Sect. VI.: Management of the Bank of England.

When the charter was renewed in 1833, the notes of the Bank of England were made legal tender everywhere in England except at the bank. Of the wisdom of this regulation no doubt can be entertained. Bank-notes are necessarily always equivalent to bullion; and by making them substitutes for coin at country banks, the demand for the latter during periods of alarm or runs is materially diminished, and the stability of the bank and of the pecuniary system of the country proportionally increased.

Since 1826 the bank has established branches in some of the great commercial towns. The mode and terms of conducting business at which have been described as follows:—

“The branch bank at Swansea (and the same is true of those established in other places) is to be a secure place of deposit for persons having occasion to make use of a bank for that purpose; such persons are said to have drawing accounts: to facilitate to the mercantile and trading classes the obtaining discounts of good and unexceptionable bills, founded upon real transactions, two approved names being required upon every bill or note discounted; these are called discount accounts. The applications of parties who desire to open discount accunts at the branch are forwarded to the parent establishment for approval, and an answer is generally received in about ten days. When approved, good bills may be discounted at the branch without reference to London. Bills payable at Swansea, London, or any other place where a branch is established, are discounted under this regulation. The dividends on any of the public funds, which are payable at the Bank of England, may be received at the branch, by persons who have opened ‘drawing accounts,’ after signing powers of attorney for that purpose, which the branch will procure from London. No charge is made in this case, except the expense of the power of attorney and the postages incurred in transmitting it. Purchases and sales of every description of government securities are effected by the branch at a charge corresponding to that made by the local bankers where the branch is situated. A commission, including brokerage in London, and all expenses of postage, is charged on paying at the Bank of England bills accepted by persons having drawing accounts at Swansea, such bills to be advised by the branch; also for granting letters of credit on London, or on the other branches. The branch grants bills on London, payable at seven days’ date, without acceptance, for sums of £10 and upwards. Persons having drawing accounts at Swansea may order money to be paid at the bank in London to their credit at Swansea, and vice versâ, at a charge of 6d. in lieu of postage. The branch may be called upon to change any notes issued and dated at Swansea; but they do not change the notes of the bank in London, nor receive them in payment, unless as a matter of courtesy where the parties are known. Bank post bills, which are accepted and due, are received at the branch from parties having drawing accounts, and taken to account without any charge for postage; but unexcepted bank post bills, which must be sent to London, are subject to the charge of postage, and taken to account when due. No interest is allowed on deposits. No advance is made by the branch upon any description of landed or other property, nor is any account allowed to be overdrawn. The notes are the same as those issued by the parent establishment, except being dated Swansea, and made payable there and in London. No note issued exceeds the sum of £500, and none are for a less amount than £5.”

But though it might have been advisable to establish offices in Manchester, Birmingham, and one or two more great towns, for the interchange of bank-notes and gold, we much doubt whether the establishment of the branch banks has been advantageous. Speaking generally, it may be laid down that local affairs are best conducted by local agencies; and this is believed to be especially the case in banking. It is a business which is most likely to flourish when those by whom banks are established in country districts belong to those districts, and are well acquainted with the character and pursuits of those with whom they deal.

The Bank of England transacts the whole business of government. “She acts not only,” says Adam Smith, “as an ordinary bank, but as a great engine of state. She receives and pays the greater part of the annuities which are due to the creditors of the public; she circulates exchequer bills; and she advances to the government the annual amount of the land and malt taxes, which are frequently not paid till some years thereafter.”

The greater part of the paper of the bank has generally been issued in the way of advances or loans to government, upon security of certain branches of the revenue, and in the purchase of Exchequer bills and bullion; but her issue through the medium of discounts and advances to individuals has also been at all times considerable, while during war, and in periods of distress, it is occasionally very great. Generally, however, the directors do not appear to have thought it advisable to enter into any very keen competition with private bankers in the discounting of mercantile paper. And hence it is that the rate of interest charged by the bank for loans being usually equal to, and sometimes rather above the market rate, comparatively few applications are made to her, in ordinary periods, for discounts. But, at the same time, every one who has any reasonable security to offer, knows where they may always be had; while the rate of interest charged by the bank necessarily forms a maximum rate which no other establishment can exceed. When, however, any circumstances occur to occasion a pressure in the money market, or a difficulty of obtaining accommodations in the usual channels, the market rate of interest generally rises to the rate fixed by the bank, how high soever that may be, and on such occasions the private bankers, and the public generally, resort to the bank for aid. She then becomes, as it were, a bank of support; and has, as such, on various occasions, rendered good service to public credit, and to the commercial interests of the country.

But, at the same time, it must be admitted that the interference of the bank in assisting the commercial interest is a matter that requires the greatest consideration, and that it can only be safely undertaken in rare instances and under very peculiar circumstances. We repeat again, that however a drain for gold may originate, the fact of its existence shows conclusively that gold is more valuable abroad than here, and consequently that the currency is redundant and ought to be diminished. Under such circumstances, it is the imperative duty of the directors, if they would prevent the total exhaustion of their banking reserve, not to fill up the vacuum caused by the exchange of notes for bullion, by the issue of fresh notes. It is at such periods, no doubt, that the applications for assistance are the most urgent; but it is impossible to yield to them, and at the same time to enforce that systematical and continuous reduction of the issues which is indispensable for the safety of the banking department of the bank. She can no longer assist herself as on former occasions, by making fresh issues of paper. And in truth that resource was of no real advantage to her, but the reverse. It tempted her to disregard those great principles and warnings which never can be neglected with impunity. The great commercial crises that took place in 1793, in 1815-16, in 1825, and in 1836-39, were all increased in violence and destructiveness by the bank declining to narrow her issues immediately on the exchange becoming unfavourable, and deferring her repressive action till too late a period.

When the bank sets about reducing her issues, she may effect her object in various ways, viz., by rejecting a portion of the bills sent to her for discount, by raising the rate of interest at which she discounts or makes advances, by shortening the dates or echèance of the bills which she negociates, and by selling bullion and securities. Of these means, some may be more or less expedient at one time, and some at another. On the whole, however, the first mode, or the rejection of bills, seems to be, in all respects, the most objectionable. The bank will not, of course, discount any bill in regard to the payment of which there can be any reasonable doubt. And when the solidity of the bills offered for discount cannot be objected to, it becomes an invidious, if not an unjust proceeding, to discount some and reject others. Under such circumstances, the true plan is to raise the rate of interest, for while such rise operates equally and universally, it makes rich parties, or those who can avail themselves of other means of accommodation, withhold their demands, and thus effects its object in the fairest and easiest way, and without sacrificing individuals.

Inasmuch, however, as any sudden rise in the rate of discount, especially if it be considerable, is always productive of more or less inconvenience to the mercantile world, it may be proper, when the exchange becomes unfavourable, to endeavour to restore it to par by shortening the dates of bills, and if circumstances will permit, by selling bullion and securities. But, at all events, the redundancy of the currency must be got rid of, and the exchange redressed; and if the other means at the disposal of the bank be inadequate to effect this object, a rise in the rate of interest should be at once resorted to, and carried to the necessary extent.

It may be observed, with respect to the sale of securities, that they may be wholly or partly paid by drafts against deposits held by the bank. But, if so, it is clear that, at all events, her debts, or the obligation under which she lies to pay notes or gold to depositors when demanded, will be in so far reduced.

The fact that the applications for discounts at the bank are usually most numerous, when the rate of discount is highest, has made some doubts be entertained in regard to the efficacy of a rise in that rate to raise the value of the currency, and restore an unfavourable exchange to par. But the additional demand for discounts, on the occasions referred to, is most commonly a consequence of the increased difficulty of obtaining them in other quarters; and when the rate of discount becomes unusually high, apprehensions of a revulsion begin to be entertained, and bankers and others carry bills to the bank, not that they may get gold to send abroad, but that they may provide for their own security, by getting a supply of notes or gold, or both, to keep in reserve. And it is further to be observed, that the rise in the rate of interest, whether it be, as it usually is, the result of capital becoming scarcer or more productive, or of a temporary increase in the demand for money, uniformly operates to hinder the exportation of the latter. That such is the case is evinced by what took place in 1825, and in 1836-37. And on the recent occasion, notwithstanding the large sums lent by the bank on bills and advances of one sort or other, the ten per cent. rate of interest charged by her was sufficient to stop the efflux of bullion to the Continent and the United States; and, but for the abuse of credit by some private establishments, the restoration of the exchange to par would have been effected without any internal revulsion.

The Bank of England rarely discounts bills that have more than two, or at most three, months to run, and it were well were this rule generally observed by other establishments. The discounting of bills at long dates is a powerful stimulus to unsafe speculation. When individuals obtain loans which they are not to be called upon to pay for six, twelve, or, perhaps, eighteen months, they are tempted to adventure in speculations which are not expected to be wound up till some proportionally distant period, and as these not unfrequently fail, the consequence is that, when the bills become due, there is commonly little or no provision made for their payment. In such cases the discounters, to avert an imminent loss, sometimes consent to renew the bills. But, while a proceeding of this sort is rarely productive of ultimate advantage to either party, the fact of its having taken place makes other adventurers reckon that, in the event of their speculations proving to be less successful than they anticipated, their bills will be treated in the same manner, and thus aggravates and extends the evil.

In other respects, too, the discount of bills at long dates, or their renewal, or the making of permanent loans, is altogether inconsistent with sound banking principles, for it prevents the bankers from having that command over their resources which is advantageous at all times, and indispensable in periods of difficulty or distress.

In the discounting of bills, a great deal of stress is usually laid, or pretended to be laid, on the distinction between those that arise out of real transactions and those that are fictitious, or that are intended for accommodation purposes. The former are said to be legitimate, while the latter are stigmatised as illegitimate. But Mr Thornton has shown that the difference between these two classes of bills is neither so well marked nor so wide as most persons suppose. A notion seems to be generally entertained that all real bills are drawn against produce of one sort or other, which, or its value, is supposed to form a fund for their payment. Such, however, is not always, nor even most commonly the case. A, for example, sells to B certain produce, for which he draws a bill at sixty days’ date. But prices are rising, trade is brisk, or a spirit of speculation is afloat, and in a week or two (sometimes much less), B sells the produce at an advance to C, who thereafter sells it to D, and so on. Hence it may, and in fact frequently does happen, that bills amounting to four, five, or even ten times the value of a quantity of merchandise, have grown out of its successive sales, before the first bill of the series has become due. And not only this, but bills are themselves very frequently rediscounted; and in this case the credit of the last indorser is generally the only thing looked to; and there is not, perhaps, one case in ten in which any inquiries are made in regard to the origin and history of the bills, though they are often of the most questionable description.

On the whole, therefore, it would seem that the real or presumed solidity of the parties signing a bill, and responsible for its payment, is the only safe criterion by which to judge whether it should or should not be discounted. But the fact of a merchant or other trader offering accommodation bills for discount ought unquestionably to excite a suspicion that he is trading beyond his capital. Inquiries of the most searching description should forthwith be instituted; and unless satisfactory explanations are given, his paper should be rejected. On the same principle, the offering of bills for rediscount ought to awaken suspicions of the bankers and others who resort to so questionable a mode of carrying on business. But, except in so far as a feeling of distrust may be thus very properly excited, there does not appear to be anything in an accommodation bill per se to hinder it from coming within the pale of negociability. It is a mode of obtaining a loan from a bank; and when the character of the bill is known to the banker, or is openly declared, it does not appear to be an objectionable mode.

Besides bills avowedly intended for accommodation purposes, another and a different variety of such bills is drawn by parties at a distance from each other, often men of straw, and made to appear as if they were bottomed on real transactions. And we are sorry to say, that bills of this sort are always current, and often to a large extent. Of course no person of respectability can be knowingly connected with such bills, which are almost always put in motion either to bolster up some bankrupt concern, or to cheat and defraud the public. But despite the mischief of which they are productive, it appears to be pretty generally supposed that the currency of these bills is an evil which cannot be prevented. There can, however, be no real doubt that it may, at all events, be very greatly diminished; and this desirable result would be effected were it enacted that all bills shall henceforth bear upon their face what they really are. That those that are intended for accommodation purposes shall have at their head the words “Accommodation Bill;” and that those only shall bear to be for “value received” that have grown out of bonâ fide transfers of property. An enactment of this sort could not be felt as a grievance by any one unless he had a fraudulent purpose in view. And were the impressing of a false character on a bill made a criminal offence punishable by three years’ imprisonment, or some such penalty, there is every probability that a formidable check would be given to the issue of spurious bills, and to the manifold abuses to which the practice gives rise.

Bill-discounters who have got fictitious paper on their hands, and attempt, as has been done, to get rid of it by concealing its character, or representing it in a favourable light, make themselves parties to the fraud. Such conduct is so very flagitious, that when it can be fairly brought home to the parties, it should subject them to the severest penalties.

The rates of discount charged by the bank, since its establishment in 1694, down to the present time (1857), have been as follows:—

The dividends on bank stock, from the establishment of the company to the present time, have been as follows:—

The Bank of England does not allow, either at the head office in London, or at her branches, any interest on deposits; and in doing so she acts wisely. Notwithstanding the non-payment of interest, she has often very large amounts of deposits on her hands, and were she to pay interest, the probability is that they would be very greatly increased, and might, in periods of difficulty, seriously compromise her safety. At present the bank may either retain deposits or invest them in those securities from which they may be most easily withdrawn. But if she allowed interest, the case would be different, and she would be obliged to look quite as much or more to the profits to be made by investments as to the facility of repossessing herself of funds. We beg, in corroboration of what has now been stated, to draw the reader’s attention to the following extract from the evidence of Mr Weguelin, late governor of the bank, before the Committee of 1857:—

“We,” said he, “at the Bank of England, have always considered that the proper functions of a banker were to keep the spare cash of his customer, such cash as his customer required for his daily expenditure, for the sudden demands of his business, and any accidental accumulation which might happen before the customer had occasion to invest it. That is contrasted with the system pursued by the joint-stock banks. The joint-stock bank invites a large deposit by offering a certain rate of interest for the deposit; in point of fact, the joint-stock bank becomes the investor of the money instead of the customer. The customer of a joint-stock bank does not himself invest his own money, but he employs the joint-stock bank to do it, taking the guarantee of the joint-stock bank, and taking, possibly, a lower rate of interest. Now that system, if applied to the Bank of England, would be, I think, very prejudicial to the public interests. It would, in the first place, force upon the Bank of England to invest its reserves much more closely than it does now. If it had to pay interest upon its deposits, it could only do so by investing them in some securities that would pay a higher rate of interest than that which it pays. Its deposits also are of that particular character which would render it still more inexpedient that they should be closely invested. They consist, in the first place, of government deposits, which rise from a low rate at one period of a quarter up to five or six millions higher at another period of a quarter, and again collapse to a very low rate at another period. Again, the private deposits consist, to a certain extent, of the deposits of the bankers and the joint-stock banks of London. Those deposits are the amounts which those bankers require to work their own business. Consequently, they are not deposits which should be very closely invested by the Bank of England. In times when there is a great accumulation of deposits in the Bank of England, it is because the public are not able at those times to find investments to their mind to employ those deposits; and consequently, it is not at all likely that the Bank of England, if that is the case with the public generally, will be able to find investments which the public themselves have not been able to do. All these reasons combined would lead me to think that to force a system upon the Bank of England by which it should be obliged to employ its deposits very closely—much more closely than it does at present—would be not only prejudicial and unsafe as regards the Bank of England, but would be prejudicial to the public interest.”—Quest. 159.

The truth is, that the whole subject of deposits is beset with difficulties. The extent to which it has been already carried has deeply endangered the stability of the banking system, and we have seen that it is indispensable it should be subjected to regulation.

Previously to 1786, the bank received an allowance for trouble in paying the dividends, superintending the transfer of the stock, &c., of the national debt of £562:10s. a million on its amount. In 1786 this allowance was reduced to £450 a million, the bank being, at the same time, entitled to a considerable allowance for her trouble in receiving contributions on loans, lotteries, &c. This, though long regarded as a very improvident arrangement on the part of the public, was acquiesced in till 1808, when the allowance on account of management was reduced to £340 per million on £600,000,000 of the public debt, and to £300 per million on all that it exceeded that sum, exclusive of some separate allowances for annuities, &c. The impression, however, was still entertained that the allowances for management should be further reduced, and this has been effected in the interim.

Exclusive of her functions as public banker, and manager of the public debt, the Bank of England is connected with government through the circulation. We have seen that she is entitled to issue upwards of £14,000,000 upon securities, that is, on the credit of the funds she has lent to government. But for these she receives about 3 per cent. interest, and such being the case, the public is clearly entitled to a portion, if not to the whole amount of the profits realised by the bank on the issue of these £14,000,000. It is difficult to say how much this may amount to. The issue department of the bank seldom re-issues notes, but for the most part destroys them as soon as they are returned to it. This practice is said to be necessary to enable the bank to obviate fraud, by keeping a proper account of the numbers of the notes afloat. An opinion is, however, pretty generally entertained that this might be effected by a less expensive process than that which is now resorted to. And, certainly, it seems to be a very wasteful proceeding, that a quantity of newly manufactured notes issued by the bank in the forenoon, and returned to her in the afternoon, should not be reissued, but consigned to the flames. The Scotch banks are justly censurable for keeping their notes too long afloat, but this is running with a vengeance into the opposite extreme.

But, as it is, the cost of maintaining an issue of £14,000,000 is estimated by the bank at about £113,000 a year; and taking the gross profits of the issue at 3 per cent., or £420,000, the nett profits may be estimated at £307,000 a year; and of this sum the bank pays to government £180,000, viz., £60,000 in lieu of the old charge for stamp duty, abolished in 1844, and a further sum of £120,000, leaving the bank £127,000 for her share of the profits. And so long as the cost of the issues remains at about its present amount, we do not know that there is much to object to in this arrangement. Probably, however, were the allowance to government further increased by some £50,000 or £60,000, the bank might find means, without injury to the public, of re-issuing her notes, or of otherwise reducing the cost of their circulation. During the year ended the 31st March 1856, the payments made to the bank for managing the national debt and annuities amounted to £95,875.

It should be observed that the responsibility and expense incurred by the bank, in managing the public debt, are very great. The temptation to the commission of fraud, in transferring stock from one individual to another, and in the payment of the dividends, is well known; and notwithstanding the skilfully devised system of checks adopted by the bank for its prevention, she has frequently sustained very great losses by forgery and otherwise. In 1803 the bank lost, through a fraud committed by one of her principal cashiers, Mr Astlett, no less than £340,000; and the forgeries of Fauntleroy, the banker, cost her a still larger sum! At an average of the ten years ending with 1831, the bank lost, through forgeries on the public funds, £40,204 a year.—(Report on Bank Charter, Appen. p. 165).

Besides the transactions alluded to, the bank entered, on the 20th of March 1823, into an engagement with government with respect to the public pensions and annuities, or, as they have been more commonly termed, the dead weight. At the end of the war, the naval and military pensions, superannuated allowances, &c., amounted to above £5,000,000 a-year. They would, of course, have been gradually lessened, and ultimately extinguished, by the death of the parties. But it was resolved in 1822 to attempt to spread the burden equally over the whole period of forty-five years, during which it was calculated the annuities would continue to decrease. To effect this purpose, it was supposed that, upon government offering to pay £2,800,000 a-year, for forty-five years, capitalists would be found who would undertake to pay the entire annuities, according to a graduated scale previously determined upon, making the first year a payment of £4,900,000, and gradually decreasing the payments until the forty-fifth and last year, when they were to amount to only £300,000. This supposition was not, however, realised. No capitalists were found willing to enter into such distant engagements. But in 1823 the bank agreed, on condition of receiving an annuity of £585,740 for forty-four years, commencing on the 5th of April 1823, to pay, on account of the pensions, &c., at different specified periods, between the years 1823 and 1828, both inclusive, the sum of £13,089,419.—(4 Geo. IV. c. 22).

Formerly the business transacted at the bank was so much encumbered with forms and conditions, that the generality of merchants and ordinary people rarely thought of employing her to keep their money or make their payments. But in this respect an entire change has been effected. Cheques, the minimum amount of which was formerly £10, may now be drawn of any amount, great or small; and all sorts of banking business is conducted with facility and dispatch, and, we may add, with perfect security.

The bank opens banking accounts, or, as they are called, “drawing accounts,” for the safe custody, and the receipt and payment of cash, not only with merchants and traders, but with all persons who choose to keep their money at a banker’s, and to draw cheques against it. The bank also takes charge of their customers’ bills of exchange, exchequer bills, and other securities, and does all that is needful either in the collection of bills of exchange, the exchange of exchequer bills, or the receipt of dividends, and so forth, free of any charge. Plate-chests, and deed and security boxes, may be deposited, free of expense, by customers, for safe custody. The bank looks to the average balance of cash on each account, to compensate for the trouble and expense of keeping it, and in this respect the requirements of the bank are certainly not greater than those of ordinary bankers. No particular sum is required to be lodged on opening an account; it is only necessary that the party should be known as respectable, and in a condition to require a banking account. But the bank receives and holds sums of money for safe custody for parties who have no current accounts.

The following are the regulations under which accounts are conducted:—

1. All letters should be addressed to the chief cashier.

2. It is desirable that drafts should be drawn upon cheques furnished by the bank.

3. Cheques upon city bankers, eastward of King Street, Cheapside,

4. Cheques paid in after 2, and before 3 o’clock, and cheques upon all other London bankers paid in before 12 o’clock, may be drawn for on the following morning.

5. Cheques paid in after 3 o’clock are sent out at 9 the following morning, and may be drawn for as soon as received.

6. Dividend warrants are received at the drawing office until 4 o’clock in the afternoon for all persons having accounts at the bank.

7. It is requested that notice be given at the drawing office of bills accepted payable at the bank, with the date of their maturity.

8. Persons keeping a drawing account with the bank (although not having a discount account) may tender bills for discount through the drawing office. Application for discounts, or for advances on stock, exchequer bills, &c., must be made before 2 o’clock.

9. Bills of exchange and notes not paid when due, will be noted.

10. The bank will make purchases or sales of British or foreign securities upon an order in writing addressed to the chief cashier; and dividends on stock may be received under powers of attorney granted to the cashiers of the bank.

11. Exchequer bills, bonds, railway debentures, or any other securities may be deposited, and the interest, when payable, will be received and placed to account.

12. Credits paid in to account are received without the bank-book, and are afterwards entered therein without the party claiming them.

13. Notes of country bankers, payable in London, are sent out the same day for payment if paid in before 3 o’clock.

14. The pass-books should be left at the drawing office, at least once a month, to be written up.

15. Where post-bills are required, or a payment is to be made to any office of the bank by cheque on the Bank of England, the cheque must be presented at the office upon which it is drawn, and exchanged for an order on the post-bill office, or on the office at which the payment is to be made.

16. Cash-boxes taken in, contents unknown, for such parties as keep accounts at the Bank.

17. A person having a drawing account may have a discount account; but no person can have the latter without at the same time having the former. When a discount account is opened, the signatures of the parties are entered in a book kept for that purpose, and powers of attorney are granted empowering the persons named in them to act for their principals. Bills of exchange having more than 95 days to run are not eligible for discount.

N.B.—All changes in the residence of persons keeping cash at the bank are requested to be made known at the drawing office; and it is particularly requested not to offer any gratuities to the clerks of the banking offices, such gratuities being strictly forbidden.

There are no holidays at the bank except Christmas and Good Friday.