Section VII.

Bank Profits and Savings—Misapplication—Proposed Remedy.

I have hitherto been considering the profits of the Bank as they regard the public, and have endeavoured to show that they have greatly exceeded what a just consideration for their rights and interests could warrant.—I propose now to consider them in relation to the interests of the proprietors of Bank stock, for which purpose I shall endeavour to state a basis on which the profits of the Bank may be calculated, with a view to ascertain what the accumulated savings of the Bank now are. If we knew accurately the expenses of the Bank, and the amount of cash and bullion which they may at different times have had in their hands, we should have the means of making a calculation on this subject which would be a very near approximation to the truth.

The profits of the Bank are derived from sources which are well known. They arise, as has been already stated, from the interest on public and private deposits,—the interest on the amount of their notes in circulation, after deducting the amount of cash and bullion,—the interest on their capital and savings,—the allowance paid them for the management of the public debt,—the profits from their dealings in bullion, and from the destruction of their notes.—All these form the gross profits of the Bank, from which must be deducted only their expenses, the stamp-duty, and the property tax, in order to ascertain their net profits.

Under the head of expenses must be included all the charges attending the management of the national debt, as well as those incurred by the proper business of the Bank. In estimating the former of these charges, I have already stated my grounds for believing that it could not exceed 150,000l. In the management of the public business, it was stated by the committee on public expenditure, that 450 clerks were employed in 1807, and it is probable that the number may now be increased to between 500 and 600.

It has also, I understand, been stated from the best authority in Parliament, that the Bank employed in the whole of their establishment about 1000 clerks; consequently, if 500 are employed exclusively on the public business, 500 more must be engaged in the business of the Bank. Supposing now the expenses to bear some regular proportion to the number of clerks employed, as 150,000l. has been calculated to be the expense attending the employment of 500 clerks in the public business, we may estimate a like expense to be incurred by the employment of the other 500, and therefore the whole expenses of the Bank to be at the present time about 300,000l., including all charges whatsoever.

But although this large sum is now expended, it must have been of gradual growth since 1797; when, probably, the whole expenses of the establishment were not more than one-half the present amount. In the first place, since 1797, the amount of bank notes in circulation has increased from about 12 millions to 28 millions, but the expenses of their circulation, instead of increasing in the same proportion only, have at least, increased as one to ten.

The amount of notes of 5l. and upwards has been raised from 12 to 18 millions, and if the average value of notes, of all descriptions above 5l., be even so low as 15l., a circulation of 12 millions would consist of 800,000 notes, and a circulation of 18 millions of 1,200,000 notes, an increase in the proportion, as one to one and one-half; but the 9 millions of notes under 5l., which are now in circulation, have been wholly created since 1797, and if they consist of 5 millions of notes of 1l., and 2 millions of notes of 2l., a number of 7 millions of notes has been further added to the circulation, and the whole number of notes has been raised since 1797, from 800,000 to 8,200,000, or as one to ten, and at an expense ten times greater than was incurred at that time, the expense being in proportion to the number, and not to the amount of notes. It is probable, too, that the notes of 1l. and 2l., which are so constantly used in the circulation, are more often renewed than notes of a higher value.

The public debt, too, under the management of the Bank, is more than doubled since 1797, and must have added considerably to the expenses of that department. These expenses have been already calculated to have risen since 1796, from 84,500l. to 150,000l. or 65,500l.

The public deposits, too, are at least double what they were in 1797, from all which I have a right to infer, that the expenses of the Bank in 1797, could not have exceeded 150,000l., and that they have been gradually increasing since that period; perhaps at the rate of 7000l. or 8000l. per annum.

The next subject for consideration, is the amount of cash and bullion in the Bank, which at no time has been laid before the public;—that, and the amount of their discounts, were the only material facts which the Bank concealed from the public in the eventful year 1797. They stated in the account laid before Parliament, that their cash and bullion, and their bills and notes discounted, amounted together to 4,176,080l. on the 26th of February 1797. They gave also a scale of discounts from 1782 to 1797, and a scale of the cash and bullion in the Bank for the same period. By comparing these tables with each other, and with some parts of the evidence delivered before the Parliamentary Committees, an ingenious calculator discovered the whole secret which the Bank wished to conceal. According to his table the cash and bullion in the Bank, on the 26th of February 1797, was reduced as low as 1,227,000l., and 4 millions was about the sum which the Bank considered as fair cash; to which it never attained after December 1795, though previously to that year it was on some occasions more than double that amount.

For the first year or two after the suspension of cash payments, the Bank must have made great efforts to replenish their coffers with cash and bullion, as they were then by no means sure that they should not be again required to pay their notes in specie. We find, accordingly, by accounts returned to Parliament by the Mint, that the amount of gold coined in 1797 and 1798, was very little less in value than 5,000,000l.

Whatever might have been the amount of cash and bullion, which the Bank had acquired in the first two years after the suspension of cash payments, it is probable that their stock has been decreasing since that period, as they could have no motive for keeping a large amount of such unproductive capital, when they must have been quite secure that no call could be made on them by the holders of their notes for guineas, and that before they were again required to pay in specie, they would have ample notice to prepare a due store of the precious metals.—It does not appear possible, then, under all the circumstances of the case, that the Bank can have added to their stock of bullion, since the great coinages of 1797 and 1798; but it is highly probable that they have considerably reduced it.

In estimating the profits of the Bank, as far as those profits are influenced by their stock of cash and bullion, I shall be justified in considering them greater since 1797 and 1798, as since those years they would naturally keep a less part of their capital in that unproductive shape, and, consequently, more in exchequer bills, or in merchants' acceptances, securities which pay interest, and are productive of profit.—On an average of the whole eighteen years, from 1797 to 1815, the cash and bullion of the Bank cannot be estimated as amounting to more than 3 millions, though, probably, for the first year or two, it amounted to 4 or 5 millions.

These circumstances being premised, it will not be difficult to calculate the profits of the Bank, from 1797 to the present time, all the facts necessary to such calculation being known to us excepting the two I have just stated, viz. the amount of expenses and of cash and bullion, but which cannot differ much from that at which I have calculated them.

Proceeding, then, on this basis, it appears, as will be seen by the accounts in the Appendix, that the profits and surplus capital of the Bank for a series of years, after paying all dividends and bonuses, have been as follows:—[For Table see next page.]

If in the accounts referred to, it should be thought that I have estimated the expenses of the Bank too low, it may on the other hand be remarked that I have not allowed for any profit from the deposits of individuals. Those deposits may not be very large, as the Bank do not afford the same accommodation to individuals as given by other bankers. Some profit must, however, be made from this source, as well as from the loss and destruction of notes, which it may be presumed, after a time, are not included in the amount stated to be in circulation. By the purchase of silver, and coinage of tokens, the Bank must, on the whole, have been gainers; for the value of the token has been generally lower in the market, than it has passed for in circulation at the time of its issue.

7 per cent.

In point of fact, too, the Bank receives more than five per cent. interest for their money; for exchequer bills paying 3½d. per day, pay 5l. 6s. 5½d. per cent. per annum; and in discounting bills, the interest being immediately deducted, is employed as capital, and is instantly productive of profit; at the same time it must be observed that during a part of the time for which these calculations are made, exchequer bills bore an interest of only 3¼d. per day, which amounts to 4l. 18s. 0¼d. per cent. per annum, rather less than five per cent.

In March 1801, when a bonus of 5 per cent., in navy 5 per cents., was divided amongst the proprietors of Bank stock, Mr Tierney said in the House of Commons, “that when the affairs of the Bank of England were investigated by the House of Commons in 1797, the surplus profits were considered by some as a security for the engagements of the Bank to the public.” To which Mr Samuel Thornton, then governor of the Bank, replied, that “he could assure the honourable member, that the security of the public would not be lessened from what it was in 1797, by the division of the sum of 582,120l. voted at the general court, on the 19th instant, as exclusive of that sum, the surplus profits of the Bank were more now than they were in 1797.”

On an inspection of the account in the Appendix, it will be seen, that, after paying all the dividends and bonuses to the proprietors, the Bank had accumulated in April 1801 savings to the amount of 3,945,109l., exceeding the savings of 1797 by 118,219l., an increase not inconsistent with the declaration of Mr Thornton, and therefore tending to confirm the correctness of the basis on which these calculations are made.

It will appear on an examination of the accounts in the Appendix for the subsequent years, that the profits of the Bank for every year since 1801 have exceeded the annual dividend paid to the proprietors, and that in 1815, the surplus for that year only must have amounted to 1,066,625l, so that the Bank could have paid a dividend for that year of 19 per cent. instead of 10 per cent.

It will appear, too, that if the Bank affairs have been only mode-rately well managed, they must now have an accumulated fund of no less than 13 millions, which, in defiance of the clearest language of an act of Parliament, the Directors have hitherto withheld from the proprietors.

With such an accumulated fund, the Bank could make a division of 100 per cent. bonus without infringing on their permanent capital; and if they could maintain their present profits, with a deduction only of 523,908l. per annum, the interest (less income tax) on the surplus capital proposed to be divided, they would still have an unappropriated income of 542,000l., which would enable them to increase their permanent dividend from 10 to 14½ per cent in addition to the bonus of 100 per cent.

If they divided only a bonus of 75 per cent., they would retain a surplus capital exceeding that of 1797, and might, on the above supposition, have an unappropriated income of 673,000l., —they might therefore raise their permanent dividend from 10 to 15½ per cent. in addition to the bonus of 75 per cent.

But it cannot be expected that the Bank will, during peace, have the same opportunities of making profit as during war, and the proprietors must prepare themselves for a considerable reduction in their annual income. What that reduction may be will depend on the new agreement now to be entered into with Government, on the future amount of public deposits, and on the conditions on which the restoration of metallic payments may be enforced. It is evident that if the plan which I have recommended in the fourth section of this work be adopted, the Bank profits from this last item will not be materially reduced.

Supposing, however, that the reduction of the annual income of the Bank should, from the falling off of their profits in all these departments, be as much as 500,000l., the profits of the Bank would nevertheless be equal to the payment of the present permanent dividend of 10 per cent., even after a division of 100 per cent. bonus to the proprietors of Bank stock; for, if my calculations be correct, the profits of the Bank, after the payment of the annual dividend of 10 per cent. to the proprietors, were, for the year ending January 1, 1816, . . . . . £1,066,625

If, instead of 100 per cent., 50 per cent. bonus only were paid to the proprietors, the annual surplus profit of the Bank, after paying 10 per cent. dividend, would be 304,671l., a sum equal to a permanent increase of dividend of 2½ per cent.

And if no bonus whatever were paid, but the savings were considered as part of the Bank capital, the annual surplus profit of the Bank, after paying 10 per cent. dividend, would be 566,625l., very nearly equal to a permanent increase of dividend of 5 per cent.

These estimates are made on a supposition, too, that the property tax should permanently continue, which is calculated to be an annual charge of more than 200,000l., to the Bank, and consequently more than equal to a dividend of 1¾ per cent.

But the Directors are bound, in my opinion, under every case, to divide the surplus profits amongst the proprietors, the law imperatively enjoining such a division, and policy being no wise opposed to it.

Well was it urged by the Hon. Mr Bouverie, who moved in the last Bank court that an account of the surplus capital of the Bank be laid before the proprietors, that this law respecting the division of profits was probably enacted by the legislature, on a consideration of the powers of accumulation at compound interest, and the dangers which might arise to the constitution or the country, from any corporation becoming possessed of millions of treasure. If the profits of the Bank were to continue at the present rate, and no addition were to be made to the dividend now paid of 10 per cent., the accumulation of the surplus profits in forty years would give to the Bank a disposable fund of more than 120 millions. Wisely, then, did the legislature enact, that “All the profits, benefits, and advantage from time to time arising out of the management of the said corporation, shall (the charges of managing the business of the said governor and company only excepted) be applied from time to time to the uses of all the members of the said corporation for the time being, rateably and in proportion to each member's part, share, and interest, in the common capital, and principal stock, of the said governor and company of the Bank of England.”

Those who vindicated the Directors at the last general court for their departure from the line of conduct prescribed by the law, recommended the increase of the capital of the Bank,—and they thought that the accumulated savings might be advantageously employed for such purpose.

It is said that the Bank Directors are favourable to such a plan.

If the measure should be a good one, the sum of capital to be added should be at once defined,—the proprietors should have accounts laid before them of the amount of their accumulated fund, and should be consulted on the expediency of such a disposition of it,—and lastly, the sanction of Parliament should be obtained.

The Bank, however, have waited for none of these conditions,—they have been, in fact, for years adding the annual surplus profits to their capital, without defining the amount added, or to be added; they do it without laying any accounts before the proprietors—without consulting them; and not only without the sanction of Parliament, but in defiance of an express law on the subject.

But if the Bank complied with all these conditions, would the measure itself be expedient, and are the reasons given in support of it, namely the enlarged business of the Bank, and that it would tend to the security both of the Bank and the public, of sufficient weight to justify its adoption?

The business and income of the Bank depend, as before stated, on the amount of the aggregate fund which they have to employ, and this fund is derived from the three following sources: The amount of bank notes in circulation, deducting only the cash and bullion: The amount of public and private deposits: And the amount of that part of the capital of the Bank which is not lent to Government. But it is only the two former of these funds which contribute to the real profit of the Bank; for the interest received for surplus capital, being only 5 per cent., might be made with as much facility by each individual proprietor, on his share of such capital, if under his own management, as by combining the whole into one fund. If the proprietors were to add from their own individual property 10 millions to the capital of the Bank, the income of the Bank would indeed be increased 500,000l. or 5 per cent. on 10 millions; but the proprietors would not be gainers by such an arrangement. If, however, 10 millions were added to the amount of notes, and could be permanently maintained in circulation,—or if the public and private deposits were to be increased 10 millions, the income of the Bank would not only be increased 500,000l but their real profits also, and this advantage would arise wholly from their acting as a joint company, and could not be otherwise obtained.

There is this material difference between a bank and all other trades: A bank would never be established, if it obtained no other profits but those from the employment of its own capital; its real advantage commences only when it employs the capital of others. Other trades, on the contrary, often make enormous profits by the employment of their own capital only.

But if this argument be correct, with respect to an additional capital to be actually raised from amongst the proprietors, it is equally so to one withheld from them.

To increase the profits of the Bank proprietors, then, an increase of capital would be neither necessary nor desirable.

Neither would such an addition contribute towards the security of the Bank; for the Bank can never be called upon for more than the payment of their notes, and the public and private deposits; these constituting, at all times, the whole of their debts. After paying away their cash and bullion, their remaining securities, consisting of merchants' acceptances and Exchequer bills, must be at least equal to the value of their debts; and in no case can these securities be deficient, even without any surplus capital, excepting the Bank should lose all that which constitutes their growing dividend; and even then they could not be distressed, unless we suppose that at the same time payment were demanded for every note in circulation, and for the whole of their deposits, both public and private.

Is it against such a contingency that the proprietors are called upon to provide; when even under these, almost impossible circumstances, the Bank would have an untouched fund of 11,686,000l. which Government owe them?

Would the security of the public be increased? In one respect it would. If the Bank have no other capital but that which they lend to Government, they must lose all that capital by their trade, or more than 11½ millions, before the public can be sufferers; but if the capital of the Bank were doubled, the Bank might lose 23 millions, before any creditor of theirs could suffer loss. Are the friends to an increase of the capital of the Bank prepared to say, that it is against the consequences of the loss of the whole Bank capital that they are desirous of protecting the public?

It remains to be considered, whether the ability of the Bank to pay their notes in specie would be increased by an increase of their capital. The ability of the Bank, to pay their notes in specie, must depend upon the proportion of specie which they may keep, to meet the probable demand for payment of their notes; and in this respect their power cannot be increased, for they may now, if they please, have a stock of specie, not only equal to all their notes in circulation, but to the whole of the public and private deposits, and under no possible circumstances can more be demanded of them. But the profits of the Bank essentially depend on the smallness of the stock of cash and bullion; and the whole dexterity of the business consists in maintaining the largest possible circulation, with the least possible amount of their funds in the unprofitable shape of cash and bullion. The amount of notes in circulation depends in no degree on the amount of capital possessed by the issuers of notes, but on the amount required for the circulation of the country; which is regulated, as I have before attempted to show, by the value of the standard, the amount of payments, and the economy practised in effecting them.

The only effect, then, of the increase of the capital of the Bank would be to enable them to lend to Government or to merchants those funds, which would otherwise have been lent by individuals of the community. The Bank would have more business to do—they would accumulate more merchants' acceptances and exchequer bills: they would even increase the income of the Bank; but the profits of the proprietors would be neither more nor less, if the market rate of interest for money were at 5 per cent., and the business of the Bank were carried on with the same economy. The proprietors would be positive losers, if they could individually have employed their shares of this capital in trade, or otherwise, at a greater profit.

But not only do the Bank refuse, in direct contradiction to an act of Parliament, to make a division of their accumulated profits, but they are equally determined not to communicate to the proprietors what those profits are, notwithstanding their bye-law enjoins, “that twice in every year a general court shall be called, and held for considering the general state and condition of this corporation, and for the making of dividends, out of all and singular the produce and profit of the capital stock and fund of this corporation and the trade thereof, amongst the several owners and proprietors therein, according to their several shares and proportions.”

If the law had been silent on the subject, the Bank Directors would, I think, be bound to show some specific evil which would result from publicity, before they refused to show a statement of their affairs to the proprietors.

It is in fact the only security which the proprietors have, against the abuse of the trust reposed in the Directors.

The affairs of the Bank may not always be managed by such men as are now in the direction, against whom not a shadow of suspicion any where exists.

Without accounts; without a division of profits; and without any other proof of the accumulated fund of the Bank, but the notoriety of the increase of the sources from which the Bank profits are made—and that for a period of more than ten years; what security have the proprietors against a corrupt administration of their affairs. It is not consistent with the delicacy of the situation of those who are entrusted with the management of millions to demand such unbounded confidence—so much reliance on their own personal character, without stating some grounds for such a demand. Yet the only answer which the Directors made to a motion for a statement of profits, in the last general court, was, that they should consider the passing of such a resolution as betraying a want of confidence in them, and as a censure on their proceedings.

On all sides, such an intention was disclaimed; yet, strange to say, no other reply could be obtained from the Directors.

The publication of accounts, besides being necessary as a check against the corrupt administration of the Directors, is also necessary to give assurance to the proprietors, that their affairs are ably administered. Since 1797, no statement has been made of the condition of the Bank; and, even in that year, it was made to Parliament, on a particular exigence, and not to the proprietors of bank stock. How, then, can the proprietors know whether, in the favourable circumstances in which the Bank have been placed, the Directors have availed themselves of all the opportunities which have offered, of employing the funds entrusted to their charge to the best advantage? Would it not be desirable, that from time to time the proprietors should be able to ascertain whether their just expectations had been realised, and whether their affairs had been ably as well as honourably administered? If the practice of laying all accounts before the proprietors had been always followed, perhaps the Directors of 1793, 1794, and 1795, might have been admonished for so badly managing the affairs of the Bank, as to keep permanently in their coffers a sum of cash and bullion, generally more than three-fourths, and seldom less than one-half the whole amount of their notes in circulation. They might possibly have been told, that such a waste of the resources of the Bank showed a very limited knowledge of the principles by which a paper currency should be regulated.

These irregularities in the proceedings of the Bank excited the attention of an independent proprietor, Mr Allardyce, in 1797 and 1801. In his excellent publication on Bank affairs, he has pointed out with great force and ability the illegal conduct of the Bank. His opinion was confirmed by Mr, now Sir James Mansfield, who was consulted by him, as to the course necessary to be pursued, to compel the Directors to lay an account before the proprietors of the state of the Company. Sir James Mansfield's opinion was given as follows:—

“I am of opinion, that every proprietor, at a general half yearly court, has a right to require from the Directors, and it is the duty of the latter to produce all such accounts, books and papers, as are necessary to enable the proprietors to judge of the state and condition of the corporation and its funds, and to determine what dividend ought to be paid. The proper method to be pursued by those who consult me in order to obtain such a production is, that a number of respectable proprietors should immediately give notice to the Governor and other Directors, that they shall require at the next general court a production of all the necessary books, accounts and papers; and at the general court, when it shall be held, to attend and require such a production. If it shall not be obtained, I then advise them immediately, or within a few days after the holding of the general court, to make an application to the Governor to call a general court, which application must be made by nine members at least, having each 500l. stock. If the Governor shall refuse to call such general court, then the nine members who shall have applied to him to have a court called, may themselves call one in the manner prescribed by the charter; and whether the Governor calls such court, or it is called by the nine members, I advise them, as soon as it is called, to apply to the Court of King's Bench for a mandamus to the Governor and Directors, to produce at such court all the necessary books, accounts and papers.

In consequence of this opinion, Mr Allardyce delivered a demand in writing at the next general court, held the 19th March 1801, that the accounts should be produced, and no doubt intended to follow up this proceeding in the way recommended by Sir James Mansfield,—but he soon after died; and since that time no proprietor has made any demand for accounts, till at the last general court in December. It is remarkable that, very unexpectedly to the proprietors, a bonus of 5 per cent., in navy 5 per cents., was voted in the general court of the 19th March 1801, the day on which Mr Allardyce's demand was made and refused. The first motion for accounts made by Mr Allardyce was in the general court, held 14th December 1797; and in March 1799, there was a bonus of 10 per cent. in 5 per cents. 1797. Mr Allardyce did not, I believe, make any motion in the Bank court between December 1797 and March 1801.

Since 1797, then, the proprietors have remained in utter ignorance of the affairs of the Bank. During eighteen years the Directors have been silently enjoying their lucrative trade, and may now possibly think that the same course is best adapted to the interests of the Bank, particularly as negociations are about to take place with Government, when it might be as well that the amount of their accumulated fund should not be known. But the public attention has been lately called to the affairs of the Bank; and the subject of their profits is generally canvassed and understood. Publicity would now probably be more beneficial than hurtful to the Bank; for exaggerated accounts of their profits have been published which may raise extravagant expectations, and which may be best corrected by official statements. Besides which, the Bank are secure of their charter for seventeen years to come; and the public cannot, during that time, deprive them of the most profitable part of their trade. If, indeed, the charter were about to expire, the public might question the policy of permitting a company of merchants to enjoy all the advantages which attend the supplying of a great country with paper money; and although they would naturally look with jealousy, after the experience furnished by other states, to allowing that power to be in the hands of Government, they might probably think that in a free country means might be found by which so considerable an advantage might be obtained for the State, independently of all control of ministers. Paper money may be considered as affording a seignorage equal to its whole exchangeable value,—but seignorage in all countries belongs to the State, and with the security of convertibility as proposed in the former part of this work, and the appointment of commissioners responsible to Parliament only, the State, by becoming the sole issuer of paper money, in town as well as in the country, might secure a net revenue to the public of no less than 2 millions sterling. Against this danger, however, the Bank is secure till 1833, and therefore on every ground publicity is expedient.