6. A banker's the growth of deposit banking, the resultant increase of joint stock banks of deposit and the restriction upon note issue, the Bank of England has become chiefly a banker's bank. It may be said to hold the cash reserves of all England. There are no laws compelling banks to keep cash reserves, this being left entirely to the judg ment of the bankers themselves. The banks carry only till money and keep their reserves on deposit with the Bank of England. Against these deposits the Bank of England usually carries a reserve of be tween forty and fifty per cent. The total cash reserve upon which the English credit system is based prob ably amounts to no more than six per cent. To Americans this seems an amazingly small figure. It is made possible by the concentration of reserves and by the commanding position which the Bank of Eng land occupies.
In England there are a number of great institu tions which are engaged in making acceptances. We have already seen how profit is made in the accept ance business and how greatly a system of accept ances benefits a country. When these great accept ance houses and joint stock companies feel a need for cash, they draw on their balances at the Bank of England. If they do not wish to deplete their re serves they take commercial paper to the Bank and have it rediscounted. The proceeds are placed to their credit subject to withdrawal.
The Bank of England cannot refuse payment on deposits after they are once made. Accordingly, in order to protect its reserve, it raises the discount rate.
The banks, finding themselves subjected to a heavier charge when rediscounting, will raise their own dis count rates to customers. The effect of this is that the only customers able to borrow are those who need accommodation most and who can offer the best pa per. Credit is contracted automatically, prices fall, imports of merchandise slacken, gold exports drop off and the country is restored to a normal basis. In such a time it would be extremely desirable for the Bank of England to have an elastic issue power. To get this, however, the Bank Act must be suspended.
It is feared by some that the rapid growth of the large joint stock banks will lower the prestige of the Bank of England. If the Bank should cease to be the main reliance of English banks for rediscounting purposes, it would no longer be able to control the general discount rate and thus to contract credit and check gold exports single handed. A general agree ment among the larger banks would be necessary and at times this might be prevented thru competition and jealousy. Action certainly could not be taken as promptly as at present. It is thought that an elastic note issue power would materially increase the pres tige of the Bank. As it is, the Bank's rate is carefully watched the world over as a barometer of trade. If the rate is lowered, it means that reserves are piled up in the Bank which it is anxious to lend; if it is raised, it indicates that the Bank is attempting to contract credit and to build up its reserves.
7. A private institution.—The Bank of England has always remained a private institution, bent upon earning profits for its stockholders. In the early
days, it became much involved in government affairs thru its loans. It did not dare refuse the demands of the government for fear that the latter would repudi ate its debt. It still greatly assists the fiscal opera tions of the government by managing the public debt, receiving government revenues and making various payments, but the government has no direct control over these functions except when its contracts with the Bank expire.
The directors of the Bank are elected by the stock holders. They must not be "bankers" in the Eng lish sense of the term, that is, lenders of money for short terms on commercial paper, but this rule does not exclude the great financiers who are engaged in other branches of the banking business. The twenty four directors elect a governor and a deputy governor for a term of one year. Usually the senior director, who has not already served, is made governor and the next in seniority, deputy governor. It is usually about twenty years from the time of a man's entry upon the board of directors until he is reached in his turn as governor. The board meets every Thursday in the historic "bank parlor" to pass upon the re ports for the week.
Altho run for profit, the bank has been managed in the interests of the whole country, and its manage ment has been so efficient and unselfish that many peo ple are under the impression that it is a government institution. In general, it has been found best that the great central banks should be managed by the government or at least that the government should have the right to determine the general policy of the bank.
8. Early banking in earliest attempt to establish a central bank of issue in France was made in 1716 by John Law, a Scotchman. The bank was well conceived and successful until it became involved in the operations of Law's famous Mississippi Com pany. This company was one of the most ambitious schemes to dominate world trade that was ever planned. It started out with a monopoly of the trade of Louisiana, Canada and the West Coast of Africa. It proceeded to take over France's public debt, to as sume responsibility for collecting the nation's taxes and to take over the tobacco monopoly. The plan was to control the commerce of two continents. Shares having a par value of 500 livres sold up to 1.2,000. A dividend of forty per cent was declared in 1720. Paris became the center of one of the wildest peculative movements the world has ever known. The bank and the Mississippi Company were made practically one. A commission which was appointed to examine the bank found that against 3,000,000,000 livres of circulation it had 21,000,000 livres of coin, 28,000,000 in bullion and 240,000,000 in commercial paper, less than ten per cent of assets in all against its outstanding notes. In the resulting run on the bank several unfortunates were trampled to death. The bursting of the Mississippi "bubble" spread ruin thru out Europe. It so prejudiced the people of France against banking that for fifty years no attempt was made to establish another bank.