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The problem of providing emergency credit and currency capable of easy expansion and rapid contraction is thus solved by means of this convention, backed by the use of the check currency which cancels itself day by day, each check existing only for the purpose of the transaction which it completes.
At the same time the Bank of England is obliged by the pressure of external conditions frequently to regulate the price of money in London. This necessity for regulation is a fact which is only dimly grasped by the London money market as a whole, which frequently resents the operations of the Bank of England and contends that the price of money ought to be left to the natural laws of supply and demand. The position of the London money market, however, as the only one in which gold can at all times be obtained, to any extent and without question, clearly makes some regulation of the rates at which it is prepared to work inevitable. None of the various items which compose the market can be expected to conduct their business with a view to the necessities of the market as a whole. If a banker wants to increase his holding of bills, he naturally does so at the market rate, without considering whether his doing so is likely to turn the foreign exchanges against London and so cause a demand on London for gold. Consequently the exigencies of their daily business, and the strong competition between them, impel the banks and discount houses to do business at rates which may sometimes be dangerous to the general interest, and it is thus clearly necessary that some institution with a commanding position at the head of the machine should occasionally intervene and regulate its operations.
(B) THE JOINT STOCK BANKS.
The most obvious function of the joint stock banks of England is the business of taking care of money for customers and meeting checks drawn against their balances. Customers place money with them either on current or deposit account. On current account it can be withdrawn at any time and earns, as a rule, no interest. Many banks make it a condition that unless the current account is maintained at a certain figure, generally £100, a charge shall be made for keeping it. A usual charge is £1 55. od. each half year, but arrangements vary according to the terms agreed with different customers, and the keen competition now prevalent enables many to obtain the convenience of a bank account for nothing. Sums left on deposit are generally placed for a week or longer, and if placed for a week the rate paid on them by the banks is generally 11 per cent below Bank rate.
Out of this function of meeting checks drawn by customers against the sums deposited has grown the banker's chief duty, which is now the provision of check currency for the mercantile and financial community. Currency in England consists of coins, notes, and checks. The coins are minted by the Government, gold coin being legal tender to any extent, silver to the extent of £2, copper to the extent of 1s. The silver and copper coins are mere tokens, passing at a conventional value which is far above that of the metal contained in them. The use of this metallic currency is almost entirely confined to small retail transactions, especially among the poorer classes which can not afford the luxury of a banking account.
The note issues are almost obsolete as currency, the Bank of England's being used chiefly as reserve by the other banks, while the issues of the country banks are so small as to be negligible. Most of the commercial and financial transactions of England to-day are settled by checks drawn on the banks by their customers. These checks are not legal tender, since it would obviously be impossible that a check drawn by an individual on a bank could be legally made acceptable by a creditor whether he wished to take it or not.
Nevertheless, the protection which the check affords to its users against fraud has been sufficient to make its use general. And the English community thus conducts exchanges between itself by means of an enormous number of pieces of paper drawn upon banks which purport to give the holder the right to demand gold or legal tender, but are, as a matter of fact, in an overwhelming proportion crossed off against one another in the bankers' clearing houses. This check currency is provided by the banks without any legal restriction or supervision. It has been, ever since the beginning of banking, the business of the banker to finance trade and commerce by lending it what is called money. Before printed instruments were known, bankers, who were in those days goldsmiths and bullion dealers, lent actual coin to their customers. When bank notes were invented, the bankers lent their own promises to pay, which were circulated among the community and took the place of coin currency. When the use of checks drove out the bank note, as happened in England, the bankers lent their customers not their own promises to pay but the right to draw checks,
involving a promise on their part to meet the checks on demand. These checks drawn are paid in to the other banks, and the check currency of England thus consists to a great extent of certificates of mutual indebtedness between the banks and their customers. The loans and discounts made by one bank create the deposits of another, and the check currency represents transfers of the credit so created. If the balance sheet of an English bank is examined, it will be found that its liabilities consist to a small extent of its capital and reserve fund, to a very large extent of its current and deposit accounts, which are its liabilities to its customers, and again to a small extent of acceptances.
On the assets side will be found “cash in hand and at the Bank of England,” which represents the till money and cash reserve—the coin and legal tender actually held by the bank—and its credit at the Bank of England. The next item is generally cash at call and short notice, which consists chiefly of the bank's loans to discount houses and also in some cases of advances to stockbrokers and others from whom it may expect to be easily able to call them in. Its investments will be a fairly considerable item, but in most cases a large proportion of assets will consist of discounts, loans, and advances. By making these discounts, loans, and advances the banks create deposits for themselves and for one another. A customer who has raised a credit by a discount or advance makes use of this credit to draw a check. He passes the check to his creditor, his creditor pays it in to his own bank, and as long as the discount or advance is current there will be a deposit against it in the books of one bank or
another. In the rare cases in which the customer uses his credit for the withdrawal of coin or notes, the same process will work; he will pass them on to a creditor who will ultimately pay them into a bank, in the enormous majority of cases. The extent to which the banks can create credit by means of loans and discounts is regulated only by their prudence and by the rules which they apply to their business. If they advance too much, their credit at the Bank of England will be diminished, owing to the fact that the claims against them in the clearing house will be heavier than the claims which they have to present against other banks. The result will be that the proportion of their cash and liabilities will be brought down to a point which is lower than they consider prudent.
There is no legal obligation of any sort on them to maintain any regular proportion between cash and liabilities, and as their position in this respect is only subjected to occasional publicity they are not obliged to consider even the effect upon their customers of any considerable variation in the proportion between cash and liabilities which they keep. The system thus works with extreme elasticity and banking facilities can be provided in England with extraordinary ease. It has of late years been frequently contended that the ease and elasticity with which it works have carried the English banking machinery to a somewhat extreme length in the matter of the economy of old and legal tenders and the extent of the credit pyramid which it builds up on them. After the crisis of 1890 Lord Goschen seems to have been strongly imbued with the conviction that the system had been carried too