Books: Lombard Street: A Description of the Money Market

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We must therefore, I think, have recourse to feeble and humble
palliatives such as I have suggested. With good sense, good
judgment, and good care, I have no doubt that they may be enough.
But I have written in vain if I require to say now that the problem
is delicate, that the solution is varying and difficult, and that
the result is inestimable to us all.

APPENDIX.

Note A.

Liabilities and Cash Reserve of the Chief Banking Systems.

The following is a comparison of the liabilities to the public, and
of the cash reserve, of the banking systems of the United Kingdom,
France, Germany, and the United States. For the United Kingdom the
figures are the most defective, as they only include the deposits of
the Bank of England, and of the London joint stock banks, and the
banking reserve of the Bank of England, which is the only cash
available against these liabilities is also the only cash reserve
against the similar liabilities of the London private banks, the
provincial English banks, and the Scotch and Irish banks. In the
case of England, therefore, the method of comparison exhibits a
larger proportion of cash to liabilities than what really exists.

(1) ENGLISH BANKING.
Liabilities.
Deposits of Bank of England, less
estimated Joint Stock Bank balances, at December 31, 1872 L 29,000,000
Deposits of London Joint Stock Banks
at December 31 1872 (see 'Economist,' February 8, 1873) L 91,000,000
Total liabilities L 120,000,000

Reserve of Cash
Banking Reserve in Bank of England. L 13,500,000

Making proportion of cash reserve to liabilities to the public about
11'2 per cent.

(2) BANK of FRANCE (FEBRUARY, 1873).

Liabilities
Circulation L 110,000,000
Deposits L 15,000,000
Total liabilities L 125,000,000

Reserve of Cash.

Coin and bullion in hand L 32,000,000

Making proportion of cash reserve to liabilities to the public about
25 per cent.

(3) BANKS OF GERMANY (JANUARY, 1873).

Liabilities

Circulation L 63,000,000
Deposits L 8,000,000
Acceptances and Indorsements L 17,000,000
Total liabilities L 88,000,000

Reserves of Cash

Cash in Hand L 41,000,000

Making proportion of cash reserve to liabilities to the public about
per cent.

(4) NATIONAL BANKS OF UNITED STATES (OCTOBER 3, 1872).

Liabilities

Circulation L 67,000,000
Deposits L 145,000,000
Total liabilities L 212,000,000

Reserve of Cash

Coin and legal tenders in hand L 26,000,000

Making proportion of cash reserve to liabilities to the public about
12.3 per cent.

SUMMARY

Liabilities Cash held Proportion of cash
to the public to liabilities per
cent
Bank of England and London
Joint Stock Banks 20,000,000 13,500,000 11.2
Bank of France 125,000,000 32,000,000 25.0
Banks of Germany 88,000,000 41,000,000 47.0
National Banks of
United States 212,000,000 26,000,000 12.3

Note B.

Extract from Evidence Given by Mr. Alderman Salomons before House of
Commons Select Committee in 1858

1146. [Chairman.] The effect upon yourselves of the pressure in
November was, I presume, to induce you to increase your reserve in
your own hands, and also to increase your deposits with the Bank of
England?--Yes, that was so; but I wish to tell the Committee that that
was done almost entirely by allowing the bills of exchange which we
held to mature, and not by raising any money, or curtailing our
accommodation to our customers. Perhaps it may be interesting to the
Committee to know that on the 11th of November we held discounted
bills for brokers to the amount of 5,623,000 L. Out of those bills,
2,800,000 L. matured between the 11th of November and the 4th of
December, and 2,000,000 L. more between the 4th of December and the
31st. So that about 5,000,000 L. of bills matured between the 11th
of November and the 31st of December; consequently we were prepared,
merely by the maturing of our bills of exchange, for any demands
that might possibly come upon us.

1147. I understand you to say that you did not withdraw your usual
accommodation from your own customers, but that you ceased to have
in deposit with the bill-brokers so large a sum of money as you had
before?--Not exactly that; the bills which we had discounted were
allowed to mature, and we discounted less; we kept a large reserve
of cash.

1148. That is to say, you withdrew from the commercial world a part
of that accommodation which you had previously given, and at the
same time you increased your deposits with the Bank of England?--Yes,
our deposits with the Bank of England were increased. We did not
otherwise withdraw accommodation.

1149. [Mr. Weguelin.] Had you any money at call with the
billbrokers?--A small amount; perhaps about 500,000 L. or less, which
we did not call in.

1150. [Chairman.] What I understand you to say is, that the effect of
the commercial pressure upon you was to induce you upon the whole to
withdraw from commerce an amount of accommodation which in other
times you had given, and at the same time to increase your deposits
with the Bank of England?--So far only as ceasing to discount with
strangers, persons not having current accounts with us.

1151. Or to give the same amount to the bill-broker?--For a while,
instead of discounting for brokers and strangers, we allowed our
bills to mature, and remained quiescent with a view to enable us to
meet any demand that might be made on ourselves.

1152. Except what you felt bound to your own customers to continue
to give, you ceased to make advances?--Quite so; perhaps I might say
at the same time, that besides a large balance which we kept at the
Bank of England, which of course was as available as in our own
tills, we increased our notes in our tills at the head office and at
all the branches.

1153. I suppose at that time large sales of public securities were
made by the London joint stock banks, which securities were
purchased by the public?--It is understood that some joint stock and
other banks sold, but I believe it is quite certain that the public
purchased largely, because they always purchase when the funds fall.

1154. Are you prepared to give the Committee any opinion of your own
as to the effect, one way or the other, which the system of the
joint stock banks may have produced with regard to aggravating or
diminishing the commercial pressure in the autumn of last year?--I
should state, generally, that the joint stock banks, as well as all
other banks, in London, by collecting money from those who had it to
spare, must of necessity have assisted, and could not do otherwise
than assist commerce, both then and at all other times.

1155. You say that your discounts, either at your own counter or
through the bill-brokers, are ordinarily very large, but that at the
time of severest pressure you contracted them so far as you thought
was just to your own immediate customers?--Yes; but the capital was
still there, because it was at the Bank of England, and it was
capable of being used for short periods; if we did not want it,
others might have used it.

1156. [Mr. Weguelin.] In fact, it was used by the Bank of England?--
Undoubtedly; I should suppose so; there is no question about it.

1157. You, of course, felt quite certain that your deposits in the
Bank of England might be had upon demand?--We had no doubt about it.

1158 You did not take into consideration the effect of the law of
1844, which might have placed the Banking Department of the Bank of
England in such a position as not to be able to meet the demands of
its depositors? I must say that that never gave us the smallest
concern.

1159. You therefore considered that, if the time should arrive, the
Government would interfere with some measure as they had previously
done to enable the Bank to meet the demands upon it?--We should always
have thought that if the Bank of England had stopped payment, all
the machinery of Government would have stopped with it, and we never
could have believed that so formidable a calamity would have arisen
if the Government could have prevented it.

1160. [Chairman.] The notion of the convertibility of the note being
in danger never crossed your mind?--Never for a moment; nothing of the
kind.

1161. [Mr. Weguelin.] I refer not to the convertibility of the note,
but to the state of the Banking Department of the Bank of England?--If
we had thought that there was any doubt whatever about it, we should
have taken our bank-notes and put them in our own strong chest. We
could never for a moment believe an event of that kind as likely to
happen.

1162. Therefore you think that the measure taken by the Government,
of issuing a letter authorising the Bank of England to increase
their issues of notes upon securities, was what was generally
expected by the commercial world, and what in future the commercial
world would look to in such a conjunction of circumstances?--We looked
for some measure of that nature. That, no doubt, was the most
obvious one. We had great doubts whether it would come when it did,
until the very last moment.

1163. Have you ever contemplated the possibility of the Bank
refusing to advance, under circumstances similar to those which
existed in November, 1857, upon good banking securities?--Of course I
have, and it is a very difficult question to answer as to what its
effect might be; but the notion appears to me to be so thoroughly
ingrained in the minds of the commercial world, that whenever you
have good security it ought to be convertible at the Bank in some
shape or way, that I have very great doubt indeed whether the Bank
can ever take a position to refuse to assist persons who have good
commercial securities to offer.

1164. [Mr. Cayley.] When you say that you have come to some fresh
arrangement with regard to your allowance of interest upon deposits,
do you speak of yourselves as the London and Westminster Bank, or of
some of the other banks in combination with yourselves?--I think all
the banks have come to an understanding that it is not desirable,
either for their proprietors or for the public, to follow closely at
all times the alterations of the Bank. I believe it is understood
amongst them all that they do not intend following that course in
future.

1165. Is that from a feeling that it is rather dangerous under
particular circumstances?--I cannot admit as to its being dangerous,
but there can be no doubt of this, that there is a notion in the
public mind which we ought not to contend against, that when you
offer a high rate of interest for money, you rather do it because
you want the person's money, than because you are obeying the market
rate; and I think it is desirable that we should show that if
persons wish to employ their money, and want an excessive rate, they
may take it away and employ it themselves.

1166. You think that there is now a general understanding amongst
the banks which you have mentioned, to act upon a different
principle from that on which they acted during last October and
November?--I think I may say that I know that to be the case.

1167. Was not it the fact that this system of giving so high a rate
of interest upon money at call commenced very much with the
establishment of some banks during the last year or two, which,
instead of demanding 10 days' or a month's notice, were willing to
allow interest upon only three days' notice; did not that system
begin about two years ago?--I do not think it began with the new
banks; I think it began with one of the older banks; I know that as
regards my own bank, that we were forced into it; I forgot to say,
that with regard to ourselves in taking money on deposit, the
parties must leave the money a month, or they lose interest. We do
not take money from any depositor at interest unless upon the
understand ing and condition that it remains a month with us; he may
withdraw it within the month, but then he forfeits interest; it will
not carry interest unless it is with us a month, and then it is
removable on demand without notice.

1168. Is it or is it not a fact that some of the banks pay interest
upon their current accounts?--Yes, I think most of the new banks do
so; and the Unlon Bank of London does it.

1169. At a smaller rate than upon their deposits, I presume?--I think
at a smaller rate, but I believe it is a fixed rate on the minimum
balance for some period, either six months or one month, I do not
exactly know the period. I think I ought to add (and I believe it is
the case with all the banks) that the London and Westminster Bank,
from the day of its first institution until the present day, has
never re-discounted a bill. No bill has ever left our bank unless it
has been for payment.

1170. Is not that generally the case with the London joint stock
banks?--I believe it is the case.

1171. [Mr. Weguelin.] But you sometimes lend money upon bills
deposited with you by bill-brokers?--Yes.

1172. And you occasionally call in that money and re-deliver those
securities?--Yes; but that we do to a very small extent.

1173. Is not that equivalent to a re-discount of bills?--No; the
discount of a bill and the lending money on bills are very different
things. When we discount a bill, that bill becomes our property; it
is in our control, and we keep it and lock it up until it falls due;
but when brokers come to us and want to borrow, say 50,000 L. on a
deposit of bills, and we let them have the money and afterwards
return those bills to them and we get back our money, surely that is
not a re-discount.

1174. When you want to employ your money for a short period, do you
not frequently take bills of long date, and advance upon them?--But
that is not a re-discount on our part. Very often brokers in
borrowing money send in bills of long date, and afterwards we call
in that loan; but that is no more a re-discount than lending money
upon consols and calling in that money again. It is not an advance
of ours; we do not seek it; they come to us and borrow our money,
and give us a security; when we want our money we call for that
money, and return their security. Surely that is not a re-discount.

1175. [Mr. Hankey.] Is there not this clear distinction between
returning a bill on which you have made an advance and discounting a
bill, that if you have discounted a bill your liability continues
upon the bill until that bill has come to maturity?--Yes.

1176. In the other case you have no further liability
whatever?--Certamly.

1177. Should you not consider that a very important distinction?--I
think it is an important distinction. Take this case: suppose a
party comes to us and borrows 50,000 L., and we lend it him, and
when the loan becomes due we take our money back again. Surely that
is not a discount on our part.

1178. Is there not this distinction, that if you re-discount you may
go on pledging the liability of your bank to an almost unlimited
amount, whereas in the other case you only get back that money which
you have lent?--Undoubtedly.

1179. [Mr. Cayley.] The late Chancellor of the Exchequer stated
before the adjournment, in a speech in the House of Commons, that
during the Monday, Tuesday, Wednesday, and Thursday of the panic,
the Bank was almost, if not entirely, the only body that discounted
commercial bills; how can you reconcile that with what you have
said, that you gave as much accommodation as usual to your
customers?--I am not responsible for what the Chancellor of the
Exchequer said; I am responsible for what I am now stating as to the
course of our bank, that our advances to our customers on the 31st
of December were nearly 500,000 L. higher than they were on the 1st
of October. With regard to our not discounting for other parties, it
was in consequence of the discredit which prevailed, that it was
necessary we should hold a portion of our deposits in order that
they should be available in case persons called for them; a certain
number of persons did so; in the month of November we had a
reduction of our deposits, and if we had gone on discounting for
brokers we should have had to go into the market ourselves to raise
money on our Government securities, but we avoided that by not
discounting, and leaving our money at the Bank of England.

1180. Then you did not discount as much as usual for your customers
during that period?--Yes. we did, and more.

1181. But not to strangers?--Not to strangers; I make a distinction
between our transactions with our customers, who of course expect us
to give accommodation, and discounts for brokers, which is entirely
voluntary, depending upon our having money to employ.

1182. How would it have been if the letter had not issued at the
last moment? That is a question which I can hardly answer.

1183. What do you mean by that general expression of yours?--It is
impossible to predicate what may happen in time of panic and alarm.
A great alarm prevailed certainly amongst the commercial world, and
it could never have been alleviated, except by some extraordinary
means of relief. We might probably have been in the state in which
Hamburg was, where they have no bank-notes in circulation.

1184. [Mr. Spooner.] What did you mean by the expression, 'the last
moment'? You said that the letter came out at the last moment; the
last moment of what?--It was late in the day; it was a day of great
distress. For two days there was a great deal of anxiety, and
everybody expected that there would be some relief; and it was when
expectation, I suppose, was highly excited that the letter came, and
it gave relief.

1185. Cannot you tell us what your opinion would have been, if that
last moment had happened to have elapsed, and the letter had not
come?--It is very difficult to say; it is too much to say that it
could not have been got over. There can be no doubt whatever that
what created the difficulty existed out of London, and not in it;
and therefore it is much more difficult for me to give an opinion. I
believe that the banking interest, both private and joint stock, was
in a perfectly sound condition, and able to bear any strain which
might have been brought upon it in London.

1186. [Mr. Hankey.] Can you give the Committee any idea as to what
proportion of deposits you consider generally desirable to keep in
reserve?--You must be very much guided by circumstances. In times of
alarm, when there are failures, of course all bankers strengthen
their reserves; our reserve then is larger. In times of ordinary
business we find, both as regards our deposits at interest as well
as those which are not at interest, that there is a constant
circulation; that the receipts of money very nearly meet the
payments.

1187. You probably keep at all times a certain amount of your
deposits totally unemployed; in reserve?--Yes.

1188. In a normal state of commercial affairs, is there any fixed
proportion, or can you give the Committee any idea of what you would
consider about a fair and desirable proportion which should be so
kept unemployed?--I think the best idea which I can give upon that
subject is to give our annual statement, or balance sheet, for the
31st of December.

1189. Does that show what amount of unemployed money you had on that
day?--Yes. I will put in a statement, which perhaps will be the best
means of meeting the question, showing the cash in hand on the 30th
of June and the 31st of December in every year, as shown by our
published accounts, together with our money at call and our
Government securities; that will be perhaps the best and most
convenient way of giving the information you desire to have. (See
Table below.)

1190. Do you consider that when your deposits are materially on the
increase it is necessary to keep a larger amount of money in reserve
than you would keep at other times?--I may say that, as a general
rule, our reserve would always bear some proportion to our deposits.

_Total Lodgments with London and Westminster Bank; also Amount of
Cash in Hand, Moneys with Bill-Brokers at Call, and Government
Securities held by the Bank._

DATE Deposits Cash in Hand Money at Call Government Securities TOTAL.
31 December 1845 3,590,014 563,072 628,500 1,039,745 2,231,317
31 December 1846 3,280,864 634,575 423,060 938,717 1,996,352
31 December 1847 2,733,753 7,231,325 350,108 791,899 1,863,332
30 June 1848 3,170,118 588,871 159,724 1,295,047 2,043,642
31 December 1848 3,089,659 645,468 176,824 1,189,213 2,011,505
30 June 1849 3,392,857 552,642 246,494 964,800 1,763,936
31 December 1849 3,680,623 686,761 264,577 973,691 1,224,029
30 June 1850 3,821,022 654,649 258,177 972,055 1,884,881
31 December 1850 3,969,648 566,039 334,982 1,089,794 1,990,815
30 June 1851 4,414,179 691,719 424,195 1,054,018 2,169,932
31 December 1851 4,677,298 653,946 378,337 1,054,018 2,080,301
30 June 1852 5,245,135 861,778 136,687 1,054,018 2,122,483
31 December 1852 5,581,706 855,057 397,087 1,119,477 2,371,621
30 June 1853 6,219,817 904,252 499,467 1,218,852 2,622,571
31 December 1853 6,259,540 791,699 677,392 1,468,902 2,937,993
30 June 1854 6,892,470 827,397 917,557 1,457,415 3,202,369
31 December 1854 7,177,244 694,309 486,400 1,451,074 2,631,783
30 June 1855 8,166,553 722,243 483,890 1,754,074 2,960,207
31 December 1855 8,744,095 847,856 451,575 1,949,074 3,248,505
30 June 1856 11,170,010 906,876 601,800 1,980,489 3,489,165
31 December 1856 11,438,461 1,119,591 432,000 2,922,625 4,474,216
30 June 1857 13,913,058 967,078 687,730 3,353,179 5,007,987
31 December 1857 113,889,021 2,226,441 1,115,883 3,582,797 6,923,121

1191. Do you employ your money in the discounting of bills for other
persons than your own customers?--Discount brokers.

1192. Only to discount brokers? Yes.

1193. Not to strangers who are in the habit of bringing you in
bills; commercial houses?--I should say generally not. We have one or
two houses for whom we discount who have not accounts with us as
bankers, but generally we do not discount except for our customers
or for billbrokers.

1194. Do you consider that any advantage can arise to the public by
the Bank of England advancing to a greater extent than can be
considered strictly prudent on the soundest principle of banking,
under the idea of their affording aid to the commercial world?--As I
said before, as long as there are good bills in circulation, that
is, bills about which there would be no doubt of their being paid at
maturity, there should be some means by which those bills could be
discounted.

1195. And do you think that it is part of the functions of the Bank
of England to discount a bill for anybody, merely because the party
holding the bill wishes to convert it into cash?--As I said before,
the Bank of England will have great difficulty in getting rid of
that inconvenient idea which there is in the mind of the public,
that the Bank of England is something more than an ordinary joint
stock bank. I think it must depend very much upon circumstances
whether you can or cannot refuse the discount of good bills which
are offered to you.

Note C.

Statement of Circulation and Deposits of the Bank of Dundee at
Intervals of Ten Years between 1764 and 1864.

Year Circulation Deposits
1764 30,395 --
1774 27,670 --
1784 56,342 --
1794 50,354 --
1804 54,096 157,821
1814 46,627 445,066
1824 29,675 343,948
1834 26,467 563,202
1844 27,504 535,253
1854 40,774 705,222
1864 41,118 684,898

The Bank did not begin to receive deposits until 1792, in which year
they amounted to 35,9441.

Note D.

Meeting of the Proprietors of the Bank of England.

September 13, 1866.

(From 'Economist,' September 22, 1866.)

A General Court of the Bank of England was held at the Bank at
twelve o'clock on the 3th instant, for the purpose of declaring a
dividend for the past half-year.

Mr. Launcelot Holland, the Governor of the Bank, who presided upon
the occasion, addressed the proprietors as follows: This is one of
the quarterly general courts appointed by our charter, and it is
also one of our half-yearly general courts, held under our bye-laws,
for the purpose of declaring a dividend. From a statement which I
hold in my hand it appears that the net profits of the Bank for the
half-year ending on the 31st of August last amounted to 970,014 L.
17s. 10d.; making the amount of the rest on that day, 3,981,783 L.
18s. 11d.; and after providing for a dividend at the rate of 6 L.
10s. per cent, the rest will stand at 3,035,838 L.. 18s. 11d. The
court of directors, therefore, propose that a half-yearly dividend
of interest and profits, to the amount of 6 L. 10s. per cent, without
deduction on account of income tax, shall be made on the 10th of
October next. That is the proposal I have now to lay before the
general court; but as important events have occurred since we last
met, I think it right I should briefly advert to them upon this
occasion. A great strain has within the last few months been put
upon the resources of this house, and of the whole banking community
of London; and I think I am entitled to say that not only this house
but the entire banking body acquitted themselves most honourably and
creditably throughout that very trying period. Banking is a very
peculiar business, and it depends so much upon credit that the least
blast of suspicion is sufficient to sweep away, as it were, the
harvest of a whole year. But the manner in which the banking
establishments generally of London met the demands made upon them
during the greater portion of the past half-year affords a most
satisfactory proof of the soundness of the principles on which their
business is conducted. This house exerted itself to the utmost--and
exerted itself most successfully--to meet the crisis. We did not
flinch from our post. When the storm came upon us, on the morning on
which it became known that the house of Overend and Co. had failed,
we were in as sound and healthy a position as any banking
establishment could hold; and on that day and throughout the
succeeding week, we made advances which would hardly be credited. I
do not believe that any one would have thought of predicting, even
at the shortest period beforehand, the greatness of those advances.
It was not unnatural that in this state of things a certain degree
of alarm should have taken possession of the public mind, and that
those who required accommodation from the Bank should have gone to
the Chancellor of the Exchequer and requested the Government to
empower us to issue notes beyond the statutory amount, if we should
think that such a measure was desirable. But we had to act before we
could receive any such power, and before the Chancellor of the
Exchequer was perhaps out of his bed we had advanced one-half of our
reserves, which were certainly thus reduced to an amount which we
could not witness without regret. But we could not flinch from the
duty which we conceived was imposed upon us of supporting the
banking community, and I am not aware that any legitimate
application for assistance made to this house was refused. Every
gentleman who came here with adequate security was liberally dealt
with, and if accommodation could not be afforded to the full extent
which was demanded, no one who offered proper security failed to
obtain relief from this house. I have perhaps gone a little more
into details than is customary upon these occasions, but the times
have been unusually interesting, and I thought it desirable to say
this much in justification of the course adopted by this house of
running its balances down to a point which some gentlemen may
consider dangerous. Looking back, however, upon recent events, I
cannot take any blame to this court for not having been prepared for
such a tornado as that which burst upon us on the ith of May; and I
hope the court of proprietors will feel that their directors acted
properly upon that occasion, and that they did their best to meet a
very extraordinary state of circumstances. I have now only to move
that a dividend be declared at the rate of 6 L. 10s. per cent for
the past half-year.

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