penalties above-named also. 42 BANKING. In the year 1858 an Act was passed, 21 & 22 Viet. c. 91, which permitted banking corporations to be established with limited liability, under the Joint- Stock Companies Act of 1857. All other banks could make the liability of their shareholders limited, excepting in regard to their issue of notes ; and for this they must remain unlimited, by regis- tering under the Act. It was necessary, however, to make due publication of the fact, that all who kept accounts or had other business with the bank might be made acquainted with the change, and withdraw if they chose. The bank was also obliged to publish periodically a statement of its assets and liabilities. Many banking companies, consisting of seven members or more, as is well known, have singly and with others become limited companies under the above Act. They are compelled, however, before registration, to obtain the consent of the majority of their members at a general meeting the only alteration required in the name of a company registering under the Limited Liability Act being the addition of the word t limited.' Private banks, of six or ten members, may still carry on their business without being required to register themselves as banking companies ; but, TWO CLASSES OF BANKS. 43 without registration, the liability of the members cannot be c limited.' On its being proposed to start a banking com- pany on the 'limited liability' principle, it is required that at least seven persons must sign a deed of association, having the following particu- lars contained therein : 1. The objects of the company ; 2. The company's name, attaching the word ' limited' at the end; 3. A statement that the members' liability is limited ; 4. Naming the place where the office of the company is to be situated ; 5. The amount of each share, and total amount of the capital, with other particulars specified in the Act in detail. A manager or director, who endorses or accepts a bill for a bank registered under the Limited Liability Act, without including the word f limited, ' becomes personally liable thereon. From 1708 to 1826, the Bank of England was the only bank in London that could be established with more than six partners. Private banks have formerly been worked upon the basis of a capital subscribed by not more than six persons, which, if one of whom die, his propor- tion has been withdrawn, unless any member of his family should succeed to his interest in the 44 BANKING. concern. As a rule, all the partners in a private bank contribute to its administration ; and it has long been a matter of dispute as to whether private banks under this system have not been more suc- cessful, in proportion to their means, than a joint- stock bank under the administration of salaried servants. It appears on the face of it reasonable that any business will be more lucrative when those who are directly interested in every one per cent, of extra profit are constantly on the look-out to take advantage of any lucrative investment that may present itself, or to secure the business of this or that firm or company. Mr. J. Stuart Mill, in his ' Principles of Political Economy,' bk. ii., p. 486, says : ' Management, however, by hired servants, who have no interest in the result but that of preserving their salaries, is proverbially inefficient, unless they act under the inspecting eye, if not the controlling hand, of the person chiefly interested ; and prudence almost always recommends giving to a manager not thus con- trolled a remuneration partly dependent on the profits, which virtually reduces the case to that of a sleeping partner.' It will be seen, however, that a manager whose remuneration depends upon the profit will be very likely to engage in transactions TWO CLASSES OF BANKS. 45 of a less secure nature than the partner of a private bank, whose fortune is at stake. A manager's income may also be at stake ; but it is a natural and reasonable conclusion, that there can be no such controlling power constantly keeping his operations in check, as when his income and capital also are endangered by engaging in hazardous business. Private banks may be looked upon now as institutions of the past. A couple of years even has seen many of the best of them swallowed up by the joint-stock system; and there can be no doubt which is the better suited to our times. A joint-stock bank differs from a private bank First, by its capital being permanent ; secondly, its number of partners unlimited ; and thirdly, in the form of its government. If a partner or, as he is generally termed, a shareholder die, his shares are simply transferred, and the capital undergoes no alteration. A joint-stock bank is directed by a board of gentlemen, drawn from various classes of society, under whom is a manager, who acts as their representative to the public, and who, under their control, administers the whole of the affairs of the bank, assisted by a sub-manager, secretary, 46 BANKING. and subordinates, as the nature of the business may require. Up to the year 1855,"* shareholders in joint-stock banks were unlimited in their liability, by which system it will be seen that many rich men would be liable for their entire fortunes by becoming shareholders ; and thus, banks of unlimited liabi- lity, on coming into positions of difficulty, would be likely to lose their best shareholders, as was often the case in the outset, when masters trans- ferred their shares into the names of their servants. This, however, was put an end to by a special clause, which all banking copartnerships take care to include in their regulations, and which empowers the directors of a bank to refuse a transfer should they not approve of the transferee. The Act of Parliament passed in 1855, limiting the liability of shareholders not banks to the amount of their shares, is looked upon by many as in principle vicious. There can be no doubt that a great number of banks, established with limited liability, have failed most disastrously both in England and America. The latter country especially has caused more ruin than any other * Limited Liability Act, 20 & 21 Viet. c. 49. TWO CLASSES OF BANKS. 47 by the stoppage of her banks, which are nearly, if not all, on the limited liability system. Some assert, with reason, that limiting the shareholders' liability takes off much of the pressure which should be constantly kept upon those whose duty it is to exercise caution and prudence in employing the bank's funds. Shareholders whose all is at stake, will see that prudent and experienced directors form the board, and a strict supervision will be insured, down to the clerks in the office. There is great danger of a new bank getting itself and all connected with it into inextricable trouble when it does not at an early stage realise the hopes of its projectors ; and how very often has this been the case ! How many lamentable windings-up have we seen; how much endless disputing have we seen at general meetings, ending in friends becoming enemies ; how many compli- cated law cases have filled the newspapers, placing in prominent relief misguided and inexperienced directors; how many unfortunate officers of all grades have been allured into the vortex by a few extra hundreds a year ! Each new bank that comes out is always going to be such a grand success. All sorts of business will flow in as soon as the offices are opened. The prospects are so 48 BANKING. bright, the preliminary expenses are begun with a light heart, and all goes well for a year or so, until the actors in so many of these unfortunate cases realise the delusion into which they have been led. There is a great deal of romance that hangs round the starting of a new bank. There is too much distance between the present hopefulness and the future stern difficulties. There is no more royal road to banking profits than to any other sort of profits ; and it is one of the most singular peculiarities in connection with mei^ who have had much experience in other walks of trade, as merchants, &c., that they are as easily deluded into believing that a bank must be a success when it is brought out with a certain eclat, and the shares are well taken up, as younger men with much less experience. There is so much dust thrown into men's eyes by the opinions of others who, in the goocjness of their hearts, wish to see all mankind pleased with any projects they may have in hand. In all these enterprises there is a great deal too much taken for granted, and trusted to chance, where matters should be properly in- vestigated. In establishing a bank there is such a multitude of people interested, and so much property that must be lost in case of failure, that TWO CLASSES OF BANKS. 49 such projects should not be left too much uncon- trolled in the hands of a few, whose self-inte- restedness is so likely to lead them to disregard the real interests of others. There is a good deal of what is termed ' kudos ' attaching to the office of director ; and there are very few persons, un- less their thirst for notoriety has been somewhat satiated, who have sufficient self-denial to refuse to become directors, when they inwardly know they bring only what prestige their name may have gained in any other walk in life to support the bank. Some men who have had nothing to do with banks before certainly may make good directors, but the danger always is that directors who are comparative novices will want to meddle too much in the management possibly with the best of motives ; but when certain functions are expected of certain people, and others who have a right to interfere by virtue of the position of director assume even occasionally those func- tions, then they do not weigh with due respon- sibility upon any one, and what should be some one's business becomes no one's. There can be nothing so injurious to the proper management of a bank as certain responsibilities not being fixed upon certain people. What is every one's E 50 BANKING. business is no one's ; and where money of all things is dealt in, and its loss made possible by an absence of proper organisation, no establish- ment, having such inherent defects, can expect to obtain any position in the public estimation, or to succeed. Every officer should have a defined position written and agreed upon, and when each part is perfect the whole will be. PERNICIOUS EFFECTS OF TOO MUCH COMPETITION IN COMMEECE AND BANKING PROPOSED CHECK. The facilities which in these times are afforded by the numerous banks and companies to any one with the smallest means who chooses to dabble in business matters, foster to a most hurtful extent those elements which have for some time past acted most injuriously against the steady and natural fluctuation in the price of credit and capital in this country. The broad area of com- mercial affairs has of late years been immeasurably extended, with undue and unsafe rapidity. The new ground has been occupied by saplings, which in many, if not most cases, strike out into exten- sive engagements before their roots have got hold of the ground, and are swept away by the first breath which may be produced by unexpected TWO CLASSES OF BANKS. 51 agitation in the commercial world. New com- panies, which are supported by the profits derived from such sources, may survive a few summers ; but when the traders, upon whose business their existence depends, are struggling to establish themselves upon ground that is already occupied, they can only expect a brief career, progressing to a certain point which will not be considered satisfactory by the shareholders for any length of time, and the inevitable winding up will be the only course left open. To decide to what extent precisely, both banks and merchants can be established with benefit to themselves and the community at large, is a matter which is beyond the capacity of almost any tribunal ; but it appears strange that com- mercial disorders follow one upon the other, with- out doubt most materially influenced by the evil to which I allude, without arousing the serious atten- tion of those who are so damaged and occasionally ruined by its effects. There are so many ways in which the eyes of the public may be blinded to the real position which a firm occupies, that it seems almost in- comprehensible that merchants generally most of whom we may presume wish to see their 2 52 BANKING. profession exalted, and the mercantile community in their own country signalised by a system which will exclude incompetent and we may say dis- honest persons from interfering with the proper and legitimate fluctuations in the rate of interest charged for the use of capital, &c. do not com- bine for the purpose of checking and endeavour- ing to remove so great an obstacle to the progress Df sound commercial business. Now that the merchants and trading ranks of all denominations are so much increased, it stands to reason that a larger number of eyes and hands are incessantly watching and ready to grasp any description of business by which a profit may be made ; and in consequence the profit upon almost everything is lowered by incessant competition, and the means by whose aid all business is carried on are raised to a higher price by the increased number who seek its assistance. Political economy tells us, that populations in- crease in proportion to the means of subsistence. Pestilences and plagues occasionally sweep num- bers from the face of the earth, and we may rea- sonably conclude that such means are employed by the Almighty for regulating the increase of mankind when they progress beyond the capacity TWO CLASSES OF BANKS. 53 of the land where they are born to support them. A commercial crisis sweeps away the weak mer- chants who will make business in places beyond the capacity of those places to support them. The discretion of man in both cases being too little exercised, he loses sight of those principles by which his actions should be governed. The undue increase in the number of merchants and traders must of necessity exercise a hurtful influence, sooner or later, upon those institutions whose business it is to furnish credit and capital to those who may require it. An increased num- ber of applicants raises the price, and more lend- ing institutions are established, which in their turn encourage speculative and dangerous trading, and in this way every department of the commer- cial system becomes weakened by too rapid and not sufficiently consolidated extension ; and when any at all exceptional causes are at work to agitate mercantile affairs, the weak houses not only ruin themselves but bring down the institu- tions who encouraged their efforts, and whose existence in a measure depended upon their support. The last few years have shown the high rate to which e interest' has been forced in the London 54 BANKING. market, by more than one cause, not the least of which is the great competition for accommoda- tion which is constantly pressing upon the market. We have seen on several occasions, when the mi- nimum interest charged by the Bank of England has receded to a moderate rate, a legion of under- takings, which have been waiting their opportu- nity, press forward ; and the only means of driving them off is by making the charge more than they can bear. In extreme cases of disorder, of what- ever nature, the first suggestion that presses itself upon us is, to contrive a combination of forces that will overcome and destroy whatever evil effects we may desire to get rid of. Banks as a body are established not only for the benefit and profit of those who establish them, but for the general convenience and assistance of all classes of the community. In quiet times when all works well and smoothly, the banks are left to make the most of their opportunities ; but it is also expected by the public that they should at the same time not forget that the period will arrive when they must be prepared to assist and protect their sup- porters. This is only reasonable ; and passing over any comments as to how far certain institutions have fallen short of what was expected of them in TWO CLASSES OF BANKS. 55 this respect, we come to the question of how far is it possible for the future to provide against similar shortcomings. There can be little doubt that in banking, as in most other professions whose institutions are governed by certain fixed principles, which they are more or less all bound to follow, the safest system upon which they can proceed is that of co-operation. It is related, and we believe truly, that certain Scotch banks are now in existence from their having adopted a system of co-operation at the first appearance of a run.' As an instance : a suspicion has been known to have arisen against a certain bank in Scotland, which caused a rapid c run ' on its deposits. Immediately the depositors obtained their money, and were outside the bank, they knew not what to do with it, and were found as a rule to place it in the nearest bank they came to. The bank receiving the funds of these panic- stricken depositors knew full well that unless the 6 run ' upon the first bank were immediately arrested, their own deposits would inevitably follow ; the consequence was, that the funds brought by the frightened depositors were in- stantly returned to the besieged bank by one ojf the receiving bank's clerks. By such an 56 BANKING. arrangement it will be evident that a c run ' may be most easily disposed of instead of allowing a probably groundless feeling of distrust, which may take its rise from the most trifling and absurd causes, to grow to such dangerous dimen- sions ; and it is not unlikely that numbers of the depositors, had they known the real origin of the alarm, would, instead of following the stream, have assisted the banks with further sums, rather than have withdrawn what they had already deposited. The age we live in, and the experience we have already had of banking, must have convinced most persons that no bank can, or is expected to be organised and worked to be at all times pre- pared to meet such sudden and crushing demands as these catastrophes produce, and that when merchants and capitalists of means know the position of the respective banks with whom they do business, to be sound, and from whom they obtain great facilities in ordinary times, they should rise above the level of forsaking them when times of pressure and distrust which must occasionally happen to every concern are weighing upon them. Most shareholders in banks also keep their accounts with the banks in whose dividend they TWO CLASSES OF BANKS. 57 are interested; and as they are, as a matter of course, anxious that the dividend should be as large as it can be consistently with safety, they wish to see the banks cleverly managed ma- naged so that all the spare funds are kept con- stantly employed, and that by their judicious and cautious arrangements as much as possible of other people's money should be intrusted to them for employment. In order, however, that all the funds which are constantly flowing into the bank from many sources should be employed, invest- ments for comparatively long periods such as six months must be made, or the banks would be unable in ordinary times to f place ' their money, and prevent a loss of interest. It will be seen, then, that a bank upon a large scale which is compelled to receive vast sums a good propor- tion of which it engages to return on demand has not a fair chance allowed it when its shareholders, who take in quiet times the bene- fit derived from placing a certain proportion of such demand liabilities at longer periods in order to obtain a higher rate of interest, when the abnormal pressure comes, expect the bank to help itself how it can ; to collect at once these six-month loans, and meet all the obligations, 58 BANKING. which by its pretensions it certainly engages to do. Mr. James Wilson made the following remarks npon this question in the ' Economist ' paper, in the year 1845, which are quite worthy of refer- ence. We are not able to give the number of the paper in which they appeared, but that is of no particular moment. The two great essential and fundamental prin- ciples, therefore, on which the success of banking depends, and to which hitherto very little atten- tion has been paid in all the discussions which have taken place on the subject, are : 6 1st. By what means can a bank attract the largest amount of deposits 9 c 2nd. In what way can a bank employ those deposits to the greatest advantage, consistently with the conditions on which they are made ; that is, repayment on demand ? 6 These two propositions really do involve the whole art of banking, whether viewed as a source of profit to bankers, or as a source of economy, safety, and convenience to the public. We will consider them separately. ' First. By what means can a bank attract the largest amount of deposits ? TWO CLASSES OF BANKS. 59 c The first essential property which a bank must possess is a perfect confidence on the part of the public. The small amount of benefit which a banker can afford to give his customer for placing his money in his hands can never be sufficient to induce any man to run a hazard ; and, more particularly, the mere difference of terms which one banker can afford compared with an- other cannot be sufficient to induce any man to give preference to more tempting terms, when weighed against a greater security and confidence. ' The want of this confidence, to a sufficient extent, and for a sufficiently long and uninterrupted period, has done more to injure the business of banking in England than any other circumstance. In this respect, and in the effect which the absence of confidence has exerted over the amount and character of the deposits of English banks, we dis- cover a striking contrast between them and the banks of Scotland. Much of this fundamental defect in the character of English banks, if not all, we believe can be traced to the effects of legis- lation. Since the Bank of England was erected into a corporation, the restrictions which the Government has from time to time imposed on the exercise of capital and the independent efforts of 60 BANKING. individuals, whether singly or in a combined form, in order to preserve the privileges of that establishment, we believe to have been the root of much if not all of the mischief and discredit which has attached to the banking practice of England. But for the peculiar privileges granted to the Bank from time to time, but for the re- strictions thus placed on private enterprise, and the constant interference of the Government to tinker and patch up evils to which their own previous acts had led, there can be no doubt whatever that many years ago we should have had our banking establishments placed on the highest, safest, and most beneficial principles which free competition, intellect, and energy could suggest and carry into practice. Banking, above all other professions, is that which under entire freedom and non-interference would soonest be placed in the most perfect position. The public will not employ an unsafe bank while they have those of perfect safety with which they can deal, and who are ready to afford them all the facilities which banks can do. It may be said that some men, who are chiefly borrowers, have no choice with which bank they can deal. But to suppose that bad banks could be supported by TWO CLASSES OF BANKS. 61 borrowers, with an indifferent credit, is absurd. It is the lenders and not the borrowers, and least of all the inferior borrowers, that constitute the strength and power of banks. We know what has been the result of the restrictions imposed on banking by the law in this country, and we have only to look to Scotland to see what has been the effect of a long career of perfect freedom and com- petition upon the character and credit of the banking establishments of that country, as well as in affording the greatest convenience and satis- faction to the public.' The second proposition which Mr. Wilson sub- mits for solution carries the assumption that all deposits are ' repayable on demand. 9 Now, no bank accepts more than it can help, repayable on de- mand; or, I may say, a bank always prefers deposits with some days' notice of withdrawal. Neither do the depositors, in many cases, wish to place their money on these conditions, as they are not and cannot be allowed so much interest as a rule as when they give the banker a certain period of notice of withdrawal. A large propor- tion of every bank's deposits must necessarily be payable on demand, if they wish to have the ac- counts of merchants and such like, who can only 62 BANKING. deal with them upon such conditions ; as the nature of a merchant's business necessitates his having a certain sum of money at his immediate disposal. This convenience can be granted to the merchant, and at the same time a certain return, in the shape of interest, for the use of his credit balance ; and such a system works exceedingly well in quiet times, as what one client draws another pays in, and so the two streams, with varying but generally moderate fluctuations, ac- cording to the activity which may exist and the employment that can be found for capital, neu- tralise each other, so far as to leave a proportion of from two-thirds to three -fourths, which the banker may safely employ without unjustifiable risk. This proportion, of course, varies in favour of the bank, as its transactions increase. While every other bank looks upon the Bank of England as the responsible institution, as holding the metallic basis upon which the credit of the country is maintained, it cannot be expected that the directors of other banks will interest them- selves in providing a system of co-operation to the same extent as they would were a general council organised, to which every bank and financial in- stitution of importance was compelled to send a TWO CLASSES OF BANKS. 63 member. Banking has so enormously expanded of late years that it will be found ere long that a complete reformation must be brought about, if the serious disturbances which commercial affairs occasionally drift into are to be handled and dealt with in such a manner that we are not held up to be ridiculed by the world. If a council were formed, at which each board of directors having a certain status was compelled to have one mem- ber present, and all boards would naturally choose the most enlightened and forward member of their body ; at the approach of disturbances an immense and incalculable power to avert the mischievous results of over-trading and dishonest speculation would be at the disposal of the mercantile com- munity and of the banking profession. By the establishment of such a council, the antagonistic feelings, which we have too great reason to believe exert at the present time a very hurtful influence over the progress of banking, might be to a great ex- tent assuaged. In order to effect such an object, so that it might work harmoniously in itself, and the members of such council be in a position calmly and with matured judgment to deliberate upon the course to be pursued under any circumstances, every feeling of jealousy would have to be set aside. 64 BANKING. There are a few large banks at the present time in London which have so consolidated their posi- tion that they may possibly be strong enough to stand alone under almost any pressure that can arise. Such institutions might refuse to attend such a council, for the reason stated ; but if the presence of members from these large and in- fluential establishments would give which there can be no doubt they would an elevating tone to the tribunal, which would require all the prestige and importance that could be collected, in order that its edicts might carry sufficient weight to influence the whole profession in following their advice, proposals for their co-operation should be so made as to insure their acceptance. The only council which has a recognised superiority, and which has taken upon itself to announce the rate of interest which the borrowing British public must pay from time to time, is the court of direc- tors of the Bank of England. This corporation has, through a long series of years, gradually acquired a predominating power from its connec- tion with the State ; but the State merely employs this establishment as its banker, without exercis- ing any influence whatever over the choice of its directors. It may easily be conceived, that in this TWO CLASSES OF BANKS. 65 manner there can be no guarantee that the best men are ever allowed a voice in the consideration of the rate of interest. The public journals, how- ever, especially the ' Economist/ f Times,' and 6 Daily News,' keep so close upon the heels of the bank court, that a false step on their part is imme- diately published by the press ; and we may con- gratulate ourselves that so powerful a check upon their proceedings is already in existence. The great advantage of the council I propose would be, that in times of extreme pressure, when an immense proportion of the country's capital was locked up ; when vast sums lay invested in raw materials, which would probably experience much difficulty in realisation immediately there was any prospect of severe tightness in the market, a wide and extensive general knowledge of the position and standing of all houses at that par- ticular period would be necessary, in order to avoid refusal of assistance to perfectly sound although temporarily embarrassed houses ; for, notwithstand- ing the dishonest speculation which thoroughly bad and capitalless houses have practised from time to time, to the injury of those who were pro- bably quite justified in anticipating that they would have been able to realise the commodities in which F 66 BANKING. their funds were at that period locked up, such fluctuations may arise in the earth's produce, and such contingencies may happen that, as far as we know or are able to calculate at present, no human foresight can render perfect the provision against such irregularities ; and, consequently, the want in such times is a power composed of the most efficient and experienced persons, to judge whether those who seek assistance have really come into their difficulties by reason of natural causes, which human foresight cannot provide against; as it is beyond dispute that mercantile houses, by favour- itism and manoauvring, obtain at times immense assistance to enable them to cover losses which have been occasioned by the most unjustifiable speculation, by engaging in a class of business which, under no circumstances, or at any time, they had a right to meddle with ; and by this means they obtain relief which cannot be given to two at the same time, and is therefore certainly employed, in one case, in encouraging a class of speculation which, when carried on by numbers, so materially stimulates the evil which can be miti- gated, in a measure, when due only to normal causes, and is most probably (at all events possibly) denied to a more modest and upright firm, whose TWO CLASSES OF BANKS. 67 operations are affected by what they may be powerless to control.' The tribunal who should deliberate upon the course to be adopted when the mercantile horizon predicts serious changes for the worse for these great commercial disorders never happen without those previous signs which are so surely premo- nitory of mischief should be composed of men whose cautious judgment has led them successfully through the shoals and quicksands which com- merce presents at all points. These men are com- paratively rare, and, consequently, whether in large commercial houses or banking and financial insti- tutions, soon work their way to the surface by the exhibition of those qualities which constitute their superiority, and which would render their selection a matter of no difficulty. By the formation of this body or tribunal, which should be composed of men who have had experience in not only banking, but all the great branches of commerce, many complicated questions, which are now tediously discussed through the leading journals, might be debated and elucidated for the public benefit. I would propose that this tribunal be composed of at least one hundred members, each of whom would be subject to re-election every year; and that F 2 68 BANKING. every person engaged in banking, financial, and mercantile affairs having attained his majority should be entitled to one vote, irrespective of his position, means, connection, or attainments ; and that his vote be not transferable. The benefit to the community generally would depend upon this tri- bunal being composed of members of every branch; by that, I mean men who have had wide experience in the fluctuations of every article of produce im- ported or exported, and also a knowledge of the chief importers and exporters, so that the banks, as a body, might, through the medium of this tri- bunal, receive a warning of any important change that was expected which might seriously embar- rass certain houses. Those, for instance, whose suspension had become inevitable, in consequence of an immense and unforeseen fall in certain pro- duce which they held, would have a claim to as- sistance against approved security by a proper representation of their position, provided always such applicants were previously known to be people of good reputation, and whose statements would warrant a further enquiry. In this manner much good might be effected, such precautions being taken before matters had proceeded too far. Timely assistance not only prevents the fall of TWO CLASSES OF BANKS. 69 one house, but generally the almost certain fall of others engaged with it ; and, what is still worse, prevents an unjust suspicion being cast upon those whose position may be perfectly sound, and de- prives them of the accommodation usually afforded ; and thus the disturbance grows, and assumes by degrees proportions, whose calamitous results we are already too much acquainted with. This tribunal should have a large hall erected in the city of London the capital of the country where the members who were chosen could devote with ease and comfort the time required of them. An alphabetical register should be kept by officers, in which should be recorded the particulars of every firm in the city how much capital they took into the business, and what business they were engaged in. Such conditions as these could be lengthened, of course, with advantage ; and, in justice to the trading community, some book of public reference should exist to prevent the present vague and uncertain information which is alone obtainable upon such matters. There are many firms which look upon them- selves as private altogether, and who do a business as large and larger than some banks. Their 70 BANKING. liabilities are also frequently greater to the public, and their failure would be more disastrous than that of any bank, and yet they never publish a balance-sheet. They may go on doing a large trade for years, all the time in the most unsound condition, striving in the most unpardonable man- ner by new speculations to retrieve lost ground ; and it is by this sort of thing that the calamitous effects of a crisis are made much more than they need be. If a tribunal, such as the one I speak of, were accessible to any member of the community, through which he could demand enquiry if he had sufficient reason to know that matters had pro- ceeded too far, and by which he could compel any firm to produce a statement of their position without giving up his name v a service would be rendered to trade and mercantile affairs generally, the beneficial effects of which are beyond calcula- tion. Should such a circumstance arise as that a firm had been unjustly suspected, it would remain in the power of the tribunal not only to sponge from their name the least suspicion which the enquiry might have occasioned, but to inform the public that Messrs. So & So were in every respect sound, and that their transactions were proved to have been characterised by the most unsullied TWO CLASSES OF BANKS. 71 integrity. Banks and many other institutions have periodically to show their position to the public, even when organised in all respects in the most complete way yet invented, and whose opera- tions are conducted upon those principles which do not include any speculative elements. How much more necessary must it be to establish some system for keeping a watchful check upon mer- chant houses which show no balance-sheet, and whose operations, in the majority of cases, are much more intricate than those of a bank, and are directed by a judgment which seldom errs on the side of prudence. There will I doubt not be many who will pronounce this scheme at once impracticable, on the ground alone that the community would never submit their affairs to be investigated at the dic- tation of any one or more individuals, who might possibly be actuated by base motives ; but I main- tain, nevertheless, that the establishment of such an institution defective as it might be at the out- set would be found, by its power to control or exclude injurious and reckless operators, of incal- culable service in purifying the stream of British commerce, and would tend, in course of time, to improve the morale of the entire mercantile com- munity. 72 BANKING. CHAPTER III. OF BANKING ACCOUNTS. As to choosing a Banker Of opening an Account Of the different sorts of Accounts General Observations. BEFORE deciding on the commencement of business with any particular banker, a prudent man will necessarily be anxious to know something of the stability of the establishment to which he is about to commit such important trusts. In the metropolis, where banks are so numerous and of such very high standing, a mistake can hardly be made ; but in the provinces the difficulty is greater, as, excepting the larger towns, the choice is generally restricted to three or four establishments ; sometimes less. The periodical publication of accounts by the joint-stock banks furnishes a very important ele- ment in coming to a decision, although, in several notorious instances, the figures given have been utterly fallacious; still we are proud to believe OF BANKING ACCOUNTS. 73 that these are exceptional cases, and that a pub- lished balance-sheet is a reliable document. In agricultural districts the private banker is usually a landed proprietor ; and from this a fair idea of his individual wealth may be formed. In manufacturing towns a trade is frequently com- bined with the business of a banker; and the question may fairly arise as to what portion of the resources of the bank are withdrawn to meet the requirements of the trade. It appears to us that the private banker labours under a disadvantage in competition with his joint-stock opponent in this way, that the publication at stated times of the accounts of the latter gives confidence to the public, whilst the transactions of the former are shrouded in mystery. With the joint-stock bank, in case of misfortune, there is the balance of capital that has not been called up to fall back upon ; but the whole of the private banker's capital will doubtless have been lost ere he will decide upon closing his doors. Again, although at some time or other a private bank may have been in possession of ample means, still, by the retirement of partners, and consequent withdrawal of their capital, its resources may be weakened to a great extent a fact of which the 74 BANKING. great body of customers would be ignorant ; and, of course, it would be to the interest of the bank that they should not be informed. So, again, on the death of a banker having a family, he bequeaths the business to one of his sons, and very probably the bulk of his property is withdrawn, to be divided amongst his other children he to whom the bank descends simply getting the hive from which others have extracted the honey. We should always distrust establishments of- fering high rates of interest. Such a method of doing business is only to be made profitable by travelling out of the usual safe paths ; the customer who has the temerity to accept such inducements is but too likely to lose his interest and endanger his principal. Bankers, before opening an account with a new customer, usually require an introduction, if the individual be a stranger. The person who introduces a customer to a bank is expected to have some knowledge both of the state of his friend's monetary affairs and of his moral respectability. One reason for this caution is very obvious, viz. the banker's own protection. OF BANKING ACCOUNTS. 75 Another, which does not appear so plainly to the casual observer, is this ; that the fact of a man having an account with a first-rate banker, is to a certain extent accepted as a guarantee, that, in the opinion of the banker, his customer is a person worthy of some trust ; and such being the case, if bankers accept indiscriminately, and without en- quiry, all accounts offered to them, the public will give them credit for precautions which they do not adopt, and will in consequence be deceived. Bankers usually object to open accounts with executors or trustees (as such). The difficulty is, however, easily got over, by taking the names of the parties individually. It is necessary, before opening an account in the name of a married woman, to have the written authority of the husband for so doing. It is not considered a good thing, except under extraordinary circumstances, for commercial houses to change their bankers ; nor do bankers look very favourably on customers who do business with more than one house. In the case of a very large business, it is sometimes done from prudential motives. There are three classes of accounts with which banks have to deal, viz. : 76 BANKING. Credit Accounts, Overdrawn Accounts, and Deposit Accounts. Of these, the first-named is by far the largest, and, in fact, the only one of which the Bank of England, and most, if not all, the London private bankers take cognisance. It is simply an account in which the customer always has a balance standing to his credit. Overdrawn accounts, or, as they are sometimes called, c cash credits/ are not unusual with country bankers. They are worked in the same way as credit accounts; but the balance is always or generally in favour of the banker, who takes security from his customer, and gives him a c limit,' beyond which he must not draw. The difference between this method and an ordinary advance, as made by London bankers, is, that in the latter case a certain sum is placed for a stated time to the customer's credit, and either repaid at the expiration of that time or renewed for a further period ; but with overdrawn accounts,, only the sum required is drawn, and on that alone interest is charged. Such arrangements may continue for years without the balance ever being a credit- balance. OF BANKING ACCOUNTS. 77 Deposit accounts, from which banks derive a large portion of the funds wherewith they carry on their business, are sums placed at stated rates of interest with a bank, for which receipts are given, called deposit receipts. These are not transferable, and must be produced and signed on the back previous to the repayment of the money. The usual rate of interest allowed on these deposits by the joint-stock banks of London is 1 per cent, under the minimum rate of discount at the Bank of England for the time being, the banks making their profit by the margin. When any alteration is made in the rate allowed, it is usual to give notice by advertisements in the f Times,' and other daily papers. As we before observed, the Bank of England and the London private banks eschew this business. In the country, however, the private banks (especially in the manufacturing districts, where money can generally be profitably employed in discounting) encourage it. It is not difficult to see how, in the cases of overdrawn and deposit accounts, a banker's profits are made ; but when we come to consider credit accounts, it is not so obvious to the non-professional. It may be asked, What balance will pay a banker for keeping my account? To this very natural 78 BANKING. enquiry we can only reply by asking such ques- tions as, What will be the extent of your trans- actions ? how many cheques will you draw ? shall you require either loans or discounts, and to what amount? Until these are answered, it will be utterly impossible to estimate what balance will be remunerative. In consideration of this subject, it must be borne in mind that a certain portion of the balance standing to a customer's credit must be retained in the banker's hands to meet current demands ; and, supposing the balance to be 1000Z., at least 200Z. of that sum must be unprofitable. Added to this we must assume that some of the nominal balance will consist of ' uncleared effects,' i.e. cheques and bills for which the money has not been received. Although cheques and bills of ex- change arrived at maturity when paid in with bank-notes and coin are all placed immediately to the customer's account, it is expected that the portion of the credit consisting of those documents, will not be drawn against until sufficient time shall have elapsed for them to be cleared ; and a memorandum is usually inserted at the beginning of the c pass book ' stating what time this opera- tion will require, which will not exceed a few hours OF BANKING ACCOUNTS. 79 where the cheques are payable in the same town as that in which the receiving bank is situated ; if they have to be sent through the country, Clearing-house, or the post, three or four days should be allowed. Of course, notes and coin may be drawn against immediately. By some it has been said that, with money at less than 2 per cent., the expenses of banking will leave no margin for profit ; to refute such an as- sertion it is only necessary to point to the usual dividends of the joint-stock banks. It is generally the case, that as money rises in value the balances in the hands of bankers decrease, and vice versa ; so that the low rate of interest is compensated for by the additional amount deposited ; and it must be noted that, with a high rate of interest prevail- ing, the bad debts will increase, however cautious the banker may be. Country banks are not affected by the changes in the money market to the same extent as those in London, as the former seldom lend to their customers at a lower rate than 5 per cent. ; they do not, on the other hand, often decrease the rate of allowance on deposits below 2J per cent. It is only in the employment of their reserves that they feel the difference ; this, as with the London 80 BANKING. banker, is balanced by the increase or diminution of deposits. It lias been estimated that the banker is remu- nerated if the average balance of an account is sufficient to show a profit of sixpence on each cheque drawn. Adopting this view for the mo- ment, suppose a customer with an average ba- lance of 500Z. and money at 3 per cent., 100Z. must be retained to meet current demands, leaving 400L to be made use of for the purposes of the bank; this, at the rate mentioned, would give 12L, so that the customer would be entitled to draw 480 cheques per annum without any charge. We cannot think this to be a fair re- muneration ; and, should these views be generally adopted, we believe the dividends received by joint- stock bank shareholders would speedily fall from the high rates at which they have so long stood. By the introduction of the joint-stock banking system into London, great facilities for banking were created for those whose means would not admit of their keeping a balance large enough to meet the views of the private bankers, by making a small charge for commission where the average balance was not remunerative. Interest was then for the OF BANKING ACCOUNTS. H first time allowed on current accounts when the balance exceeded 2001. Before leaving this branch of our subject, we would address a few general remarks, which may perhaps be useful, to the large and ever-increasing class who keep banking accounts. A banker is bound to know his customer's handwriting, and for that reason, on opening a new account, he takes his customer's signature in the book kept for the purpose, in order that, in cases of doubt, he may verify any document presented for payment. We wish to urge the importance of adhering closely to one style of signature, as a great pre- ventive to the success of forgeries ; and to protest against the fallacy that an illegible handwriting is the most difficult to imitate ; experience all goes to prove the reverse ; the more distinct the writing the more obstacles does it present to the forger. On the death of a customer, the bank, previous to parting with any balance standing to his credit at his death, will require the production of the probate of the will of the deceased for registration in the bank's books, after which the balance is at the disposal of the executors. Where the deceased died intestate, the heir-at-law must produce letters of administration. G 82 BANKING. Enquiries as to the standing or means of any customer are never answered by bankers to private individuals ; so that, to obtain information of the kind, the person requiring it is obliged to make use of his own banker. This precaution is a safe- guard against malice and idle curiosity. An order restraining bankers from parting with money is sometimes granted by the judges of the superior courts, and must be obeyed, at the risk of being committed for contempt of court. There are various ways in which customers may save their bankers considerable time, without en- tailing any great trouble on themselves. Bankers always furnish to their customers printed forms, called ' credit tickets,' which are divided into different heads, and should be filled up and taken to the bank with the cheques, &c. All cheques and bills of exchange should be carefully examined, to see whether stamps or in- dorsements are required ; in a word, whether they are regular. Should a clerk or servant be sent for a cheque- book or any document belonging to a customer, it is necessary to have a written order for its delivery. The only receipt usually given by bankers is the OF BANKING ACCOUNTS. 83 acknowledgment by entry in the pass book ; there are, however, some exceptions to this rule. It is always advisable to cross cheques remitted by post, if the name of the payee's banker be known, with his name; if not, with the words 6 and company.' Should the cheque be delivered to the payee, it is a good plan to ask for his banker's name, and cross it. Besides bills of exchange, of which mention will be made in a future chapter, there are various securities on which advances will be readily made by bankers. Securities transferable by delivery, such as ex- chequer bills and the bonds of colonial and foreign governments, are the most available; the posses- sion being sufficient, it is only necessary for the borrower to give a lien to the banker, who will then advance according to the value of the se- curities for the time being, retaining a margin for eventualities. Government stocks, as consols, &c., are required by bankers, previous to an advance, to be trans- ferred from the name of the customer to that of some partner or officer of the bank; this only entails the trouble of making the transfer, as the consideration is merely nominal. Many bankers G 2 84 BANKING. object to lend money on shares in railways or trading companies, for this reason unless the shares are regularly transferred, the security is not tangible ; and should the precaution of having a transfer executed be adopted, the lender makes himself liable for any calls the company make, and in the event of insolvency, for the debts incurred. Dock warrants and bills of lading are frequently advanced on, but many bankers consider it an unsound practice. Life-assurance policies are almost invariably objected to as security for advances, except as a c make-weight. 5 The chief objections to be urged against them are, that the validity entirely de- pends on punctual payment of the premiums, and should the owner neglect such payments, the holder must in self-defence make it right, or his security is valueless. It is necessary that a life office should be informed of the assignment of any policies to any third person, otherwise, in case of death, there will probably be difficulty, if not litigation, before a settlement will be made. When an advance is made by a banker on the title deeds of real property, it would appear to be sufficient that the borrower should write a letter stating the circumstances, and giving a lien on OF BANKING ACCOUNTS. 85 the property. It may, however, be safer to require an undertaking to execute a regular mortgage if called on to do so. A banker has no right to detain, or appropriate to the payment of an overdrawn account, property of any description which has been placed in his hands for safe custody ; it must be given up to the owner on his application, although he may be indebted to the banker at the time to the full amount of the property. Nor can a banker (without the express consent of his customer) appropriate any balance realised by the sale of securities, deposited to cover a specific advance, towards the liquidation of any claim that may have arisen since such deposit. 86 BANKING. CHAPTER IV. CHEQUES. "What is a Cheque How it should be drawn As to Stamps Post- dating Cheques Crossing Cheques Indorsement Presentation Bankers bound to pay Cheques Exceptions To whom the Banker is liable for negligent dishonour Forgeries Cheque not a legal tender Cheque in payment of Bill of Exchange Cheque as evidence. CHEQUES, which are such an important part of the circulation of the country, appear to have had their origin so far back as the times of the Romans, though it is difficult to fix the exact date of their introduction. The names by which these documents were known were ' attributio ' and ' prescriptio.' We cannot discover that any great use of them took place either in this coun- try or abroad until about the year 1780, when the bankers in London adopted them instead of the goldsmiths' notes, of which they then discon- tinued the issue. Since that time the use of cheques has extended year by year ; and although there do not exist any data by which either the CHEQUES. 87 number or amount drawn may be arrived at, it must come to a total of some hundreds of millions per annum. A cheque is an order addressed to a banker by his customer to pay a sum of money on demand. It is not necessary that a cheque to be legal should be couched in any particular form of words, although the banker, if he give due notice, may refuse to pay cheques not drawn according to his directions. The best plan is to adhere to the printed cheques, which all bankers now issue to their customers free of charge, as the use of plain paper does away with one difficulty for the forger the obtaining possession of the blank cheque. We believe it is now correct to say that all bankers issue printed cheques to their customers ; it is, however, only within the last fifteen years that the custom has been adopted by the old- established firm of Child & Co. The place where a cheque is drawn ought to be truly stated, and the date must be that of the day on which it is issued. Prior to 1853 all cheques were unstamped, and were illegal documents if dated more than fifteen miles from the bank on which they were drawn ; in that year an Act was passed by which such 88 BANKING, cheques were legalised, provided they bore either an impressed or adhesive penny stamp, and the drawers were allowed the privilege of making these cheques payable to ' order ' instead of to 'bearer/ the effect of which will be mentioned below. This Act was constantly evaded by dating the cheque from the town on which it was drawn ; it led, moreover, to endless disputes as to distance, and finally was a failure as a source of revenue. An Act which came into operation in 1858 obliged all cheques drawn by private individuals to bear the penny stamp, with the exception of those payable to 4 self,' drawn at the bank counter, or paid to an authorised person for the use of the drawer. This exception has been since abolished, and at present the only cheques which are legal unstamped are those of some of the Govern- ment offices, poor-law unions, and charities ; the transfers passing between bankers are likewise exempted. The stamp should be put on by the drawer, but should he omit it, the payee, or any one who pre- sents the cheque, can legalise it by affixing a stamp.. Cheques drawn out of the United King- dom are considered by law as foreign bills, and CHEQUES. 89 require to have ' ad valorem ' foreign stamps. The Channel Islands and the Isle of Man are included in the word foreign. Post-dated cheques, i.e. cheques bearing date subsequent to the actual drawing, are illegal ; the drawer, payee, and the banker who knowingly pays such cheques, incur penalties of 100?. in the drawer and banker's case, and 20Z. in that of the payee.* The reason of this is obvious, as post-dated cheques if used may do away with the necessity for bills of exchange, and thus defraud the revenue of the stamp duty thereon. The practice of crossing cheques, which is now so general, is a most important safeguard against fraud. It originated with the Clearing-house, the clerks of which used to cross the cheques they deli- vered to other bankers with the name of their own house ; and gradually the public adopted the system. For many years, however, although bankers used to act upon the crossing, it was not compulsory to do so ; and it appears, by decisions * There seems to be some doubt whether a post-dated cheque, if payable to ' order,' .is invalid. Byles on Bills, 8th edit. p. 16 ; Grant on Banking, 2nd edit. p. 15. as regards deposits, the whole country was exempted from the sway of the Bank of England. In 1759 notes were first issued for 15Z. and 10Z., the minimum having previously been 20Z. ; no ON BANK-NOTES. 181 further alteration took place until 1795, when 5L notes were used. It is worthy of remark that about 1781, the use of cheques becoming more general, the London private bankers discontinued the issue of notes ; * and from that time have never renewed it, al- though not prevented by legislative enactment until 1844. We have now to consider an episode in the history of the nation which, to a commercial people like ourselves, must always be looked back upon with shame and regret; we allude to the suspension of cash payments. Yarious causes have been assigned for this unfortunate step, the management of the Bank being very roughly cen- sured by some writers. Sinclair, in his ' History of the Revenue,' f quotes the opinion of a contem- porary, and especially mentions that he agrees with it, to the effect ' that the conduct pursued by the Bank of England, for a considerable time previous to the suspension of the payment of its notes, almost warrants the suspicion that instead of really dreading that suspension as an evil, they * Macleod, vol. ii. p. 63. t Sinclair's ' Hist, of Kevenue,' vol. ii. p. 307. 182 BANKING. rather looked to it as an advantage. 3 There is no doubt that the holders of bank stock did benefit largely by the suspension, as the following figures will testify. In the year 1797, when the restriction com- menced, the highest price of bank stock was 146, the lowest 115 ; * we will take the price every five years down to the final resumption in 1821 : Years Highest Lowest 1802 ... 207 ... 178 1807 ... 235 ... 208 1812 ... 232 ... 212 1817 ... 294 ... 220 1821 ... 240 ... 221 Tor several years prior to 1797 the dividend on bank stock had been at the rate of 7 per cent, per annum. In 1807 it was raised to 10 per cent., in addition to which from 1797 to 1816 the pro- prietors had bonuses on their capital presented to them of the following amounts, viz. : 17^- per cent, in Navy Five per Cents. 15 in Money. 25 in BankStock.f These advantages truly were very great; but before condemning the directors for acting as they * Francis' ' Hist, of Bank,' vol. ii. p. 261. f Ibid. p. 276. ON BANK-NOTES. 183 did, the difficulties of their position should be well considered, and -the probable effects of a different system to that adopted duly weighed. A clause in the Act of 1694 prohibited the Bank from advancing money to the Government under the penalty of a fine of treble the amount so ad- vanced. In 1793 Mr. Pitt introduced and quickly passed an Act repealing this clause,* which practi- cally took the management of the Bank out of the hands of the directors, unless they resorted to the extreme measure of refusing to pay the drafts of the Government, and thereby proclaim- ing a national bankruptcy. In his extreme need of money Mr. Pitt did not fail to make use of this resource, and to such an extent that by an account dated February 10, 1797, we find the advances amounted to 7,185,645?., exclusive of 400,000?. for arrears of interest, f It must be understood that this is altogether distinct from the permanent debt due to the Bank of 11,686,800?., which was included in the national debt accounts as funded debt, and was the subscribed capital of the Bank ; the advances in question formed part of the un- funded debt. * Sinclair's ' Hist, of Revenue,' vol. iii. p. 26. f Francis' ' Hist, of Bank,' vol. i. p. 229. 184 BANKING. The enormous subsidies this country was send- ing abroad to aid its allies on the continent in the struggle against Napoleon, had caused an im- mense drain on the metallic reserves of the Bank for the last year or two ; while the diminution of the provincial bankers' issues since 1793 (esti- mated by Mr. Thornton at one half) rendered an extra supply of bullion necessary to supply the deficiency which also was drawn from the Bank, and altogether had reduced the stock of specie so low that the directors in their anxiety to provide for their own safety used every means to get notes in, and to such purpose that in five weeks prior to February 25, 1797, the circulation was reduced from 10,550,830L to 8,640,2502.* The contraction of the note circulation increased the requirement for gold ; the probability of invasion induced hoarding, and a run on, and consequent stoppage of, two large banks at Newcastle on February 20 caused a complete panic, which lasted all through the week, by which time the bullion at the Bank was brought down to 1,272,0002. On Sunday, February 26, 1797, a cabinet council was held, when the resolution was * ' Lords' Eeport, 1797,' p. 177. ON BANK-NOTES. 185 arrived at to suspend cash payments, and instruc- tions to that effect were given both to the Bank of England and the Bank of Ireland. From that date to May 1, 1821, this colmtry had what it is to be hoped it will never see again an incon- vertible paper currency. It appears that at the time of the suspension the assets of the Bank exceeded its liabilities by 3,826,8902. exclusive of the permanent debt of the Government. Committees of both houses were immediately appointed to investigate the affairs of the Bank, and the causes and advisability of the suspension. The directors attributed it to the advances to Government; merchants to the sudden contrac- tion of the note circulation. Mr. Macleod,* after some remarks in which he agrees with the merchants, says : ' From the fore- going consideration, as well as the weight of authority on the subject, we can scarcely have any room to doubt that the suspension of cash payments was brought about at that particular time by the erroneous policy of the directors. We must in candour state that it appears open * Macleod, ' On Banking,' yol. ii. p. 98. 186 BANKING. to much doubt whether any management, how- ever skilful, could ultimately have saved them from such a disaster during some period of the war.' But he also says : c As the suspension, then, must, we think, have taken place sooner or later, it was probably advantageous for the country that it did occur so early in the struggle.' * Although, as already mentioned, the resumption of cash payments did not take place until the year 1821, when the order for suspension was issued, the 24th of June in the same year was the date given for resuming, but after one or two extensions of the time, a month after the con- clusion of a definitive treaty of peace was finally fixed as the limit. An Act was passed in 1797 to remedy the want of small change by allowing small notes to be issued; in England below 5Z., in Scotland below 1Z. The following figures, extracted from ' Francis' History of the Bank of England,' will show the wonderful effect the suspension and the issue of small notes had upon the Bank circulation ; un- fortunately the country banks at that time made * Macleod, ' On Banking,' vol. ii. p. 100. ON BANK-NOTES. 187 no returns, so that it can only be a matter of esti- mate as to what extent they were influenced. Circulation. Bullion. Feb. 28, 1792 . . 11,307,000 . 6,468,000 1797 . . 9,675,000 . . 1,086,000 1802 . . 15,187,000 . . 4,153,000 1807 . . 16,951,000 . . 6,143,000 >? 1812 . . 23,408,000 . . 2,983,000 1817 . . 27,398,000 . 9,681,000 1821 . . 23,885,000 . . 11,870,000 1823 . . 18,392,000 . . 10,384,000* By this it will be seen that while the circula- lation, i.e. the profitable part of the Bank business, rapidly expanded, the bullion, or unprofitable part of its resources, was usually lower than before the inconvertible system began. Although it is not possible to tell the amount of the increase of the country bank-notes, there cannot be the slightest doubt that, taking into consideration the number of new banks started during the period, it must have been many millions. In 1797 the number of country banks was 270 ; in 1810, 721 a threefold increase in the space of 13 years. In 1813 they had risen to 940. It will be scarcely worth while to follow the course of the paper currency through its vicis- situdes for the next few years, or to trace the * Francis' 'Hist, of Bank,' vol. ii. p. 277. 188 BANKING. gradual depreciation, first of Bank of Ireland, and later of Bank of England notes, a depreciation which the Bank directors in both countries ear- nestly denied, contending that gold had risen instead of the note having fallen in value. It is as well to pass over this, and like controversies of that day, as matters on which there is now no difference of opinion. Mr. Macleod gives a table showing the market price of bullion,* and conse- quent real value of the bank-note at various times during the restriction, by which it appears that down to 1804 the depreciation was but nominal, after that time it became gradually Worse ; on August 6, 1813, the price of bullion was bl. 10s., making the \l. note equivalent to 14s. 2d. in coin ; this was the extreme point of depreciation. The Peace of Amiens, concluded March 27, 1802, compelled the Bank to be ready to pay bullion in a month from that date, but Mr. Addington relieved it of the necessity by persuading parlia- ment to prolong the restriction until March 1, 1803 ; it was then put off to the following session, by which time war had again broken out, so the resumption of cash payments was deferred until * Macleod's ' History of Banking/ vol. ii. p. 221. ON BANK-NOTES. 189 six montlis after the conclusion of a treaty of peace. This period expired in March 1815, but again was the evil day postponed to July 1816, after- wards to 1818, and finally, by the provision of Peel's Currency Bill, a gradual resumption took place. This celebrated Bill enacted that between Feb- ruary 1 and October 1, 1820, the Bank should cash its notes in bullion at 4L Is. per ounce; from October 1, 1820, to May 1, 1821, at 3Z. 19s. 6d. ; and from the last date to May 1, 1823, at 3. 17s. 10-JcL ; in each case the notes presented were to represent the value of 60 ounces. On May 1, 1823, the restriction acts were to expire finally. In 1821 a Bill was passed to allow the Bank to resume its payments in cash, May 1, 1821, which it accordingly did on that date. The Act of 1819 had provided that the issue of country notes for 11. and 21. should be stopped in two years from the Bank of England resuming cash pay- ments ; but it was found in 1822 that the rapid contraction of the currency owing to the enact- ment of Peel's Bill, had caused such a diminution in prices generally that it was deemed wise to respite the small notes till 1833. This had a most injurious effect the country 190 BANKING. banks poured forth their paper in all directions, prices rose rapidly, arid speculation was engendered to a vast extent ; bubble companies started up by dozens, and loans were contracted with the greatest ease by foreign powers ; all went well and pros- perously till the latter end of 1825, when the bullion in the Bank began to diminish, and the directors in consequence contracted the discount accommodation to the public. Then the compa- nies formed by the speculation of the hour found their shares fast falling in price, the country banks were beset for cash in exchange for notes, the whole ending in the panic of 1825. It is said that the discovery of a number of 1Z. notes at the Bank of England ready for circulation, and the issue thereof with the consent of the Government, was of the most important service in restoring confi- dence in the country districts. The panic was, however, the death-blow to the small notes, as after February 1826 no more stamps were issued, and in April 1829 small notes were finally abolished in this country. Government at this time intended also to extinguish the Scotch and Irish \l. and 21. notes, but the opposition to it, especially in Scot- land, where it was assisted by the powerful pen of Sir Walter Scott, was too strong for ministers to ON BANK-NOTES. 191 meddle with, and the small notes exist to this day in both the sister countries. The panic of 1825 led to two other important measures, both with the same end in view the improvement of the country circulation viz. the establishment of branches of the Bank of England in the larger towns, and the partial abolition of the Bank monopoly by the permission to open joint-stock banks of issue beyond sixty- five miles from London. We may remark en passant that in the debates relative to these changes, both Mr. Huskisson and Sir Robert Peel advocated the limited liability system for banking companies, which has lately been so largely developed. The important step of making notes of the Bank of England a legal tender was taken at the renewal of the charter in 1833, when it was declared that the tender of notes for any sum above 5L was legal in England and Wales, except by the Bank of England itself. This measure was strongly debated at the time, and among its opponents was Sir Robert Peel, but it was carried on a division by 214 to 156. In this Act was inserted a clause to the effect that the exclusive privileges of the Bank of Eng- land did not extend to the prohibition of joint- 192 BANKING. stock banks within sixty-five miles of London, provided they were not banks of issue. This clause was strongly protested against by the Bank, on the ground that the negotiations with the ministry previous to the renewal were carried on with the understanding that the privi- leges of the Bank were to be preserved intact. This was strictly true. At the time these com- munications passed there can be no doubt that both parties were of opinion that the phraseology of the charter prevented the establishment of banks, either of issue or deposit, within sixty-five miles of London; but when the law officers had been consulted and gave their opinion ad- versely to the Bank, Lord Althorp determined to avail himself of it, and answered the directors by saying that the stipulation was that their privileges should not be lessened, to which he would strictly adhere, but that he could not con- sent to improve their position by any new enact- ment. Now, whatever may be the general opinion respecting the policy of curtailing the exclusive rights of the Bank as regards the public, it will doubtless be conceded that it was rather sharp practice towards the corporation. The directors did not feel strong enough to resist the Govern- ON BANK-NOTES. 193 ment, so they did the best thing possible under the circumstances, submitted with a good grace. The charter was renewed in 1833 for twenty- one years from August 1, 1834, but power was reserved by the Government to suspend it after the expiration of ten years if a twelvemonths' notice was given of the intention. Within the next few years there were two serious disturbances in the money market, but arising from very different causes; the first cul- minating in the latter end of the year 1836, the second in 1839. The harvests of 1832-3-4 were very abundant, and the price of corn in con- sequence fell extremely low, which although a severe trial for the agricultural, was a source of great prosperity to the manufacturing inte- rest. Eailway schemes were starting, and spe- culation of all kinds increasing, the new joint- stock banks giving great facilities by credit and discounts; which latter were immediately re-dis- counted, until the Bank of England issued a notice to the effect that all bills bearing the in- dorsement of a joint-stock bank would be refused discount, whatever other indorsements they might have. America was about this time re-establish- ing a metallic currency, and drawing large sums o 194 BANKING. from this country in exchange for securities. Two large joint-stock banks failed the c Northern and Central ' in England, the ' Agricultural and Com- mercial ' in Ireland during the month of Novem- ber 1836, and of course created a great deal of uneasiness, but the Bank of England by giving large accommodation seems to have averted the storm. The second disturbance was owing to very different causes : following the plentiful harvests above mentioned was a succession of bad ones, causing an enormous demand for corn from abroad, which in due course necessitated an ex- port of bullion to pay for it. The Bank of Eng- land was obliged to resort to an artificial means of getting the gold back, and the expedient adopted was this : by arrangement, Messrs. Baring drew for about two millions sterling on Paris bankers, the Bank of France engaging to pay the drafts even should the acceptors not be in a posi- tion to take them up at maturity. This had the effect of stopping the drain ; but so low had the cash fallen that, on September 2, 1839, the total amount at the Bank was 2,406,OOOZ.,* and it is * Macleod's ' Hist, of Banking,' vol. ii. p. 285. ON BANK-NOTES. 195 said that but for this relief it would have been necessary to suspend payment. Having rapidly glanced at the history, so to speak, of the paper currency, we come to the con- sideration of the Act of 1844, which is now the regulator of the note circulation of the United Kingdom ; for although the parts affecting Scot- land and Ireland formed different bills, still it may really be considered as a single Act. As before mentioned, at the renewal of the charter in 1833, the Government reserved the power of declaring the exclusive privileges of the Bank of England at an end in 1844. In the month of April of that year a correspondence was opened by Mr. Goulburn, the Chancellor of the Exchequer, with the Governor and Deputy-Governor of the Bank as to the new enactments proposed by the ministry; to which, after ineffectual efforts on the part of the Bank to obtain better terms as regards the amount to be paid in lieu of stamp duty, the consent of the court of directors was given. The main object in view in these changes was 'to place the general circulation of the country on a sounder footing, and to prevent as much as possible fluctuations in the currency, of the nature 02 196 BANKING. of those which, have at different times occasioned hazard to the Bank, and embarrassment to the country.' * As to the success of the means employed to attain this end opinions vary greatly, and the names on either side of the question are of very high authority. Want of space prevents the argu- ments being fully stated here : suffice it to remark that the advocates of the Act have a primd facie case against them, inasmuch as neither in 1847, 1857, nor 1866, did it, when in operation, prevent the panic, although when suspended a better state of feeling immediately arose. f The clauses of the Act relative to the Bank of England are as follows : 1st. That on and after the 31st August, 1844, the issue of bank-notes payable on demand by the Bank of England should be separated and thenceforth kept wholly distinct from thfe general banking business, and should be carried on by a separate department, entitled ' The Issue Department of the Bank of England.' 2nd. That on the 31st August, 1844, there should be transferred to the Issue Department securities to the value of 14,000,0002. (of which the debt * Mr. Goulburn's Letter, April 16, 1844. f Vide extract from the ' Times.' Appendix. ON BANK-NOTES. 197 due by the public should be deemed a part), and also any gold and silver not required for banking purposes; and thereupon the Issue Department should deliver to the Banking Department such an amount of notes as should, together with those in the hands of the public, be exactly equal to the aggregate amount of securities, gold, and silver transferred to the Issue Department. The Bank was forbidden to increase the securities in the Issue Department, but it might decrease them at pleasure, and again increase them up to the limit. After the transfer the Issue Department could only issue notes in exchange for other notes, or for gold and silver coin or bullion, either to the banking department or the public generally. 3rd. That the silver bullion held by the Issue Department should not at any time exceed one fourth part of the gold coin and bullion. 4th. That after August 31, 1844, all persons should be entitled to demand notes for standard gold, at the rate of SI. 17s. 9d. per ounce, the assay to be conducted by persons approved by the Bank, and the expense thereof to be borne by the seller. 5th. That if any banker, who on May 6, 1844, was issuing his own notes, should cease to do so, 198 BANKING. it should be lawful for the Privy Council, on the application of the Bank of England, to authorise the increase of the securities in the Issue Department beyond 14,000,000?., by a sum not exceeding two- thirds of the issue so discontinued, and thereupon to issue notes to that amount ; the authority for so doing to be published in the next 6 Gazette.' 6th. That the accounts of the Bank should be published weekly in the London Gazette.' 7th. That Bank of England notes should be freed from stamp duty. 8th. That the sum paid by the Bank for its exclusive privileges should be raised from 120,0002. to 180,000?. per annum; and aU profits arising from increased issues (under clause 5) should be paid to the public. 9th. That it should be lawful for the Bank, up to August 1, 1856, to compound with banks of issue to discontinue their own notes, and sub- stitute those of the Bank at the rate of 1 per cent, per annum, the amount of such composition to be deducted from the sum paid by the Bank to the public. 10th. That the Bank of England should retain all privileges not abolished by this Act till twelve months' notice had been received by the Bank, ON BANK-NOTES. 199 which notice might be given after August 1, 1855, and after repayment by the public of all debts due to the Bank. The authorised circulation has, in accordance with the provisions of the fifth clause, been thrice increased : viz. in December 1855, 475,OOOL ; July 1861, 175,0002.; January 1866, 350,0002., which brings the fixed issue of the Bank, exclusive of that against bullion and coin, to 15,000,000?. The clauses in the Act of 1844 res'pecting country banks are also of great importance ; they are as follows : 1st. That no person other than a banker who on May 6, 1844, was issuing his own notes, should, after the passing of the Act, have the power to do so in any part of the United Kingdom. 2nd. That after the passing of the Act it should not be lawful for any banker to draw, accept, make, or issue in England or Wales any bill of exchange, promissory note, or engagement for the payment of money to bearer on demand, or to borrow, owe, or take up any sums of money on the bills or notes of such banker payable to bearer on demand, except such bankers as were on May 6, 1844, issuing their own notes, who should, under restric- tions hereafter named, continue to do so. The 200 BANKING. rights of any existing firm should not be affected by the admission or retirement of partners, pro- vided the number did not exceed six. 3rd. That if a bank of issue should discontinue issuing, whether from bankruptcy or other cause, it should not be lawful to resume. 4th. That every banker claiming to issue notes should give notice to the Commissioners of Stamps and Taxes, the place, name, and firm, at and under which he had issued notes during the twelve weeks preceding April 27, 1844. That the ave- rage amount in circulation for those twelve weeks should be ascertained, and it should then be lawful for the bank to continue to issue notes, provided that on an average of four weeks the certified sum should not be exceeded. 5th. That if during the twelve weeks preceding April 27, 1844, two banks of issue had amalga- mated, it should be lawful for the united bank to issue notes to the aggregate amount of each sepa- rate bank. 6th. That the Commissioners of Taxes should publish in the ' Gazette ' a statement of the autho- rised issue of each bank. 7th. That if, after the passing of the Act, two banks amalgamated, the aggregate amount of the ON BANK-NOTES. 201 notes of each separate bank should be the autho- rised amount of the united bank, provided the total number of partners did not exceed six, in which case the privilege of issuing notes should cease. 8th. That if, on an average of four weeks, it should appear that any banker had exceeded his authorised issue, he should forfeit a sum equal to the excess. 9th. That every bank of issue should make a weekly return to the Commissioners of Taxes of the amount of notes in circulation each day of the week, and every four weeks of the average amount during that time, these returns to be published in the ' Gazette.' A false return to be punished by a fine of 100Z. 10th. That the average should not exceed the amount certified by the Commissioners. llth. That the Commissioners should have the power to examine and make extracts from bankers' books. 12th. That every banker should, on January 1 in each year, forward to the Commissioners afore- said the name, residence, and occupation of each member of the firm, which particulars should be published in the local newspapers. 202 BANKING. 13th. That banks of issue having branches should be required to take out a licence for each branch, with this exception, that banks in exist- ence prior to this Act, and having already four licences, should not be required to increase that number. 14th. That after the passing of the Act, it should be lawful for any number of persons, though exceeding six, carrying on the business of banking in London, or within sixty-five miles thereof, to draw, accept, or indorse bills of ex- change, not being payable to bearer on demand, any Acts to the contrary notwithstanding. It strikes one at once on reading over this Act, that the great means to the end of ' placing the general circulation of the country on a sounder footing,' in the opinion of Sir Robert Peel, was to sweep away all banks of issue except one, which was to be tied down to an arbitrary amount under all circumstances, as, of course, the exchange of notes for gold is no increase to the currency, but simply a convenience to the public. It would seem, indeed, that it was no feeling of consideration for the country banking interest which procured it terms even as advantageous as these ; on the contrary, a fear that hostility on the ON BANK-NOTES. 203 part of the bankers would endanger the success of the measure, and, possibly, the knowledge that it would cause considerable inconvenience in the country, was the reason of the leniency shown by Sir Robert Peel to the banks of issue ; other- wise he would probably have finished at once what will now be a work of time ; viz. the extinc- tion of the country note issue. Sir Robert Peel avowed his own predilection for a central bank of issue, and it appears from, his tone that he would have preferred the establish- ment of a new bank for the purpose, under the auspices of Government. In the speech he made at the introduction of this measure, he laid great stress on the evils of uncontrolled competition amongst banks of issue, and adduced the American banks as an in- stance of the truth of his views; but, singularly enough, overlooked the Scotch banks, which were entirely unrestrained, and of whose solvency and respectability there was no question. Banking authorities are almost unanimous in asserting that with a note circulation convertible into gold on demand it is impossible to force it beyond the requirements of trade, for it will be either returned in exchange for gold or be 204 BANKING. made a deposit, but certainly in some way re- turned to the issuer. The following figures will show the effect of the Act of 1844 on the issues of country notes. At the passing of the Act there were in England and Wales, issuing notes : 204 Private Banks with authorised issues \ amounting to J5,153,407 72 Joint-Stock Banks .... 3,495,446 8,648,853 Of these the following have, from a variety of causes, discontinued their issues : 71 Private Banks with authorised issues ^ amounting to ) 1,089,895 15 Joint-Stock Banks 719,632 1,809,527 Leaving the fixed issues of the country banks at present (May, 1866) as follows : 133 Private Banks with authorised issues of 4,063,512 57 Joint-Stock Banks . . . . 2,775,814 6,839,326 In practice no bank can keep up to its fixed issue for fear of being in excess on the average of four weeks; when banks have numerous branches the amount reserved is necessarily a large proportion. ON BANK-NOTES. 205 The Bills regulating the Irish and Scotch banks were not passed until 1845, and are materially different in their provisions to the one just described. The only legal tender in the sister countries is gold. Irish and Scotch banks have the privilege of issuing notes as small as 1L Like the English banks they have fixed issues. In practice there is this difference, that whilst in England the limit cannot be exceeded, in Ireland and Scotland it can, if the bank has gold and silver to the amount of the excess. Weekly returns are made as in England, but the large and small notes must be divided, and the total of gold and silver shown. In Ireland there are six banks of issue, whose fixed issues amount to 6,354,494?. In Scotland there are thirteen banks of issue, and their total issue is 2,749,271?. The fixed issues of the United Kingdom are at present (May, 1866) : Bank of England 15,000,000 English Private Banks .... 4,063,512 Joint-Stock Banks . . . . 2,775,814 Irish Banks 6,354,494 Scotch Banks 2,749,271 Total . , 30,943,091 206 BANKING. Passing from the consideration of this important Act of Parliament, it becomes necessary to make some few reflections prompted by the facts, and shortly to notice the various opinions and theories respecting the proper regulation required on the one hand to secure the convertibility of the note, and on the other to keep the issues within due bounds. Intimately connected with these two points, is the arrangement necessary to insure an adequate supply of the precious metals. In entering upon the consideration of this most im- portant element in our financial system, it is well to remark that however great may be the present necessity that the paper currency of this kingdom should be based securely, and conducted on the soundest principles, the question is not of that vital importance to the country that it was a century ago, when it would have been thought impossible to have carried on the business of a banker without having a large note issue. We now see many of the greatest banks in every sense of the word who have never issued notes, and some of the most prosperous who have done so discontinuing the practice ; thus clearly show- ing that it is by no means essential to the pros- perity of a banker to have the privilege. Largely ON BANK-NOTES. 207 as the trade of this country has increased in all its branches, it is a fact well known to all con- nected with financial matters, that the note circu- lation slowly but certainly diminishes ; a fact suggesting rather a singular reflection, and show- ing the fallacy of the ideas that were generally received on the subject. The decrease of that branch of banking which last century was deemed the most important, may now be taken as a very good proof of the enormous increase of the busi- ness in general. Doubtless it will be argued by many that, as regards the country bank-notes, this is the effect of the legislative measures of 1844, and to a certain extent that view may be accepted as correct ; but if the returns in the ' Gazette ' be examined, it will be found that many bankers are always below their authorised issues by from 25 to 50 per cent., some even more. These remarks are by no means intended to imply that the proper regulation of the paper currency is of secondary importance ; and, later, it will be desirable to consider whether some im- provement might not be made on our present system. Fifty or sixty years ago it was no uncommon opinion that a circulating medium of any descrip- 208 BANKING. tion, save and except the precious metals, was vicious in principle. Of late years only one writer (we believe) has gone to this length ; he, however, in a work, published within the last twenty years, evidently considers paper currency and the pres- sure of the national debt to be evils so gigantic, that nothing short of the abolition of the one and the repudiation of the other will redeem the hope- less condition of the nation c once high-spirited, happy, rich, free, and great, brought down to the state of a set of spiritless, half-starved, corrupted, and bewildered slaves by a body of usurers and villains as contemptible as any that ever made the sun blush to shine upon them, or the winds of heaven unable to blow over them without nausea and loathing.' The theories that have at different times been started as to the right and proper regulations that should govern a paper currency, have been almost as numerous as the writers on the subject. There is the celebrated theory of Mr. Law, that notes may be safely issued by the owners of land or commodities, to the value of such property ; and truly it is a most taking idea, it having been tried in France, America, and in our own country, and has always ended disastrously, when pushed to its ON BANK-NOTES. 209 logical conclusion. The only reason for noticing it here is to point out that in a modified form we have it still in force. The Act of 1844 gives the Bank of England the power of considering that portion of its capital which has been lent to the Government, and over which it has lost all control, as a part of the security on which the issues of notes are based. It is true that, going as it does, to a limited extent, no danger to the com- munity can possibly arise, still the principle is the same as that advocated by Mr. Law. It has been thought that an extension of note issues had the same effect on the country that an influx of the precious metals had, and in the case of an inconvertible paper currency, for a time it does seem to have that effect; as notes are issued prices rise rapidly, and all seem getting rich until time proves such a notion to be entirely fallacious. It would be simply a waste of space to argue for, or attempt to show the advantages of, an in- convertible paper currency, public opinion in this country having so emphatically decided that it should be convertible ; and legislation following in its wake, has done what was possible to ensure this absolutely, so far as Bank of England notes are p 210 BANKING. concerned, by fixing the price at which gold can be demanded at the Bank in exchange for notes. In the case of country bankers in England and Wales, their issues may be based on either gold or Bank of England notes, the inability to furnish either in exchange for their own notes being deemed proof of bankruptcy. To secure the absolute convertibility of the note, it is necessary that there should be a basis of bullion, and so long as a due proportion between the issues and the precious metals is preserved, so long is convertibility ensured. Parliament thought it impossible that under any circumstances the Bank of England notes in the hands of the public could fall below 14,000,000?., and therefore only required the amount beyond that to be secured by bullion. But as matters now stand, the Bank issues 15,000,000?. against securities, thus showing that the authorised country issues have since 1844 been dimi- nished by at least 1,500,000?., though practically the reduction is much more considerable. It is, therefore, a very fair subject for consideration, whether the fixed issue of the Bank of England might not be advantageously increased, still at present the balance of opinion is certainly in ON BANK-NOTES. 211 favour of the present limit, although at every recurrence of 6 tightness ' in the money market, an outcry is raised that it is owing to the restrictions on the Bank. As to the sum either in Bank paper or coin required to protect country issues, the legislature has left the bankers entirely to their own discre- tion, and it hardly seems possible to fix a uniform proportion for the whole kingdom, some districts being much more liable to large and sudden demands than others. Sir Archibald Alison, in his ' History of Europe, 3 considers that the circulating medium (i.e. coin and notes) should as much as possible be kept to a fixed amount, that when gold is exported notes should be issued to supply its place ; if bullion be imported notes should be withdrawn from circula- tion. But then the difficulty arises, if gold be exported and the vacuum supplied by paper, and the rate of interest not at the same time raised, in all probability the drain will continue, and in course of time the convertibility of the note would be endangered, if not destroyed. Moreover, with a brisk trade a larger amount of the circu- lating medium is required than at a time when commerce is languishing, so that the dead level p 2 212 BANKING. which Sir Archibald advocates is scarcely desir- able. To a certain extent, in ordinary times, his object is attained by the arrangement prohibiting the Bank of England from issuing notes beyond a fixed limit, unless an equal amount of gold be withdrawn from circulation ; but on the occasions since this restrictive enactment has been in force, when serious monetary panics have taken place , as in the autumn of 1847, and 1857, it has been found to intensify existing evils, and has been temporarily suspended with the best possible results.*" The friends of the Act of 1844 say, and say truly, that neither in 1847 nor 1857 was the convertibility of the note endangered ; but when they attempt to show that this was a result of Sir Eobert Peel's Act their case at once breaks down. Convertibility was as safe before as after the passing of that Act; the directors of the Bank of England would have been in care to provide for that, whoever might have suffered in the effort. But supposing that through any chain of circumstances, at the periods in question, the bank-note had fallen into discredit, how would the case have then stood ? When the suspensions of the Act of 1844 took place in 1847 and 1857 the * Vide Appendix. ON BANK-NOTES. 213 state of things in the Issue Department was as follows : October 23, 1847. Notes in the hands of the public . . 21,000,000 Bullion 7,866,000 November 12, 1857. Notes in the hands of the public . . 21,000,000 Bullion 6,524,000 thus showing that the absolute inconvertibility of the note was not secured. But if the Issue Department was not safe, how did the Banking Department stand ? October 23, 1847. Private Deposits . ' . . . . 8,580,000 Notes and Coin in reserve .... 2,094,000 November 12, 1857. Private Deposits 12,935,000 Notes and Coin in reserve . . ... 1,461,000 Now, looking at these figures, although it is very clear that if gold had been demanded at the counter in the Hall ' for more than a third of the notes in circulation the demand could not have been supplied, practically no danger was to be apprehended on this head, for the public were only too anxious to get the notes ; but there was a real and tangible danger to the banking depart- ment so great, indeed, that had not the Govern- ment intervened, a suspension of payment must 214 BANKING. have taken place, although millions of bullion were in the vaults; and will any one seriously affirm that this would not have been a disaster, by the side of which the temporary inconvertibility of the note would have been mere child's play, entailing as it would have done the absolute sus- pension of business throughout the country ? There seems to be a strong feeling that it is necessary to restrain the Bank of England, and, indeed, all the banks of issue, from abusing their privileges by stringent regulations, but a very great diversity of opinion exists as to the best means of attaining that object. It has been pro- posed that the Bank of England should not be controlled directly in its issues, but that it should adopt a graduated rate of interest founded on the amount of notes in circulation, and bullion in the vaults. There are, however, so many points to be taken into consideration in deciding upon raising or lowering the rate of interest, that it seems very unjust to tie the hands of the directors in so important a particular ; it would greatly impede them in their duties to both the holders of bank stock, and also to their customers. More- over, in proposing such an arrangement, there is involved the assumption of a fallacy that the Bank ON BANK-NOTES. 215 of England has the command of the rate of interest, which it most undoubtedly has not ; that institution, like any other, must follow the market ; if the rate out of doors be 5 per cent, it would be simply childish of the directors to fix their rate at 6 per cent.; the only effect of such a course would be to diminish the dividend on Bank Stock, be- cause, although notes would flow in as securities ran off, they would be drawn out again through the depositors. It may, perhaps, be said that the rate of interest outside the Bank of England corre- sponds to the terms exacted by that establishment; but the fact that it does so only proves that the opinion of the public coincides with that of the Bank directors. Of course, in fixing the rate of interest, the amount of the reserve of notes and bullion is a most important element, not only as to the re- sources of the Bank, but as a monetary barometer showing the state of the atmosphere of the money market. Still it will not do to treat a foreign drain of gold in the same way as a domestic one, the latter being invariably of a special, and gene- rally of a temporary nature. In a most able article published in ' Blackwood's Magazine ' for March 1866, well worthy of the 216 BANKING. attentive perusal of all interested in this and kindred subjects, the writer strongly deprecates the obligation imposed on the Bank of keeping the security for the notes in the form of bullion. He argues most justly and forcibly that a drain of gold does not take place through the Issue Depart- ment, and that the only demands for gold through that department are for the supply of small change. He therefore proposes that the Issue Department should transfer the bullion to the Banking Depart- ment, receiving Government securities in ex- change, and that in future notes should be issued entirely against such securities. The effect of this would be to increase the strength of the reserve in the Banking Department to an enor- mous extent, as the whole of the bullion would be available. There remains the question whether if that were so, the temptation to allow this un- profitable portion of their assets to fall to a low figure, and thereby increase the profits of the Bank, might not be too great for the virtue of the authorities. It is here as well to remark a slight error into which the writer of the article in ' Blackwood ' has fallen: he speaks of the depositors at the Bank having an equal claim on the bullion in the ON BANK-NOTES. 217 Issue Department as the holders of notes, which is clearly contrary to the spirit and letter of the Act of Parliament. Respecting the issues of country notes, there being no security whatever provided for them, it seems that it would be but an act of justice to declare that in cases of bankruptcy, the holders of notes should have their claims settled before the depositors or other creditors. With reference to the larger part of the ques- tion, the regulation of Bank of England issues, the space prescribed to this branch being exhausted, it must suffice to say that for fair weather the Act of 1844 works, or rather leaves other things to work, tolerably well ; but in times of commercial panic it is more than questionable whether it does not aggravate and intensify existing evils. 218 BANKING. CHAPTEE X. OF COINS. THE earliest mention that is made in authentic history of the use of a metal currency occurs in the 23rd chapter of Genesis, where Abraham bought the field of Macpelah for 400 shekels of silver one shekel was about 2s. 3^. A talent was 3,000 shekels, or 342L 3s. 9d.; a talent of gold, 5,475?. both Jewish. With whom the talent originated, or when, is not recorded. The Jews were in the habit in those times of weighing their money in scales, which they carried about with them for the purpose. The earliest mention of coins is made in 1 Chron. xxix. 7, and Ezra, ii. 69, where the Persian coin, the daric, is spoken of, which was of gold, value 2s., having an impression on one side of an archer kneeling. Gold was used by the Egyptians before silver the latter was called by them white gold ; both metals were afterwards used for their currency, being made up OF COINS. 219 in the form of rings, without, however, any stamp or indication of their purity or weight ; these rings were generally weighed in the gross against other weights in the shape of oxen and lambs, which tedious process continued as late as the time of the Ptolemies, and was only gradually superseded by Grecian coins. It is recorded that Aryandes, Governor of Egypt, struck silver coins in imitation of the golden ones of the Persian empire, for which invasion of prerogative the king struck off his head. On the Persians quitting the country these coins were discontinued. The earliest men- tion of a coin with any pretension to a value of its own stamped upon it was the Lydian c stater,' a Greek coin, a mixture of gold and silver, as three to one. They were simply lumps of metal struck on one side only, leaving the impression of a lion's head or other emblem. Darius was the first to introduce coins of real gold, though it would seem that they were intended as medals, and after- wards used as coins. The ring money before spoken of was circulating in Britain previous to the invasion of the Eomans. We learn from Csesar that the Gauls also used iron and gold rings of certain weights for their money. The gold rings have been discovered at no distant date in 220 BANKING. Ireland. These Irish rings possessed much more the features of a true coinage than the pieces of metal used by the Egyptians, as the larger ones have been found on being weighed to be multiples of the small ones or units. The Roman coinage ceased in Britain, and was succeeded by the Saxon on the Romans leaving the country, A.D. 426. Herodotus gives Pheidon, King of Argos, the credit of having first introduced weights, measures, and coins into Greece, the coins having been struck at .ZEgina, being also lumps of metal like the Lydian, with the impression of a turtle or tortoise stamped on one side. Silver was the only currency in Greece until the time of Croesus, who is said to have given Alcmseon as much gold as he could carry. The gold coinage of Persia and other nations circu- lated at Athens until the time of Alexander the Great, when both gold and copper coins became common. The most worthless currency of which we find record was that of Sparta, where the native iron, so tempered as to be useless for any other purpose, was formed into little bars and employed as legal currency ; also leather is said to have been used for the same purpose. This extra- ordinary proceeding seems to have originated with Lycurgus, who having travelled, much in other OF COINS. -221 countries, was at length recalled to quell the feuds in his own. Having convinced himself, like many modern philosophers, that money was the root of all evil, he conceived the idea of prohibiting the use of gold and silver to his countrymen, and we find that up to the latest age of the state it was forbidden to any Spartan to possess gold or silver. The Hollanders used pasteboard as late as 1574. On renouncing all such articles as leather and shells, countries will be found to have adopted the metals most easily obtainable. The Greeks used silver ; the Egyptians gold ; Italy copper, &c., and they stamped them with a device representing wealth, such as cattle and sheep whence pecunia and the Greek coin fiovs. The florin also from fiorino, the Florentine lily. The original Eoman coin was the c as,' which as time wore on they reduced from 12 oz. to 1 oz., whereby they reduced their debt in a like proportion. Having thus briefly touched upon ancient money and coins, simply as an introduction to the coin- age of Great Britain, we shall pass on to the time of Athelstan, A.D. 925. Should the foregoing re- marks create a desire in the reader to become familiar with the coinages and articles used for- merly as money in other countries, we can 222 BANKING. recommend the work entitled ' Ending's Annals of the Coinage/ published abont the year 1840 or 1841, and for silver coins only, ( Hawkins on the Silver Coinage' (the latter of England only). Here follows the coinage of England from Athel- stan, A. D. 925, to Victoria, for which we are much indebted to W. S. W. Yanx, Esq., M.A., &c. &c., of the British Museum, and President of the Numis- matic Society. The denominations only of the coins are given as they were issued in the different reigns : Coinage of England. Athelstan, A.D. 925, to Henry II., A.D. 1189, silver pennies only. Richard I No English money. John No English money. Henry III Gold Pennies. Silver Pennies. Edward I Silver Groats, pennies, halfpennies, far- things. Edward II. ... Silver Pennies, halfpennies. Edward III. . . . Gold Florin, half-florin, quarter-florin, noble, half-noble, quarter-noble. Silver Groat, half -groat, penny, halfpenny, farthing. Richard II. ... Gold Noble, half-noble, quarter-noble. Silver Groat, half-groat, penny, halfpenny, farthing. Henry IV Gold Noble, half-noble. Silver Groat, penny, halfpenny. Henry V No English money. Henry VI Gold Angel, angelet. Silver Groat, penny, halfpenny. OF COINS. 223 Henry IV. V. or VI. Gold Noble, half-noble, quarter-noble. Silver Groat, half-groat, penny, halfpenny, farthing. Edward IV. ... Gold Eose-noble, half-noble, quarter-noble, angel, angelet. Silver Groat, half-groat, penny, halfpenny, farthing. Edward V Gold Angel, angelet. Silver 'None. Eichard III. . . . Gold Angel, angelet. Silver Groat, half-groat, penny, halfpenny, farthing. Henry VII. . . . Gold Sovereign, rose-noble, angel, angelet. ' Silver Shilling, groat, half -groat, penny, halfpenny, farthing. Henry VIII. . . . Gold Sovereign, half-sovereign, rose-noble, crown, half-crown, angel, half- angel, quarter-angel, George-noble. Silver Shilling, groat, half-groat, penny, halfpenny, farthing. Edward VI. ... Gold Three-pound piece, sovereign, double- sovereign, half-sovereign, quarter- sovereign, half-crown, angel. Silver Shilling, groat, half -groat, crown, half-crown, penny, halfpenny, far- thing. Mary . . ... Gold Sovereign, royal, angel, half-angel. Silver Half-crown, shilling, sixpence, groat, half-groat, penny. Philip and Mary . . Gold None. Silver Half-crown. Elizabeth .... Gold Sovereign, pound-sovereign, half- pound, quarter-pound, half-quarter pound, royal, angel, half-angel, quarter-angel. Silver Crown, half-crown, shilling, groat, half-groat, penny, sixpence, three- pence, twopence, three halfpence, three farthings. 224 BANKING. James I. Gold Charles I. Oliver Cromwell . Commonwealth Silver Copper Gold Silver Copper . Gold Silver Copper . Gold Silver Charles II. . Gold ,, Copper James II Gold Silver Copper William and Mary . Gold Silver Copper Rose-royal, spur-royal, angel, half- angel, pound-sovereign, unite, laurel, half-sovereign, half-unite, double-crown, half-laurel, quarter- sovereign, Britain-crown, quarter- laurel, thistle-crown, half-crown. Half-groat, shilling, sixpence, half- crown, crown. Pennies. Three-pound piece, angel, unite, double-crown, British-crown. Twenty-shilling piece, crown, half- crown, shilling, sixpence, groat, threepence, half-groat. Pennies. None. Crown, half-crown. Farthing. Unite, half-unite, crown. Crown, half-crown, shilling, sixpence, half-groat. Twenty-shilling piece, double-crown, crown, five-guinea piece, two- guinea, one-guinea, half-guinea. Crown, half-crown, shilling, sixpence, fourpence, threepence, twopence. Halfpenny, farthing. Five-guinea, two-guinea, one-guinea, half-guinea. Crown, half-crown, shilling, sixpence, fourpence, threepence, twopence. Halfpenny, farthing. Five-guinea, two-guinea, one-guinea, half-guinea. Crown, half-crown, shilling, six- pence, fourpence, threepence, two- pence. Halfpence, farthing. OF COINS. 225 William III. . . . Gold Five-guinea, two-guinea, one-guinea, half -guinea. Silver Crown, half-crown, shilling, six- pence, fourpence, threepence, two- pence. Copper Farthing. Anne Gold Five-guinea, two-guinea, one-guinea, half-guinea. Silver Crown, half-crown, shilling, six- pence, fourpence, threepence, two- pence. Copper Halfpenny, farthing. George I Gold Five-guinea, two-guinea, one-guinea, half-guinea, quarter-guinea. Silver Crown, half-crown, shilling, six- pence, fourpence, threepence, two- pence. Copper Halfpence. George II Gold Five-guinea, two-guinea, one-guinea, half-guinea. Silver Crown, half-crown, shilling, six pence, fourpence, threepence, two- pence. Copper Halfpence. George III. . . . Gold One-guinea, half-guinea, seven-shil- ling piece, quarter-guinea, sove- reign, half-sovereign. Silver Crown, half-crown, shilling, six- pence, fourpence, threepence, two- pence. Copper Twopence, penny, halfpenny, far- thing. George IV Gold Double-sovereign, one-sovereign, half- sovereign. Silver Crown, half-crown, shilling, six- pence, fourpence, threepence, two- pence. Copper Farthing. Q 226 BANKING. William IV. ... Gold Sovereign, half-sovereign. Silver Crown, half-crown, shilling, six- pence, fourpence, threepence, two- pence. Copper None. Victoria Gold Sovereign, half-sovereign. Silver Crown, half-crown, florin, shilling, sixpence, fourpence, threepence. Copper Penny, halfpenny, farthing. ,, Bronze (I860) Penny, halfpenny, farthing. Athelstan, we are informed, was the first to establish uniform coin in England, and after that time the kings became the bullion merchants and coiners. The royal mint was established in the reign of Edward II. There were also several provincial mints under the control of that of London. Henry II. instituted one at Winchester, 1125. Stow informs us the mint was kept by Italians, the English being ignorant of the art of coining, 7 Edward I., 1278. The operators were formed into a corporation by charter of Edward III. The first entry of gold into the mint for coinage pur- poses occurred 18 Edward III., 1343. Tin was coined by Charles II., 1684 ; gun metal and pew- ter by his successor, James. The present mint, for the erection of which grants were made be- tween 1806 and 1810 to the amount of 262,0002., OF COINS. 227 was partially destroyed by fire in 1815. The new constitution of the mint took effect in 1817. The mint has eight melting furnaces, two cranes, and two pouring machines. The furnaces are used three times a day when coining is going 'on, and as each pot is about 420 pounds, they melt 10,080 pounds in a day of ten hours. The gold pots are about 100 pounds, and melt it in an hour. The gold bars are rolled cold to the thickness of the coin, and the silver bars hot. The old hammer and punch were superseded by the mill and screw in the reign of Queen Elizabeth, to whose minis- ters we are greatly indebted for the restoration of the coinage. They also stamped the coins with their true value, so that persons who held the debased coins lost about five-sixths by such opera- tion, for which they had mainly to thank Henry VIIL, during whose reign the currency had been allowed to sink to such a degraded state. The number of coins issuing from the mint each year varies considerably according to circumstances, such as- depreciation by abrasion, &c. We subjoin the gold, silver, and copper or bronze coinages for the four years from 1859 to 1862, taken from the statistical abstract presented by command to both Houses of Parliament : Q 2 228 BANKING. Years. Gold. Silver. Copper or Bronze. Total. 1859 2,649,509 647,064 8,512 3,305,085 1860 3,121,709 218,403 37,990 3,378,102 1861' 8,190,170 209,484 273,578 8,673,232 1862 7,836,413 148,518 352,800 8,337,731 The gold coins at present in use in Great Britain are, first, the sterling or sovereign. signifies pounds, from the Latin * librae ; ' sterling is the contraction of easterling, and is supposed to have been first adopted in the reign of Henry VIL, being derived from the festival of Easter,* when Govern- ment officials visited the Mint and examined the coinage. The sovereign was first minted by Henry VII., and was then a 20s. piece. Twenty- two and a half of these pieces were coined from the pound tower ; and the pound tower containing 5,400 grains, there were 240 grains of gold in each coin. The sovereign at present in use contains 113-12 grains of pure gold, so that the sovereign of Henry VII. was intrinsically worth 21. 2s. 5d. of our money. On July 1, 1817, a coin in imitation of the one coined by Henry VII. was proclaimed * Easter is derived from 'Eastra,' the Saxon goddess, whose festival fell in April. OF COINS. 229 current, and to be of the value of 20s., called a sovereign. It weighed 5 dwts. 3-274 grs. of stand- ard gold.* Henry VIII. debased the gold coin from 23 carats 3J grs. fine, with gr. of alloy, to 22 carats pure and 2 of alloy. He also debased the silver to 4 oz. fine and 8 of alloy ; that is to say, by successive stages during his reign it reached that debased state. Two neighbouring kingdoms, Scotland and France, we find were even in a worse condition. The pound Scots had become reduced to -^ part of its original value. The pound weight, which is now coined into 66 shillings, was coined into 144 shillings in the year 1475 ; and from that, by gra- dual reductions or debasements, was coined into 720 in 1601. The French, we find, were still worse than the Scotch, judging from an extract taken from the Mint Indenture of Edward I. Their ' sou,' corrupted from ' solidus,' meaning a shilling, now represents a halfpenny of our money; the 6 livre ' nearly corresponded to the modern franc at the termination of the old monarchy. * On Saturday, Feb. 3, 1866, at a privy council, it was ordered that the sovereign of the Sydney mint, in Australia, should be pro- claimed a legal tender in this country, and in all British possessions. In Mauritius and Ceylon it has for some time been legal currency, and it will now have imperial circulation. 230 BANKING. The standard purity of the sovereign underwent many changes until fixed by James I. at 22 carats as the standard purity, which has remained without alteration up to the present time. The carat is the 24th part of a pound troy, or 10 dwts. ; and the carat grain, 2 dwts. 12 grs. troy. The legal weight of the sovereign is 5 dwts. 2f grs. The half- sovereign was coined also on July 1, 1817, and what has been said of the sovereign with respect to weight and fineness applies to it also. Of the silver coinage, the florin, shilling, sixpenny piece, and threepenny piece, are to remain permanently in circulation until some further decimal change takes place. The crown or five-shilling piece, the half-crown and fourpenny piece, are no longer coined, and only remain in circulation until they are so defaced that the Bank will be compelled to withdraw them. The florin, as we have before observed, derives its name from ' fiorino,' the Florentine lily; this is the only alteration since 1817 (with the exception of the bronze coinage) that has taken place, and was coined with the intention of introducing the decimal system. In 1503 (the 18th of Henry VII.) the old Saxon money of account, the shilling, was converted into a coin. It contained 144 grains of silver ; and, as OF COINS. 231 our modern shilling contains 80*7 grains, it was intrinsically worth Is. 9-408^. of our money. The Irish shilling was struck in 1560. English and Irish money was assimilated January 1, 1826. The weight of a shilling is 3 dwts. 15 T 8 T grs. The groat is derived from c grot,' which signifies great, it being the largest of the Saxon coins then in use. The division of the pound into 20s., and the shilling into 12 pence, was introduced by William the Conqueror after the plan of Charlemagne in France in the eighth century, and is supposed to be derived from the Eomans. The ancient silver penny is said to have been the first silver coin in use among the Anglo-Saxons. It was coined with a cross deeply indented, so that it might be broken in two or four pieces. This peculiarity ceased with Edward I. Charles I. issued silver coins of 7| grs., called silver pennies, of the same weight and purity as those issued by his father. This coin was not circulated after the Eestoration of Charles II. The lowest silver coin struck after this silver penny was the sixpence. The silver coins are not now legal tender for sums above 40 shillings. The coins smaller than this were used for Maunday money. The Maunday money consisted of 4, 3, 2, and 232 BANKING. 1 penny pieces in silver, which, were distributed among the poor the Thursday before Good Friday ; called Maunday Thursday from mande, signifying a hand-basket, from which the alms are supposed to have been distributed. Another authority says, from f dies mandati,' as the day when Christ gave His great ' mandate ' that we should love one another. This custom was begun by Edward III., A.D. 1363, when he was 50 years of age. On this day it was the custom of our kings or their almo- ners to relieve as many old men as they were years old. The custom still exists. The copper coinage of England cannot be said to have existed until the reign of Queen Elizabeth. The want of a smaller coin than the silver penny caused the importation of large quantities of base coin from the continent for the convenience of people in trade, whose only means of using a part of the silver penny was by breaking it into two or four, which the cross deeply indented in the coin admitted of their doing. In the reign of Henry VIII., however, the traders being perplexed for want of small coins, commenced issuing private tokens of lead to represent halfpence and farthings. This went on through the succeeding reigns until the 1 ministers of Elizabeth thought that a national OF COINS. 233 coinage of copper would be far preferable to this endless and confusing variety of tokens. The attempt failed, however ; and, being revived in the reign of James L, failed again, as far as coining copper at the Royal Mint was concerned, and patents were granted to private persons. At length, in the year 1672, a coinage of copper took place at the Eoyal Mint. Nothing of any importance inter- fered with the copper coinage until December 1860, when the bronze coinage was introduced. The bronze coinage of 1861 (the first full year after its introduction) weighed 665 tons, and consisted of pence, halfpence, and farthings, to the number of 99 millions. The material of which it is composed consists of 95 parts of copper, 4 of tin, and 1 of zinc. Pence or halfpence are not legal tender for more than 12c?., or farthings for more than 6d. : d, signifying pence, is derived from ' denarii.' The coinage of England, although superintended by Government officers (and any alterations that may be made are sanctioned by Parliament), is not issued by the Government. The Bank of England supplies the Government with bullion, as it would any other individual, for coinage purposes. The Bank of England has been for years the only im- porter of bullion into the Mint. It is, therefore, 234 BANKING. hardly to be expected that the Bank or the Govern- ment, without the full concurrence of the country, would supply new and full-weight coin for those that have by circulation, and often ill-treatment, fallen below their legal weight. The Bank of England is compelled to meet this expense by charging the person tendering the light gold, at the rate of 4*d. for the sovereign and 3c. for the half-sovereign; and is under a contract with the Government to retire from the currency the de- faced silver. The Government coins gold free of expense for any individual who sends bullion of not less than 10,OOOL value; but these instances are of very rare occurrence. The whole of the coinage may be said to enter circulation through the Bank of England. The price paid for gold by the Bank is 3Z. 1 7s. 9d. per oz., and the expense of the assay is borne by the seller. The privilege of coining silver and copper is vested solely in the Crown, who supply new coins for those retired from the cur- rency by the Bank. The character and device of the coins of the present day are considered the prerogative of the Crown; and any impressions made afterwards by the people, by way of advertise- ment or otherwise, is punishable by law. It was OF COINS. 235 different, however, at Eome. Eacli family or indi- vidual might have their own silver coined with such device as they pleased, provided its weight and purity were guaranteed by an additional stamp made by the Government officers. This was abo- lished by Augustus. The guinea, now withdrawn from the currency, took its name from the country producing the gold of which it was made. It varied in value from 20 to 30 shillings till the year 1717, when, by the advice of Sir Isaac Newton, it was fixed at 21 shillings. The last coinage of guineas took place in 1813. The system existing previous to the year 1816, which made both metals standard measures of value, caused much disorder, as they were both a legal tender to any amount. Their market prices being subject to endless variation, one or other was constantly being driven out of circulation. To remedy this, gold being the metal in which the principal payments were made, it was adopted as the standard measure of value, and the only legal tender in coin that could be made to an unlimited amount. In the same year a new coinage of sove- reigns took place, in due proportion to the guinea, viz. 46| sovereigns to the pound troy, and of 20 236 BANKING. shillings value each. A new coinage of silver also took place, when 66 shillings instead of 62 (the old rate) were produced from the pound troy. The relative values of gold and silver having perceptibly changed at the end of the eighteenth century, the adjustment which had taken place in 1717 no longer corresponded to the existing market value of the metals ; and consequently had a recoinage of silver taken place at the former denomination and weight, it must have disappeared from the circulation as before. To prevent this, the Govern- ment enacted that private persons should no longer enjoy the privilege of having their silver bullion coined ; and in addition to this, the pound weight of silver was coined into 66 shillings instead of 62, the four shillings being kept back for the expenses of coinage. The present shilling, in consequence, passes for slightly more than 6 per cent, above its intrinsic value. But as the public must necessarily suffer by this arrangement, if silver were a legal tender to any amount, a law was passed enacting that no tender above 40s. in silver coin at one time should be legal. The silver coinage has since remained entirely in the hands of the Government, who, by judiciously limiting the quantity, have main- OF COINS. 5>37 tained the current value above the intrinsic value. The circulation of silver in Great Britain and her colonies is inconsiderable when compared with other countries. Gold being the only metallic legal tender for sums above 40s.) the silver and copper or bronze are simply auxiliary coins. Wrought gold has two legal standards. The coin is 22 carats of fine gold, mixed with 2 of alloy; or, in other words, 8-333 alloy + 91-666 gold, which has undergone no alteration since the reign of James I. The silver, -f^, or 7' 5 alloy + 92*7 silver. The nature of the alloy is left to the discretion of the Master of the Mint ; but the practice has always been to add copper only to such extent as will complete the proportion of alloy, including that which may be naturally present in the bullion, whether gold or silver. The second gold standard is 18 carats, mostly employed for jewellery. Wrought silver has two legal standards. The other standard is better than the coin, being 11 oz. 10 dwts. out of 1 pound troy. The standard of England is gold. France has a double standard, which causes more frequent fluc- tuations. The standard of most other European countries is silver. In countries where gold is 238 BANKING. the standard, silver in by far the largest propor- tion is employed as merchandise, and vice versa. The decimal coinage, about which so much discus- sion has taken place some in favour of II. as the integer, some in favour of the Wd. integer is, we consider, so far from a satisfactory solution, that instead of discussing the methods proposed for adoption, we must refer our readers to the pam- phlets on the subject by James Laurie and others, also the opinions of a committee of the House of Commons which was in favour of the II. integer. The decimal system was introduced into France in 1790, and, according to good authorities, works most unsatisfactorily.* It is adopted in America, where the dollar is the integer ; also in Holland and other countries. Sir John Wrottesley brought the subject before the British Parliament February 25, 1824. In the year 1838 a commission was appointed at the instance of the then Chancellor of the Exchequer, Mr. Spring Eice. In June 1843, another commission was appointed both reported strongly in its favour. On August 1, 1853, a committee reported to the same effect, but Mr. Gladstone thought the change premature. Another * This has reference to the weights and measures. OF COINS. 239 commission on the subject was appointed in 1855 ; the last discussion took place in July 1863 the result was unimportant. The decimal system was adopted in Canada January 1, 1858. There can be no doubt existing in the mind of any advocate of social progress, or even the most conservative of modern philosophers, that the decimal coinage is in every respect the best fitted to spare the time and. trouble of persons whose business involves pecuniary calculations. Having had some years' experience of the working of the decimal system of coinage abroad, I can without hesitation assert, that all persons who come here from a country having a decimal system, are astonished that a land whose commercial position stands so high as that of England, can continue to puzzle the brains of her sons with a system which long ago should have been but a mere matter of history. 240 TABLE OF CAEDINAL NUMBERS AND English French German Spanish Italian 1 one un ein uno uno 2 two deux zwei dos due 3 three trois drei tres tre 4 four quatre vier cuatro quattro 5 five cinq fiinf cinco cinque 6 six six eechs seis sei 7 seven sept sieben siete sette 8 eight huit acht echo otto 9 nine neuf neun nueve nove 10 ten dix zehn diez dieci 20 twenty vingt zwanzig veinte venti 30 thirty trente dreissig treinta trenta 40 forty quarante vierzig cuarenta quaranta 50 fifty cinquante fiinfzig cincuenta cinquanta 60 sixty soixante sechzig sesenta sessanta 70 seventy soixante-dix siebenzig setenta settanta 80 eighty quatre-vingt achtzig ochenta ottanta 90 ninety f quatre- ) \ vingt-dix J neunzig noventa novanta 100 hundred cent hundert cien cento 1000 thousand mille tausend mil mille Day day jour Tag dia giorno Week week semaine Woche semana settimana Month month mois Monat mes mese Year year annee Jahr ano anno On demand on demand ) a f } presenta- { ) tion ( nach Sicht, bei Vorzeigung ) ^ ( t- presenta- < ) cion { apresentazione At sight at sight avue a vista a la vista a vista After sight after sight a jours de vue nach Sicht a ... dias vista dopo vista After date after date a jours de date nach Dato a ... dias f echa dopo data Pay to the order ( pay to ) \ the I ( order j payez a 1'ordre ( fUr mich, \ \ or uns, an [ ( die Ordre j a la Orden | p T te I ( 1'ordine j ( T \ (werde ich, \ I promise to pay 1 promise [ to pay J je payerai or werden wir 1 bezahlen J pagare pagare With inte- rest f with ) 1 interest } avec interets mit Zinsen con interns f con inte- ) t resse ) COMMERCIAL TERMS IN ELEVEN LANGUAGES. 241 Portuguese Dutch Russian Turkish Danish Swedish f hum, TO. ) j huma,/. j een odun bir en en f douo, m. } 1 duas,/. j twee dba iki to twa tres drie tru utch tre tre ouatro vier tschetire dirt fire fyra cinco vyf piat been fern fern seis zes schest alti sex sex sete zeven sem yedi syv sju outo acht votem sekiz otte Stta nove negen deviat dokouz ni nio dez tien desat on ti tio vinte twintig dvadzat yirmi tyve tjugu trinta dertig trudzat otouz tredive . trettio quarenta veertig sorok kirk fyrgetive fyrtio cincoenta vyftig piatdesat elli {halvtred ) sindatyve j femtio secenta zestig schestdesat ultmish tredsinstyve sextio setenta zeventig semdesat yedmish f halvfierds ) j indstyve f sjuttio oitenta tachtig vosemdesat seksen fiirsindstyve attio noventa negentig devianosto doxen f halvfems ) ( indstyve j nit tio cem honderd sto yuz hundredre hundra mil duizend tisatz bin tusinde tusen dia dag den guun dage dag semana week nedela hafta uger wecka mez maanden mesatz ai maaned manad anno jaar god sene aar ar a presenta9ao op vertoon po bziskam isteghindS I paa anfor- [ { dring | pa anfordring a vista f opzight, \ { a vista J po prediavleni f ghiordu- ) ( ghiunde j a vista vid sigt ( ghiordu- ) a ... dias vista dagen na zigt po prediavleni \ ghiunden \- cnra 1 efter sigt efter sigt a ... dias data dagen na dato gato | V SUr<* J tarihinden sora [ efter dato fran dato f voor my, \ . ( behag at, ) f behagar att, pagase a ordem ] aan f ( de order ) nlat it order emrine ver \ betaletil \ { ordre j \ betalatill ( ordre pagarei f Ik neem ) ] aan te 1 betalen 1 ia obetschai (endemey6 | . s .? f veririm 1 f jegfor- ] pligter 1 mig at 1 ( betale J f jag fijrplig- { tar mig att | betala com intereses met interest is prozentamu f aiz ila med rente med ranta 242 BANKING. CHAPTEK XI. OF THE BATE OP INTEREST. THE natural fluctuations in the rate of interest charged for the use of capital or its representa- tive, money, are determined by the same causes which influence the price of any other commodity ; namely, demand and supply. If there arises an unusual demand for any commodities, in the interior of a country, or from foreign lands, the extra production cannot take place without the aid of more money, and the price of that com- modity by which the others are produced rises in proportion to the demand for its assistance. As the price of money rises, so will the price of the article produced advance in proportion until the demand for it subsides, when the price of the article and the rate of interest charged for the money to produce it return to their natural points. A high rate of interest may prove the commerce of a country to be in a most flourishing and healthy condition, and it may also prove the OF THE BATE OF INTEREST. 243 country to be on the verge of bankruptcy. In the autumn of 1865 we have seen the rate of interest standing very high in England, and going higher in 1866, but this was attributed to an increase in the trade generally of the country ; large quanti- ties of merchandise were shipped to America on the conclusion of the war, and this would of itself be sufficient to raise somewhat the price of capital or money. There are many persons who maintain that bankers as a body desire to keep the rate of interest as high as possible ; this view is held by the writer of an article in c Blackwood's Magazine ' for March 1866, on ' The Eeform of the Bank of England,' and I do not hesitate to state that such is quite erroneous. On the first consideration of such a question, it will appear to the uninitiated in banking practice that a high rate of interest will be always for the benefit of bankers ; but there are under- currents at work here. In the first place, a banker always considers himself best off when his clients are well to do, and can obtain all they want to enable them to carry on their various trades prosperously, and if possible extend them. Now, when the rate of interest is high a merchant cur- tails his operations unless the profits promise a R 2 244 BANKING. corresponding augmentation, and even under such circumstances, the increased profit cannot long keep pace with the rise in the rate, as the pressure must be felt somewhere sooner or later ; as a high rate of interest must be hurtful to those who are borrowers, and a large part of a banker's profits are derived from discounting bills and making advances to those who bank with him, it will stand to reason that no more money than will be sufficient to keep the accounts open will remain to the credit of the banker's clients so long as the rate continues un- usually high. As the rate of interest rises, the deposits are withdrawn from the banks by all persons who understand how better to employ them, and it is unnecessary to remark that the number of persons who do remove their money for better investment is certainly increasing. It will thus be seen that, irrespective of the possible inconvenience which may be occasioned to the banker by having his deposits withdrawn, he may lose considerably more by the absence of the profit upon the with- drawn deposits than he gets by a higher rate of interest upon a probably diminished number of discounters. Then again, in obedience to a fixed law, as the price of the article increases, so do the bad debts increase. OF THE KATE OF INTEREST. 245 A high rate of interest with, any appearance of permanence is sure to fill the minds of the com- munity more or less with alarm ; and this feeling spreads very fast, as the price of money is so much a topic of conversation in all circles, and is gene- rally most talked about, and the greatest distrust disseminated, where the question is the least understood. The banker who will soon be made aware of any feeling of uneasiness which may be growing in the public mind will find it necessary at an early stage to make preparations for forti- fying his position ; and the only effectual means by which this can be accomplished is by keeping a larger supply of cash upon his premises, which, as a matter of course, will occasion him a further loss ; to invest it in the most saleable securities will scarcely answer his purpose, as he runs again a further risk of being obliged to sell at the moment when there is most pressure in the market, by which he suffers the loss from a fall in the price of the securities. To pursue a system of speculating in the funds or other securities is considered discreditable to a bank ; and, therefore, unless consols, exchequer bills, &c., be purchased only for the purpose of having an interest bearing reserve, such transactions are better avoided. 246 BANKING. In seasons of scarcity, when the rate of interest is high, the banker, in exercising increased caution, will make refusals, which in many cases will be sure to give offence ; the persons refused will mention the fact to their friends, and probably state as the reasons that the banker was short of funds, which will increase the general want of confidence which then prevails, and further tend to embarrass the banker's position. When the rate of interest is high, merchants and traders in many cases get into difficulties, and apply to the banker for assistance, stating that they have much property, but at the moment are unable to realise it. The banker makes an advance, a repetition of which is soon applied for, and, as we have seen in such innumerable instances, the banker continues to throw good money after bad, the termination of which, under the best circum- stances, is an indefinite lock-up, which is among the most dangerous situations, if permitted to any extent, in which a banker can place himself. The banker offering a high rate of interest in time of pressure is imprudent, as it gives rise to the opinion that he is short of funds, and wishes to attract them which will probably result in more of his deposits being withdrawn. OF THE EATE OF INTEREST. 247 After a panic or continued pressure in the money market has spent itself, money always becomes rapidly abundant, and the banker finds himself overrun with funds which he cannot employ, and which must remain for some time in his hands, causing him a certain loss. I need scarcely add more to prove that the idea which conceives an unnaturally high rate of interest to be beneficial to the banker is an entirely erro- neous one. The permanently higher rates of interest which exist in some countries, such as Sweden, Canada, &c., prove nothing in favour of such an argument, as the financial positions of these half-developed and capitalless countries have not yet advanced to that stage when the principles of competition, demand, supply, &c., have entered the field, and been allowed to exer- cise that regulating influence which is necessary before the monetary affairs of a country can be said to be relatively in order. Dr. Adam Smith says : 6 The riches, and, so far as power depends upon riches, the power of every country must always be in proportion to the value of its annual produce the fund from which all taxes must ultimately be paid. But the great object of the political economy of every country 248 BANKING. is to increase the riches and power of that coun- try.' Panics and frequent pressure in the money market, causing high rates of interest, although producing a temporary increase of a banker's pro- fits, neither conduce to his ultimate permanent welfare, nor c increase the riches and power of that country,' as the difficulty of obtaining that commodity, by which industry is set in motion and agriculture advanced and made more productive, will keep a country back ; throw numbers of its people out of employ, thereby sowing the seeds of disaffection and disorder; will cause compound loss by all descriptions of stock, plant and other kinds of capital deteriorating by their remaining idle and unproductive ; and will impede the progress of science and invention, by withdrawing artisans, mechanics, &c., from their accustomed employment, by which the general advancement of civilisation must be retarded. As the fluctuations in the demand and supply of loanable capital are more frequent than with any other description of capital, it being the com- modity by whose agency all others are exchanged, it will be evident that industry and commerce will be affected in all their branches by the fluctuation in the price of loans. OF THE RATE OF INTEREST. 249 There is what our first writers on political economy call the ' natural rate,' either side of which fluctuations will always take place, and are always expected to take place, and for which mer- chants and traders are accustomed to leave a margin in their calculations. The unnaturally high rates which have ruled in the London market during the last three or four years, can be accounted for to a great extent by the artificial pressure which is brought to bear by the number of borrowers, who seek to obtain pos- session of large sums of money, not for the purpose of employing it directly in assisting in the increase of the natural productions of the earth, but for the purpose of lending it again at a higher rate, thereby giving an abnormal and artificial value to money; and, as a matter of course, the farther this system can be carried with any degree of safety and permanence, in a like degree may the price at which the use of capital can be obtained be expected to remain unnaturally enhanced. That part which forms so important an item in a banker's profits, should be received from his clients as much for their benefit, and more so, than for his. Setting aside the pleasantness of the banker's position, when he lends his money to a 250 BANKING. client who cheerfully pays the rate of interest de- manded, there can be no doubt whatever that neither side is benefited so well permanently, as when a client pays a rate of interest which the business in which he employs it will safely bear, and the banker can part with his money with a conviction that he will receive it when due, and in the meantime will have no occasion to supply its place at a loss. Mr. John Stuart Mill, 'Principles of Political Economy,' vol. ii. p. 194, says : ' Fluctuations in the rate of interest arise from variations either in the demand for loans, or in the supply. The supply is liable to variation, though less so than the demand. The willingness to lend is greater than usual at the commencement of a period of speculation, and much less than usual during the revulsion which follows. In speculative times, money-lenders, as well as other people, are inclined to extend their business by stretching their credit ; they lend more than usual (just as other classes of dealers and producers employ more than usual) of capital which does not belong to them. Accordingly, these are the times when the rate of interest is low, though for this, too (as we shall immediately see), there are other causes. During the revulsion, on the OF THE RATE OF INTEREST. 251 contrary, interest always rises inordinately, be- cause, while there is a most pressing need on the part of many persons to borrow, there is a general disinclination to lend. This disinclination, when at its extreme point, is called a panic. It occurs when a succession of unexpected failures has created in the mercantile, and sometimes also in the non-mercantile, public a general distrust in each other's solvency; disposing every one, not only to refuse fresh credit, except on very onerous terms, but to call in, if possible, all credit which he has already given. Deposits are withdrawn from banks ; notes are returned on the issuers in exchange for specie; bankers raise their rate of discount, and withhold their customary advances ; merchants refuse to renew mercantile bills. At such times the most calamitous consequences were formerly experienced from the attempt of the law to prevent more than a certain limited rate of in- terest from being given or taken. Persons who could not borrow at five per cent, had to pay, not six or seven, but ten or fifteen per cent, to compen- sate the lender for risking the penalties of the law; or had to sell securities or goods for ready money at a still greater sacrifice. ' Except at such periods, the amount of capital 252 BANKING. disposable on loan is subject to little other varia- tion than that which arises from the gradual pro- cess of accumulation ; which process, however, in the great commercial countries is sufficiently rapid to account for the almost periodical recurrence of these fits of speculation ; since, when a few years have elapsed without a crisis, and no new and tempting channel for investment has been opened in the meantime, there is always found to have occurred, in those few years, so large an increase of capital seeking investment, as to have lowered considerably the rate of interest, whether indicated by the prices of securities or by the rate of dis- count on bills; and this diminution of interest tempts the possessors to incur hazards, in hopes of a more considerable return.' It will thus be seen that the rate of interest which may be ruling at one period or another is not influenced by the amount or value of money which may be in circulation. As the rate of interest rises, all descriptions of securities become depressed ; and there is always the danger that bankers will be tempted to lend too large a proportion of their deposits, so that when demanded by the depositors they may be unable to return them. APPENDIX. The following is copied from the ' Times 9 of May 18, 1866. The return from the Bank of England for the week ending May 16, 1866, gives the following results, when compared with the previous week : Eest . . . 3,343,412 Increase . . 105,825 Public deposits . 5,936,219 154,392 Other deposits . 18,620,672 5,105,135 On the other side of the account : Government securities 10,837,056 Decrease . 57,198 Other securities . . 30,943,259 Increase . 10,099,042 Notes unemployed . 730,830 Decrease . 4,219,495 The amount of notes in circulation is 26,120,995?., being an increase of 3,776,600?. ; and the stock of bullion in both departments is 12,323,805?., showing a decrease of 832,335?. when compared with the preceding state- ment. This is the most extraordinary return ever presented. On neither of the two preceding occasions of the sus- pension of the Bank Act did the figures exhibit any very violent change, but in tnis instance the peculiar severity of the panic caused an extra 10 millions to be applied for by the public in the shape of discounts and temporary advances, of which 5,105,135?. found its way back in the shape of bankers' balances, and between four 254 APPENDIX. and five millions went into circulation in the form of remittances of notes and coin to country bankers and others. Under these circumstances, although the re- ceipts of foreign bullion during the week exceeded the withdrawals for exportation by 93,0002., the stock held shows a decrease of 832,3352. As the reserve of notes and bullion in the banking department still amounts to 1,202,8102., it will be seen that no actual infringement of the Act has taken place, and consequently, that no Parliamentary action will be requisite. In reply to the questions of two honourable members of the House of Commons, put to the Chancellor of the Exchequer on May 17, 1866, Mr. Gladstone, in inform- ing them that they were under a misapprehension as to the Bank of England not having made advances ' upon the lodgment of Government securities,' stated that : 'The advances made by the Bank of England on Govern- ment securities on Friday, the day of the panic, amounted to 919,0002. ; on Saturday, to 747,0002., and on three subsequent days various amounts, making up the total amount advanced on these securities in five days to 2,874,0002. Then, with regard to the accommodation of commerce in general, the best measure that can be given of the manner in which the Bank has exercised its functions is shown in this that it has made advances upon bills, and has discounted bills to the extent of 9,350,0002., making a total of advances and discounts in five days of 12,225,0002.' 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