date. Thus numerous large tradesmen and others were suddenly enabled to pass into circulation a very considerable number of notes, which, owing to the scarcity of coin, were eagerly accepted; a fact which enabled these self-formed bankers to lay, in many cases, the foundation of a healthy and permanent business. As instances of the admixture of shop-keeping and banking, we may instance the cases of "the Gloucester Old Bank," said to have been established in 1716 by Mr. J. Wood, and carried on at his draper's shop for at least half-acentury. The founder of Smith's Bank at Nottingham was also a draper. Unfortunately a very large proportion of these bankers were not of the class just mentioned. Thus, Macleod,† speaking of their origin, says :-"Bank of England notes had no circulation "beyond London. Its monopoly prevented any other great banks being formed and it would not extend its "branches into the country. England required to "have a currency; and, as it could not have a good one, it had a "bad. Multitudes of miserable shop-keepers in the country, grocers, "tailors, drapers, started up like mushrooms and turned bankers, and "issued their notes, inundating the country with their miserable rags." 66 . In the year 1738, the Bank of England, after a representation from the Postmaster-General upon the subject, first issued post bills, payable seven days after sight; so that, in case of the mail being robbed (a not unusual occurrence at the time), payment might be stopped. This was the first form by which remittances to and from the country were facilitated. The discount business carried on by the country bankers (those, namely, who were enabled to live through the panic of 1793, when no fewer than 100 are said to have suspended payment) was of a nature similar to that carried on in London; the bills, however, being of a less secured kind, drawn in many cases by agriculturists, farmers and others; often dependent upon the result of the year's harvest for their chance of payment, for the discount of which a higher rate was exacted. A similar difference between London (with which now rank several other large towns) discounts and those passing through a country banker's hands, still exists; and it is a well known fact, that the London or bank rate of discount has little effect upon the country bankers' minimum, which, with a few exceptions perhaps, seldom falls below five per cent. A great deal of practical information upon this point may be gathered from Rae's "Country Banker." With reference to this higher rate, which monopoly had at first allowed country bankers to charge, we find that, upon the Bank of England being empowered by Act of Parliament (7 Geo. IV., c. 46) to open branches (some doubts having previously existed as to its legality); and it, having taken advantage of the permission, opened branches at several large towns (e.g., Gloucester, Manchester, Swansea), * R. W. Barnett's Progress and Development of Banking. (Prize Essay.) †Theory and Practice of Banking, 1883, p. 507. a deputation of country bankers held a meeting at the London Tavern, passed several resolutions, and appointed a deputation to wait upon the First Lord of the Treasury, to protest against the action of the bank. One of the resolutions was "That it can be distinctly "proved that the prosperity of trade; the support of agriculture (sic); "the increase of general improvement are intimately "connected with the existing system of banking.' "That the country bankers would not complain of rival establish"ments founded upon equal terms; but they do complain of being "required to compete with a great company, possessing a monopoly "and exclusive privileges." The Bank of England, coming into the field with its "monopoly and exclusive privileges," was enabled to do business at a cheaper rate than the country bankers, and so draw away their customers. Hence the dispute. Another bone of contention between the country bankers and the Bank of England was, that the latter had always issued their post bills unstamped, they being included in the composition of £3,500 per annum on every £1,000,000 of their notes in circulation. When the branches were established, they issued their bills upon the head office at twenty-one days' date, also unstamped, alleging that they, too, were included in the composition. At the same time the country bankers could only issue bills upon their London agents upon stamped paper. After an appeal to the Government, the statute 9 Geo. IV., c. 23, was passed, enabling country bankers to compound for the duty on their notes, and to include therein bills upon London at twenty-one days' date at the same rate as the Bank of England. Another branch of business which the large number of country banks now facilitated was that of remittance. Each country banker had an agent in London, upon whom he was entitled to draw; and with whom he kept a running account. It became consequently unnecessary for a debtor, residing in the country, to remit coin or even country notes, to his creditor in London. It was only needful to apply to the local bank; which, against cash or credit, would give him a bill at so many days date upon their London agents; this bill was then remitted to the creditor, who could cash it without difficulty or charge. Or in the case of the creditor residing elsewhere than in London, the bill would pass through the local bank where he resided, being cashed ultimately by that bank's London agent for their account. Thus it came that all remittances and outstanding differences began to be settled through the London banks; and this system has now grown until it comprehends the greater part of the differences and remittances throughout the entire world. For instance, a travelling letter of credit issued in America will result in the agent of the American house in Italy, France, Germany, or elsewhere drawing, not upon the American house, but upon their London agent. Of course the system of remitting money merely by the remitter paying the money into one bank to be passed by them to the credit of their agents, and so to the credit of the ultimate remittee, is accomplished by a number of advices, and in no way encroaches upon our domain of bills of exchange. may Whilst touching upon this branch of our subject, it may not be out of place to state that the discount by a banker of a non-local bill accomplishes a two-fold object, namely, the placing what would otherwise be the remittee in immediate possession of funds, and the obviating the transmission of money by, what would otherwise be, the remitter. To some extent, therefore, this traffic in non-local bills be said to resemble the negotiation of foreign bills of exchange; the fact of more bills being payable by than to the residents in a certain town being to some extent a criterion, as between country and country, of the state and prosperity of its trading. Thus we find that Seyd entitles inland bills local mediums of exchange, inasmuch as they effect the transfer of value from one person to another in the country of their origin, in contradistinction to foreign bills, which he terms universal mediums of exchange, transferring, as they do, value from one country to another. In 1795, the Bank of England took the extraordinary step of posting up a notice in their discount office, to the effect that no bills would be taken in after twelve o'clock, and that only a pro rata proportion of otherwise unobjectionable bills would be received for discount, should the amount so offered be greater than it was considered desirable to discount on that day. The minimum rate prevailing at the time was five per cent., a rate which there was, at the time, a popular prejudice of exceeding. This is an instance of the ignorance of the directors as to the proper mode of keeping their reserves within proper limits; an ignorance which we shall see (page 433) was not thoroughly dispelled till the middle of the present century. This contraction of accommodation, caused by a drain of gold, not only failed to stop that drain but, from a mistaken policy, even tended to aggravate it, for, finding that notes could not be had, and that things were gradually coming to a standstill, every one rushed to the bank for that last inevitable commodity, gold. This drain led to the ultimate suspension of cash payments by the bank two years later. Another trait in the discount business of the Bank of England was shown in the year 1836, when the bank refused to discount any bill bearing the indorsement of a joint stock bank of issue. The reason of this action was the discovery of a series of gigantic transactions between this class of bank and America. The erection of new, and the enlargement of the capital of the already existing, banks in America, led to a considerable portion of the required capital being drawn from this country; the quantity of the acceptances of American houses afloat in the market first attracting the attention of the directors of the bank. It further appeared that during the four preceding years nearly the whole of the foreign trade of America, not only with Great Britain, but with the East and even with South America, had been carried on by credit obtained in England under these credits; bills were drawn at 4 m/d, and, although originally the bills of lading for the goods had been retained in agents' hands until the bills were met, of late the custom had been discontinued, and the whole of these transactions were practically without security. "This "business was almost entirely in the hands of seven houses: six in "London, one in Liverpool. As much as 15 or 16 millions sterling of "their acceptances were stated to have been in circulation at one "time; while the actual capital possessed by them was estimated at less "than one sixth the amount. At the beginning of March, 1837, "three of these houses, Messrs. Wilde's, Miggin's and Weston's, "stopped payment, at which time their outstanding acceptances "amounted to 5 millions. The aggregate engagements of the other "American houses were estimated to amount to a like sum. In order "to avoid the general panic that must have ensued if these enormous "amounts had been unmet, the bank made large advances to the "extent of £6,000,000 and enabled them to be liquidated without "disaster. It was probably owing to this timely discovery and "judicious management on the part of the bank, that, when all the "United States banks stopped payment in 1837, the losses here were "comparatively so small." The progress which has taken place in the amount of paper discounted in this country may be gathered from the fact that the Bank of England, in the first years of its existence, was restricted from issuing a greater sum than the amount of its capital (the whole of which, by the by, had been lent to the Government), namely, under one million and a quarter. Another instance of its comparative minuteness was shown by the fact that, on the 5th May, 1696, the private bankers and others, with a view of wrecking the bank, collected a sum of £30,000 in bank notes, and suddenly presented them for payment, and the directors, "after solemn deliberation"† refused payment of them. The enormous sums to which these comparatively small figures have since risen are too well known to need particular recapitulation. One or two broad statements will suffice to enable the reader to form some idea as to the magnitude of the sums dealt in. Thus in the analysis of 10 London joint stock banks published by Mr. Wm. Abbott, for the half-year ending 31st December, 1887, they together possessed a paid-up capital of £12,005,000, whilst the total *R. W. Barnett's Progress and Development of Banking. of their bills discounted, loans and other securities, amounted to £92,000,092. * In glancing at the balance sheet of one of our most successful joint stock banks we find that, with a capital of £2,000,000, the amount invested in "bills " apart from "loans and other securities," was † £12,263,087; or just six times the amount of their capital. Again, in the case of one of our essentially metropolitan banks, we find that with a capital of £1,800,000 the conglomerated item in the last half-yearly balance sheet, of bills, loans, etc., was £12,063,608, the proportion of bills to capital being probably somewhat smaller in this case, owing to the greater facilities enjoyed by the former bank in carrying on the business of discounting from its complete branch business system. When these figures are multiplied by the large number of banks now existing, some idea of the magnitude of the amounts dealt in is obtained. With reference to the rate of discount, the prediction, made by Mr. Michael Godfrey (a director of the bank, who came to so untimely an end at the battle of Namur), in a pamphlet published in 1694, that "the bank will infallibly lower the interest of money," was convincingly fulfilled. On the 16th January, 1695, the rate for foreign bills having three months to run was 6 per cent.; whilst to those keeping accounts with the bank only 3 per cent. was charged; and on the 19th May, running notes and bills were discounted at 3 per cent., and money was advanced on merchandise at 4 per cent. When these figures are compared with the rates mentioned previously, as prevailing amongst the "other bankers," the sense of the prediction becomes apparent. Since that time the rate has periodically fluctuated between its two extremes, 2 and 10 per cent. falling to the former in times of stagnation and abundance of money, rising to the latter in times of great commercial crises, a subject we shall dwell upon, some pages later. Having now considered somewhat scantily the attributes of, and the part played by the genuine bill of exchange, we shall do well to glance at a species of paper which has proved one of the bugbears of banking, and been the cause of the failure of several of the largest institutions in the country. I refer to that known as "accommodation paper," but which in many instances deserves quite another name. There are, roughly speaking, three distinct classes of bills which come into the hands of a banker for discount; namely, bank paper, consisting of mostly short-dated drafts drawn by one banker upon another, principally for purposes of remittance, the stability and credit of the participating banks being sufficient security for their payment; secondly, by far the largest class, bills drawn by a trader (whether in money, merchandise, or other goods) upon his customer *The London & County Bank, Limited. The London Joint Stock Bank. |