Books: Lombard Street: A Description of the Money Market

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An election so liable to be disturbed by powerful vitiating causes
would rarely end in a good choice. The best candidate would almost
never be chosen; often, I fear, one would be chosen altogether unfit
for a post so important. And the excitement of so keen an election
would altogether disturb the quiet of the Bank. The good and
efficient working of a board of Bank directors depends on its
internal harmony, and that harmony would be broken for ever by the
excitement, the sayings, and the acts of a great election. The board
of directors would almost certainly be demoralised by having to
choose a sovereign, and there is no certainty, nor any great
likelihood, indeed, that they would choose a good one. In France the
difficulty of finding a good body to choose the Governor of the Bank
has been met characteristically. The Bank of France keeps the money
of the State, and the State appoints its governor. The French have
generally a logical reason to give for all they do, though perhaps
the results of their actions are not always so good as the reasons
for them. The Governor of the Bank of France has not always, I am
told, been a very competent person; the Sub-Governor, whom the State
also appoints, is, as we might expect, usually better. But for our
English purposes it would be useless to inquire minutely into this.
No English statesman would consent to be responsible for the choice
of the Governor of the Bank of England. After every panic, the
Opposition would say in Parliament that the calamity had been
'grievously aggravated,' if not wholly caused, by the 'gross
misconduct' of the Governor appointed by the ministry. Or, possibly,
offices may have changed occupants and the ministry in power at the
panic would be the opponents of the ministry which at a former time
appointed the Governor. In that case they would be apt to feel, and
to intimate, a 'grave regret' at the course which the nominee of
their adversaries had 'thought it desirable to pursue.' They would
not much mind hurting his feelings, and if he resigned they would
have themselves a valuable piece of patronage to confer on one of
their own friends. No result could be worse than that the conduct of
the Bank and the management should be made a matter of party
politics, and men of all parties would agree in this, even if they
agreed in almost nothing else.

I am therefore afraid that we must abandon the plan of improving the
government of the Bank of England by the appointment of a permanent
Governor, because we should not be sure of choosing a good governor,
and should indeed run a great risk, for the most part, of choosing a
bad one.

I think, however, that much of the advantage, with little of the
risk, might be secured by a humbler scheme. In English political
offices, as was observed before, the evil of a changing head is made
possible by the permanence of a dignified subordinate. Though the
Parliamentary Secretary of State and the Parliamentary
Under-Secretary go in and out with each administration, another
Under-Secretary remains through all such changes, and is on that
account called 'permanent.' Now this system seems to me in its
principle perfectly applicable to the administration of the Bank of
England. For the reasons which have just been given, a permanent
ruler of the Bank of England cannot be appointed; for other reasons,
which were just before given, some most influential permanent
functionary is essential in the proper conduct of the business of
the Bank; and, mutatis mutandis, these are the very difficulties,
and the very advantages which have led us to frame our principal
offices of state in the present fashion.

Such a Deputy-Governor would not be at all a 'king' in the City.
There would be no mischievous prestige about the office; there would
be no attraction in it for a vain man; and there would be nothing to
make it an object of a violent canvass or of unscrupulous
electioneering. The office would be essentially subordinate in its
character, just like the permanent secretary in a political office.
The pay should be high, for good ability is wanted--but no pay would
attract the most dangerous class of people. The very influential,
but not very wise, City dignitary who would be so very dangerous is
usually very opulent; he would hardly have such influence he were
not opulent: what he wants is not money, but 'position.' A
Governorship of the Bank of England he would take almost without
salary; perhaps he would even pay to get it: but a minor office of
essential subordination would not attract him at all. We may augment
the pay enough to get a good man, without fearing that by such pay
we may temptas by social privilege we should temptexactly the sort
of man we do not want.

Undoubtedly such a permanent official should be a trained banker.
There is a cardinal difference between banking and other kinds of
commerce; you can afford to run much less risk in banking than in
commerce, and you must take much greater precautions. In common
business, the trader can add to the cost price of the goods he sells
a large mercantile profit, say 10 to 15 per cent; but the banker has
to be content with the interest of money, which in England is not so
much as per cent upon the average. The business of a banker
therefore cannot bear so many bad debts as that of a merchant, and
he must be much more cautious to whom he gives credit. Real money is
a commodity much more coveted than common goods: for one deceit
which is attempted on a manufacturer or a merchant, twenty or more
are attempted on a banker. And besides, a banker, dealing with the
money of others, and money payable on demand, must be always, as it
were, looking behind him and seeing that he has reserve enough in
store if payment should be asked for, which a merchant dealing
mostly with his own capital need not think of. Adventure is the life
of commerce, but caution, I had almost said timidity, is the life of
banking; and I cannot imagine that the long series of great errors
made by the Bank of England in the management of its reserve till
after 1857, would have been possible if the merchants in the Bank
court had not erroneously taken the same view of the Bank's business
that they must properly take of their own mercantile business. The
Bank directors have almost always been too cheerful as to the Bank's
business, and too little disposed to take alarm. What we want to
introduce into the Bank court is a wise apprehensiveness, and this
every trained banker is taught by the habits of his trade, and the
atmosphere of his life.

The permanent Governor ought to give his whole time to the business
of the Bank. He ought to be forbidden to engage in any other
concern. All the present directors, including the Governor and
Deputy-Governor, are engaged in their own business, and it is very
possible, indeed it must perpetually have happened, that their own
business as merchants most occupied the minds of most of them just
when it was most important that the business of the Bank should
occupy them. It is at a panic and just before a panic that the
business of the Bank is most exacting and most engrossing. But just
at that time the business of most merchants must be unusually
occupying and may be exceedingly critical. By the present
constitution of the Bank, the attention of its sole rulers is most
apt to be diverted from the Bank's affairs just when those affairs
require that attention the most. And the only remedy is the
appointment of a permanent and influential man, who will have no
business save that of the Bank, and who therefore presumably will
attend most to it at the critical instant when attention is most
required. His mind, at any rate, will in a panic be free from
pecuniary anxiety, whereas many, if not all, of the present
directors must be incessantly thinking of their own affairs and
unable to banish them from their minds.

The permanent Deputy-Governor must be a director and a man of fair
position. He must not have to say 'Sir' to the Governor. There is no
fair argument between an inferior who has to exhibit respect and a
superior who has to receive respect. The superior can always, and
does mostly, refute the bad arguments of his inferior; but the
inferior rarely ventures to try to refute the bad arguments of his
superior. And he still more rarely states his case effectually; he
pauses, hesitates, does not use the best word or the most apt
illustration, perhaps he uses a faulty illustration or a wrong word,
and so fails because the superior immediately exposes him. Important
business can only be sufficiently discussed by persons who can say
very much what they like very much as they like to one another. The
thought of the speaker should come out as it was in his mind, and
not be hidden in respectful expressions or enfeebled by affected
doubt. What is wanted at the Bank is not a new clerk to the
directors, they have excellent clerks of great experience nowbut a
permanent equal to the directors, who shall be able to discuss on
equal terms with them the business of the Bank, and have this
advantage over them in discussion, that he has no other business
than that of the Bank to think of.

The formal duties of such a permanent officer could only be defined
by some one conversant with the business of the Bank, and could
scarcely be intelligibly discussed before the public. Nor are the
precise duties of the least importance. Such an officer, if sound,
able, and industrious, would soon rule the affairs of the Bank. He
would be acquainted better than anyone else, both with the
traditions of the past and with the facts of the present; he would
have a great experience; he would have seen many anxious times; he
would always be on the watch for their recurrence. And he would have
a peculiar power of guidance at such moments from the nature of the
men with whom he has most to deal. Most Governors of the Bank of
England are cautious merchants, not profoundly skilled in banking,
but most anxious that their period of office should be prosperous
and that they should themselves escape censure. If a 'safe' course
is pressed upon them they are likely to take that course. Now it
would almost always be 'safe' to follow the advice of the great
standing 'authority'; it would always be most 'unsafe' not to follow
it. If the changing Governor act on the advice of the permanent
Deputy-Governor, most of the blame in case of mischance would fall
on the latter; it would be said that a shifting officer like the
Governor might very likely not know what should be done, but that
the permanent official was put there to know it and paid to know it.
But if, on the other hand, the changing Governor should disregard
the advice of his permanent colleague, and the consequence should be
bad, he would be blamed exceedingly. It would be said that, 'being
without experience, he had taken upon him to overrule men who had
much experience; that when the constitution of the Bank had provided
them with skilled counsel, he had taken on himself to act of his own
head, and to disregard that counsel;' and so on ad infinitum. And
there could be no sort of conversation more injurious to a man in
the City; the world there would say, rightly or wrongly, 'We must
never be too severe on errors of judgment; we are all making them
every day; if responsible persons do their best we can expect no
more. But this case is different: the Governor acted on a wrong
system; he took upon himself an unnecessary responsibility:' and so
a Governor who incurred disaster by disregarding his skilled
counsellor would be thought a fool in the City for ever. In
consequence, the one skilled counsellor would in fact rule the Bank.
I believe that the appointment of the new permanent and skilled
authority at the Bank is the greatest reform which can be made
there, and that which is most wanted. I believe that such a person
would give to the decision of the Bank that foresight, that
quickness, and that consistency m which those decisions are
undeniably now deficient. As far as I can judge, this change in the
constitution of the Bank is by far the most necessary, and is
perhaps more important even than all other changes. But,
nevertheless, we should reform the other points which we have seen
to be defective.

First, the London bankers should not be altogether excluded from the
court of directors. The old idea, as I have explained, was that the
London bankers were the competitors of the Bank of England, and
would hurt it if they could. But now the London bankers have another
relation to the Bank which did not then exist, and was not then
imagined. Among private people they are the principal depositors in
the Bank; they are therefore particularly interested in its
stability; they are especially interested in the maintenance of a
good banking reserve, for their own credit and the safety of their
large deposits depend on it. And they can bring to the court of
directors an experience of banking itself, got outside the Bank of
England, which none of the present directors possess, for they have
learned all they know of banking at the Bank itself. There was also
an old notion that the secrets of the Bank would be divulged if they
were imparted to bankers. But probably bankers are better trained to
silence and secrecy than most people. And there is only a thin
partition now between the bankers and the secrets of the Bank. Only
lately a firm failed of which one partner was a director of the
London and Westminster Bank, and another a director of the Bank of
England. Who can define or class the confidential communications of
such persons under such circumstances?

As I observed before, the line drawn at present against bankers is
very technical and exclusively English. According to continental
ideas, Messrs. Rothschild are bankers, if any one is a banker. But
the house of Rothschild is represented on the Bank direction. And it
is most desirable that it should be represented, for members of that
firm can give if they choose confidential information of great value
to the Bank. But, nevertheless, the objection which is urged against
English bankers is at least equally applicable to these foreign
bankers. They have, or may have, at certain periods an interest
opposite to the policy of the Bank. As the greatest Exchange
dealers, they may wish to export gold just when the Bank of England
is raising its rate of interest to prevent anyone from exporting
gold. The vote of a great Exchange dealer might be objected to for
plausible reasons of contrary interest, if any such reasons were
worth regarding. But in fact the particular interest of single
directors is not to be regarded; almost all directors who bring
special information labour under a suspicion of interest; they can
only have acquired that information in present business, and such
business may very possibly be affected for good or evil by the
policy of the Bank. But you must not on this account seal up the
Bank hermetically against living information; you must make a fair
body of directors upon the whole, and trust that the bias of some
individual interests will disappear and be lost in the whole. And if
this is to be the guiding principle, it is not consistent to exclude
English bankers from the court.

Objection is often also taken to the constitution of the Committee
of Treasury. That body is composed of the Governor and
Deputy-Governor and all the directors who have held those offices;
but as those offices in the main pass in rotation, this mode of
election very much comes to an election by seniority, and there are
obvious objections to giving, not only a preponderance to age, but a
monopoly to age. In some cases, indeed, this monopoly I believe has
already been infringed. When directors have on account of the
magnitude of their transactions, and the consequent engrossing
nature of their business, declined to fill the chair, in some cases
they have been asked to be members of the Committee of Treasury
notwithstanding. And it would certainly upon principle seem wiser to
choose a committee which for some purposes approximates to a
committee of management by competence rather than by seniority.

An objection is also taken to the large number of Bank directors.
There are twenty-four directors, a Governor and a Deputy-Governor,
making a total court of twenty-six persons, which is obviously too
large for the real discussion of any difficult business. And the
case is worse because the court only meets once a week, and only
sits a very short time. It has been said, with exaggeration, but not
without a basis of truth, that if the Bank directors were to sit for
four hours, there would be 'a panic solely from that.' 'The court,'
says Mr. Tooke, 'meets at half-past eleven or twelve; and, if the
sitting be prolonged beyond half-past one, the Stock Exchange and
the money market become excited, under the idea that a change of
importance is under discussion; and persons congregate about the
doors of the Bank parlour to obtain the earliest intimation of the
decision.' And he proceeds to conjecture that the knowledge of the
impatience without must cause haste, if not impatience, within. That
the decisions of such a court should be of incalculable importance
is plainly very strange.

There should be no delicacy as to altering the constitution of the
Bank of England. The existing constitution was framed in times that
have passed away, and was intended to be used for purposes very
different from the present. The founders may have considered that it
would lend money to the Government, that it would keep the money of
the Government, that it would issue notes payable to bearer, but
that it would keep the 'Banking reserve' of a great nation no one in
the seventeenth century imagined. And when the use to which we are
putting an old thing is a new use, in common sense we should think
whether the old thing is quite fit for the use to which we are
setting it. 'Putting new wine into old bottles' is safe only when
you watch the condition of the bottle, and adapt its structure most
carefully.

CHAPTER IX.

The Joint Stock Banks.

The Joint Stock Banks of this country are a most remarkable success.
Generally speaking the career of Joint Stock Companies in this
country has been chequered. Adam Smith, many years since, threw out
many pregnant hints on the difficulty of such undertakings--hints
which even after so many years will well repay perusal. But joint
stock banking has been an exception to this rule. Four years ago I
threw together the facts on the subject and the reasons for them;
and I venture to quote the article, because subsequent experience
suggests, I think, little to be added to it.

'The main classes of joint stock companies which have answered are
three:--1st. Those in which the capital is used not to work the
business but to guarantee the business. Thus a banker's business--his
proper business--does not begin while he is using his own money: it
commences when he begins to use the capital of others. An insurance
office in the long run needs no capital; the premiums which are
received ought to exceed the claims which accrue. In both cases, the
capital is wanted to assure the public and to induce it to trust the
concern. 2ndly. Those companies have answered which have an
exclusive privilege which they have used with judgment, or which
possibly was so very profitable as to enable them to thrive with
little judgment. 3rdly. Those which have undertaken a business both
large and simple--employing more money than most individuals or
private firms have at command, and yet such that, in Adam Smith's
words, 'the operations are capable of being reduced to a routine or
such an uniformity of method as admits of no variation."

'As a rule, the most profitable of these companies are banks.
Indeed, all the favouring conditions just mentioned concur in many
banks. An old-established bank has a "prestige," which amounts to a
"privileged opportunity"; though no exclusive right is given to it
by law, a peculiar power is given to it by opinion. The business of
banking ought to be simple; if it is hard it is wrong. The only
securities which a banker, using money that he may be asked at short
notice to repay, ought to touch, are those which are easily saleable
and easily intelligible. If there is a difficulty or a doubt, the
security should be declined. No business can of course be quite
reduced to fixed rules. There must be occasional cases which no
pre-conceived theory can define. But banking comes as near to fixed
rules certainly as any existing business, perhaps as any possible
business. The business of an old-established bank has the full
advantage of being a simple business, and in part the advantage of
being a monopoly business. Competition with it is only open in the
sense in which competition with "the London Tavern" is open; anyone
that has to do with either will pay dear for it.

'But the main source of the profitableness of established banking is
the smallness of the requisite capital. Being only wanted as a
"moral influence," it need not be more than is necessary to secure
that influence. Although, therefore, a banker deals only with the
most sure securities, and with those which yield the least interest,
he can nevertheless gain and divide a very large profit upon his own
capital, because the money in his hands is so much larger than that
capital.

'Experience, as shown by plain figures, confirms these conclusions.
We print at the end of this article the respective profits of 110
banks in England, and Scotland, and Ireland, being all in those
countries of which we have sufficient information--the Bank of England
excepted. There are no doubt others, but they are not quoted even on
local Stock Exchange lists, and in most cases publish no reports.
The result of these banks, as regards the dividends they pay, is--

No. of Companies Capital L
Above 20 per cent 15 5,302,767
Between 15 and 20 per cent 20 5,439,439
10 and 15 per cent 36 14,056,950
5 and 10 per cent 36 14,182,379
Under 5 per cent 3 1,350,000
110 40,331,535

that is to say, above 25 per cent of the capital employed in these
banks pays over 15 per cent, and 62 1/2 per cent of the capital pays
more than 10 per cent. So striking a result is not to be shown in
any other joint stock trade.

'The period to which these accounts refer was certainly not a
particularly profitable oneon the contrary, it has been specially
unprofitable. The rate of interest has been very low, and the amount
of good security in the market small. Many banks--to some extent most
banks--probably had in their books painful reminiscences of 1866. The
fever of excitement which passed over the nation was strongest in
the classes to whom banks lent most, and consequently the losses of
even the most careful banks (save of those in rural and sheltered
situations) were probably greater than usual. But even tried by this
very unfavourable test banking is a trade profitable far beyond the
average of trades.

'There is no attempt in these banks on the whole and as a rule to
divide too muchon the contrary, they have accumulated about
13,000,000 L., or nearly 1/3 rd of their capital, principally out of
undivided profits. The directors of some of them have been anxious
to put away as much as possible and to divide as little as possible.

'The reason is plain; out of the banks which pay more than 20 per
cent, all but one were old-established banks, and all those paying
between 15 and 20 per cent were old banks too. The "privileged
opportunity" of which we spoke is singularly conspicuous in such
figures; it enables banks to pay much, which without it would not
have paid much. The amount of the profit is clearly proportional to
the value of the "privileged opportunity." All the banks which pay
above 20 per cent, save one, are banks more than 25 years old; all
those which pay between 15 and 20 are so too. A new bank could not
make these profits, or even by its competition much reduce these
profits; in attempting to do so, it would simply ruin itself. Not
possessing the accumulated credit of years, it would have to wind up
before it attained that credit.

'The value of the opportunity too is proportioned to what has to be
paid for it. Some old banks have to pay interest for all their
money; some have much for which they pay nothing. Those who give
much to their customers have of course less left for their
shareholders. Thus Scotland, where there is always a daily interest,
has no bank in the lists paying over 15 per cent. The profits of
Scotch banks run thus:

Capital L Dividend
Bank of Scotland 1,500,000 12
British Linen Company 1,000,000 3
Caledonian 125,000 10
Clydesdale 900,000 10
Commercial Bank of Scotland 1,000,000 13
National Bank of Scotland 1,000,000 112
North of Scotland 280,000 10
Union Bank of Scotland 1,000,000 10
City of Glasgow 870,000 8
Royal Bank 2,000,000 8
9,675,000

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