MODERN ENGLISH BANKING The crisis of 1825 marked a turning-point, and tolled the death knell of the small country bank and of the note as the foundation of the banking system. Legislation quickly followed. In 1826 joint-stock banking (with unlimited liability) was permitted out side a radius of 65 miles from London, and at the same time the issue of bank-notes of less than £5 face value was prohibited. In 1833, the monopoly of the Bank of England was breached to the extent that joint-stock banking was permitted within the 65 mile radius, but without the right of issuing notes. This quali fication was of minor practical importance, for it was already clear that the note was to be replaced by the cheque, and that deposit as opposed to issue banking could be made a paying business. In 1834, the London and Westminster and London and County Banks were founded, and though cold-shouldered by the London private banking firms, rapidly established themselves, and when they had fought their way into the London Clearing House, as they did at an early date, their position was secure.
Meanwhile the Bank of England was to undergo a series of radical changes, which were to transform it from its old posi tion of being the foremost issue and deposit bank in the country to its present position of being a Central Bank in the modern sense of the word. The crises of 1829, in which the Bank had to borrow from the Banque de France to meet the demands of the public, forced the Government to take action, and there followed Peel's famous Bank Act.
The Bank Act.—This measure divided the Bank of England virtually into two banks—issue and deposit. The sole duty of the issue department was to issue bank-notes, and the fiduciary part of the issue was limited to the original Government debt of L14,000,000. Permission to exceed this limit could only be given by the Prime Minister and the Chancellor of the Exchequer acting conjointly, this forming the famous operation known as "suspending the Bank Act." The issue of notes by private or joint-stock banks was limited to those who already had and exercised the right, and to the average amount outstanding in the first quarter of 1844. If a bank, by reason of coming to London or absorption by another bank, lost its right to issue notes, the Act empowered the Bank of England to increase its fiduciary issue by two-thirds of the lapsed private issue. It may be added, as a matter of historical interest, that the last English country bank lost its right to issue as late as 1920, and that since that year the Bank of England's fiduciary limit has stood at £19,750,000.
The following is a very brief history of the great banking insti tutions familiarly known as the "Big Five":— ( ) Barclays Bank, Limited, was established as a private bank early in the i8th century and became a joint-stock company in 1896 as the result of an amalgamation of twenty private banks. In 1916 it absorbed the United Counties Bank, in 1918 the Lon don Provincial and South-Western Bank (itself an amalgama t ion of the London and Provincial and London and South-Western Banks), and has since acquired one or two small country banks and also the control of the Union Bank of Manchester. In Scot land, it has acquired the British Linen Bank, while abroad it owns Barclays Bank (France), Barclays Bank S.A.I. (in Italy), and Barclays Bank (Dominion, Colonial and Overseas), which includes the Anglo-Egyptian Bank and the National Bank of South Africa.
(2) Lloyds Bank, Limited, was founded in 1765 and became a joint-stock company in 1865. In 1918 it amalgamated with the Capital and Counties Bank, and a year later acquired the West Yorkshire Bank. In Scotland, it owns the National Bank of Scot land, and abroad it controls the Bank of London and South America. Among other absorptions of interest is that of Messrs. Cox and company, the famous army agents. In conjunction with the National Provincial Bank, it owns Lloyds and National Pro vincial Foreign Bank, operating in France, Belgium and Switzer land.
(3) Midland Bank, Limited, was established in 1836, and in 1918 amalgamated with the London Joint-Stock Bank. In Scot land it owns the Clydesdale Bank and the North of Scotland Bank, and in Ireland it owns the Belfast Banking company. It has no overseas branches or subsidiaries.
(4) National Provincial Bank, Limited, was established in 1833, and was registered as a limited company in 1880. In 1917 it amalgamated with the Union of London and Smiths Bank, and in 192o it acquired the control of Messrs. Coutts and com pany. In the course of its history it has absorbed numerous country banks, the most famous perhaps being Prescotts Bank, itself a union of many west country banks. It has no direct interests in Scotland and Ireland, while its foreign interests are referred to above under Lloyds Bank.
(5) Westminster Bank, Limited. The London and Westminster Bank was established as a joint-stock bank in 1834, and the Lon don and County Banking company two years later. Both were registered as limited in 188o, and amalgamated in 1909. Parrs Bank was founded in 1865, and the final union between it and the London County and Westminster took place in 1918. Among well-known country banks now incorporated in the Westminster Bank are Stuckeys of Bristol and the West, Cromptons of Derby shire, Becketts of Yorkshire and the Nottingham and Notting hamshire Banking company. In Ireland it owns the Ulster Bank, while its subsidiary, the Westminster Foreign Bank, operates in France and Belgium.
To return to London, Peel's act did not put an end to banking crises. Three times in the 19th century the Bank Act was sus pended; in 1 84 7, following the "railway mania"; in 1857, on which occasion alone the Bank had to take advantage of the sus pension and issue notes in excess of its fiduciary limit ; and in 1866. In this last year, the bank rate was raised to in an attempt to draw money from the Continent and so to ease the pressure. The attempt proved vain. Continental bankers for some time thought that the "suspension of the Bank Act" meant a suspension of cash payments or a moratorium, and even when convinced to the contrary, roundly said that if a first-class London acceptance sold at a discount rate of io%, there must be "some thing wrong somewhere." Paradoxically enough, the Bank of England had to lower its rate before it could restore confidence abroad and attract foreign money to London.
It was about this time that the Bank of England began to assume its present functions of a Central Bank. Mr. Walter Leaf, in Banking, ascribes this change to the writings of two famous financiers. In 186o, Goschen in his celebrated Theory of the Foreign Exchanges shewed how the bank rate could be used to influence the course of the foreign exchanges, the movement of gold to and from the country, and so the contraction or expansion of credit. Thirteen years later, Bagehot convinced the directors of the Bank and the financial world at large of the changed posi tion of the Bank of England. Imperceptibly, the Bank had ceased to be a rival to the deposit banks of the country, and had become the custodian of their balances and the guardian of the nation's credit. Henceforward, the governing factor in its policy had to be, not the earning of profits for its shareholders, but the main tenance of a cash reserve, which though unremunerative to its owner, would be sufficient and more than sufficient to meet the probable demands of the nation.
Meanwhile, legislation was extending the scope of the joint stock bank, and in accordance with the Bank Act of 1844, each such extension brought about a contraction in the private bank note issue, and so helped the change-over from issue to deposit banking. In 1858, joint-stock banks were permitted by law to assume limited liability. For a time the permission was mainly of nominal effect, for there was a general belief that the voluntary continuance of unlimited liability added to the prestige and good will of a bank. In 1878, this belief was to receive a rude shock. In that year, the City of Glasgow bank failed, and all the stock holders were liable to the depositors to the full extent of their means.
The natural result was that no bank could obtain new capital, and to remedy this a fresh Companies' Act was passed in the following year. Henceforward unlimited liability only attached to bank-notes, which already were a diminishing quantity. It also followed that limited liability became an asset rather than a reproach to the banks, for its adoption rendered it easier for them to raise fresh capital. In point of fact, at the outbreak of the World War most banks were over- rather than under capitalized.
It is now necessary to leave purely internal banking, and to trace the part played by the banks in the field of foreign trade. Originally, foreign trade was financed by the great Continental Exchange Banks, such as the Bank of Hamburg and Bank of Am sterdam. These were not issue or deposit banks, but primarily money-changers, though an important and growing function was the financing of trading ventures out of the capital of their proprietors. Their lineal descendants in the City of London are the great merchant bankers and accepting houses of to-day.
Until the end of the i8th century, Amsterdam was the great international finance centre, but at that time the Bank of Amster dam fell upon evil days, while the Napoleonic wars completed the destruction. Many of the big finance houses migrated to London, and since then the famous London houses, such as Roths child's, Barings and Lazard's, have reigned supreme. For the whole of the next century, the financing of the growing overseas trade was in their hands. Their acceptance gave the hall-mark of respectability to an obscure foreign bill, and rendered it saleable in the London money market. It was mainly their representatives who dealt in foreign currencies "on 'change." A foreign merchant needing a London credit, a foreign Government wishing to float a loan naturally applied to them. The British banks kept outside their business, and frankly admitted they did not understand it. A British bank would discount internal bills for its customers, but would only buy foreign bills through the money market, and these had to be "clean" and carry at least one first-class name.
There were, it is true, two sets of rivals to the Accepting Houses. First came the foreign banks, which opened offices in London, and on the whole received a cordial welcome. Next came the great Eastern "Exchange Banks," and these had the financing of the Far Eastern trade largely in their hands. The London offices of the Dominion Banks also had their full share of financing Empire trade.
One point must be emphasized. The Accepting Houses and Merchant Bankers do not as a rule accept deposits. The money they employ is almost entirely their own.
This was the position in 1914. The private banking house was not dead, but joint-stock banking, with limited liability, was the preponderating element. The Bank of England controlled the great majority of bank-notes then outstanding, but gold was still diffused throughout the banks and the public at large. Amalga mations had reached the point where the final step could be taken, but numerous independent concerns were still in existence. Finally the banks largely confined their attention to home trade, and, while holders of foreign bills, left the "spade-work" to the foreign banks and London Accepting Houses.
Whether the Government borrowed by issuing Treasury bills or by "ways and means" advances from the Bank of England, the ultimate effect was much the same. The money so raised was disbursed by the Government to its creditors of one kind and another, and was paid by them into their accounts at the different banks. Hence, deposits grew with the floating debt, while in so far as money was raised direct from the Bank of England, the immediate result was an increase in the joint-stock banks' balances at that institution, which form the basis of bank credit. Hence loans to the public and also deposits could be multiplied several times for each such advance by the Bank to the Government. Notwithstanding the intensive production of all kinds of corn modities during the war, this multiplication of credit had the in evitable effect upon prices and wages, and when the peak was reached some i8 months after the close of hostilities, wholesale price index numbers stood at about three times their 1913 level.
The war witnessed one or two important changes in the banking world itself. First and foremost comes the final amalgamations, resulting in the appearance of the "big five." Next came the concentration at the Bank of England of the gold formerly in the hands of the banks and the public, who received in exchange bank and currency notes. The German banks disappeared from London, while foreign finance houses began to demand that Lon don bills should carry the name of a British bank. This forced the British banks into what was to them the new fields of foreign bills and foreign trade, and to-day "acceptances" are a prominent item in our bank balance-sheets. Immediately after the war, the "big five" started opening up branches on the continent, and also affiliating with or obtaining control over Dominion and Colonial banks. They had already acquired control over certain famous Scottish and Irish banks, such as the British Linen Bank and the Ulster Bank.
It may be added that the banks to-day form the chief element in the London Foreign Exchange market. The biweekly meeting "on 'change" was abandoned in 1921, and dealings in foreign cur rencies now take place by telephone between the banks, finance houses and similar institutions. Even the bill of exchange no longer possesses its former importance. Many transactions are settled by cable drafts (called "telegraphic transfers" or T.T.) or cheques drawn by a British bank upon its balance with agent in the country concerned. This again is a war and post-war de velopment. The trade depression of 1921 and onwards created a new set of problems for the banks. To begin with they were violently attacked as being the authors of deflation and industrial depression, while all along the real responsibility rested with the Government, who were obtaining huge budget surpluses and apply ing them to the reduction of the floating debt, thereby reversing the war process of inflation described above. In fact, at the time when these attacks were the most violent, bankers were experienc ing extreme difficulty in liquidating the huge mass of their "frozen loans," which was the direct result of the trade slump. Their losses, though unrevealed, must have been enormous, but against these they could set the increase (also unrevealed) in the values of their holdings of Government stock, resulting from the simul taneous improvement in the national credit.
Despite the amalgamations, banking competition in England is even fiercer than before, as is shown by the following official table: It is also admitted by the banks that it takes longer to-day for a new branch to become remunerative than it did before the war.
It is not true that the banks are restricting loans unduly. In Aug. 1927, advances to customers equalled 55% of deposits, whereas 5o% is regarded as a normal proportion.