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want for niore banking has been felt; that want has been met by the application of the joint-stock principle to money dealing, together with the adoption of the Scotch scheme of paying interest on deposits, with modifications; and hence the vast increase in the sums held on deposit, and the vast increase of bankers' reserves which were in the hands of the Bank of England at the time of the pressure in November, 1857, and which had been placed there by the joint-stock banks, in order to be in readiness in case any sudden demands should have been made on them by their customers for the re-payment of the sums they held, on call or at short notice. It is not to be forgotten, among other advantages, such as the promotion of liabits of prudence, self-denial, thrift, and forethought, which an extension of the habit of keeping a banker gives rise to, how largely it serves to economise the circulation. The system of payments by cheques and bills, instead of by coin and notes, which springs out of the now generally diffused practice of banking, has had so much effect in this way that the circulation, as regards gold and notes, is found to be actually smaller than it was some time ago. Payments are more commonly made by transfers in account; credit is substituted for money to an almost incomparably greater extent than formerly; and the national gain (at any rate in ordinary times) is certain. Every one acknowledges the immense expansion of trade and manufactures, and no one disputes the ample proofs of the fact which the tables of exports and imports afford, and which are patent to the eye in the rapid advancement of our great towns. But when you say this, do you not at the same time imply that fresh uses are thereby created for money ; new fields of employment for capital opened, affording quicker returns than were possible to be had under less active and animated commercial conditions, when transactions were rarer and money changed hands seldomer, in a poorer period ?
“ The same sum in a rich country will effect perhaps ten successive operations of exchange in the same space of time as one in a poor country. In a poor country, after a dealer has disposed of his wares, he is sometimes a long while before he can provide
himself with the returns he has in view, and during the interval the money proceeds remain idle in his hands. Moreover, in a poor country, the investment of money is always difficult. Savings are slow and gradual, and are seldom turned to profitable account until after a lapse of years, so that a great deal of money is always lying by in a state of inaction.'
Hence it may well be that modes of banking which were thought unsafe, or at least not en régle, among the older bankers, the experience of these days may show to be sound and beneficial; and as, for instance, to lend money on railway debentures has at length come to be considered no infringement of the banking canon against investments on inconvertible securities, facts having shown the pedantry of such a notion, so the payment of interest on deposits contains in itself nothing to alarm the most timid; at any rate, in times when it is possible for the banker to employ a portion of those deposits in such a way as to derive a satisfactory profit, chiefly by discounts of bills having no long time to run, and to arrange the run off of the bills he discounts in such a way as to secure his being at all times in funds to meet the demands that may be expected to come upon him. The capital of the bank he does not employ in this way, but invests in Government securities, so as to be available at the shortest notice to satisfy unexpected demands, and to give that confidence to the publie and to his customers which is the heart's blood of his business and the richest of his assets. As we have said, there is no substance in the commonplace objection against the joint-stock banker because he professes to pay interest on deposit accounts, and also to pay large dividends on the paid-up capital. If a customer brings in £100 on a deposit account, and the banker discounts out of it a good commercial three months' bill at five per cent., then the interest on the deposit only being payable in most cases when it has been retained a month, he can afford to pay his customer a satisfactory interest for however short a time the money may be retained over the month, and a very handsome interest if it be retained for a twelvemonth, it
1 Say-Polit. Econ., Bk. II., cap. 4.
being supposed that the money is used or turned, in the same process of discounting, four times in that period; and in either case a large surplus will remain for the part payment of dividend on the capital, to be added to the three per cent, which that capital has been making during the same time on its investment in Consols, and which sums together make up the total dividend paid.
The rate of discount at the London joint-stock banks is always, it is to be observed, lower than that of the Bank of England; and there is this additional drawback and burden in discounting with the latter-If you have a discount account with the Bank, and a bill running, and one of the parties to the Lill fails, the Bank's practice is to return the bill to you, and to call upon you to pay it at once, without waiting until maturity. This no other bank takes upon itself to do, the practice being, in fact, wholly in excess of any legal rights belonging to the holder of a bill of exchange.
The subject of bill-broking is so closely connected with banking business that it is impossible to avoid saying a word or two on it. An attempt has already been made to convey some notion of the enormous sums with which the great banking interest of this country is intrusted. Here is an account of the deposits held by the undermentioned London joint-stock banks at the latter end of 1857, with the dates of their respective commencement of business ::
There are also the sums deposited in the other joint-stock banks and private banks of London and the country, the bulk of all which is to be turned to profit in some way or other. To effect this the agency of bill-brokers is employed to a great extent, and the practice of so employing them has much grown of late years; for, as larger sums became intrusted to the bankers, the more difficult it became for them to find discounts enough for themselves, and they resorted to bill-brokers, a class who were in their origin merely what their name imports — the agents for bringing together holders of bills, and persons who were willing to discount bills. About fifty years ago the business of billbroking began to assume its present character, the principal feature in which is, that the bill-brokers discount themselves, and have become the great medium for the transmission of the spare capital of one part of the country to another part where it is more required. Thus the bankers of the rural districts, where capital is not much in request, send their money up to the London brokers to be used at interest, and with this money the brokers discount the bills sent up to them for that purpose by the bankers, and sometimes the merchants and others, of the manufacturing and mining districts, and the great centres of industry and commerce. The commercial classes of London are also supplied by these brokers with money on discounts, to which, otherwise, they would have no ready access. The feature of the system, to which, however, we have at present principally to direct attention, is, that the London and provincial bankers were much in the habit of depositing largely the money intrusted to them by their customers, with the hill-brokers at interest, but also on call; and the bill-brokers were enabled, without keeping any reserve of their own, and in some cases without, in fact, possessing any capital of their own, to meet all these immense liabilities, by the operation of a system which had been in existence since the year 1830; and by which the Bank of England had been in the habit of allowing them accommodation to any extent, by way of loan advance
upon the security of good bills lodged by them in the Bank. The extent of these trans
actions may be in some degree estimated by considering that, during the monetary pressure of the year 1857, the loans and advances of the Bank of England rose from 10 millions sterling, on October 24, to upwards of 20 millions sterling, on November 21; and that half of that latter amount consisted of accommodation to bill-brokers. During this year, one or two bill-broking houses stopped payment; the liabilities of one of which is stated to have been no less than £5,442,285. The reader must, however, carefully bear in mind this—it has not as yet been made to appear
that these failures arose from any other cause than the misconduct of the individuals concerned in the management of the business. There is nothing brought to light pointing to the conclusion that such consequences necessarily flow from the system itself. At any rate, the system is now materially altered, as the Bank of England, in the course of last year, closed their discount accounts with bill-brokers, who can, therefore, no longer look to the Bank for assistance, but must depend in future on resources of their own; their dealings with the Bank being now confined to the usual quarterly advances. It will be understood that, when we spoke of the bankers depositing money with the bill-brokers on call, it was not intended to convey that the money was intrusted to them without security. The banker so depositing always receives bills having some time to run, or other security, to an amount sufficient to cover the sum he deposits, and which, of course, were returned to the bill-broker by the banker when he calls back his money. The business of a billbroker is one which has for its object the convenience of bankers who employ their deposits at call, and the convenience of the public who receive discounts by these means; and it is found that the wants of the public for discount are about equal to the money seeking employment from day to day. The two demands nearly balance one another; and these two demands being in existence, the practical question is, whether the balance of them
1 Mr. Neave's Evid. Evid., p. 25; Q. 377, 379.