Banking. The business of banking consists in trading in money by receiving, lending, and exchanging it. A bank (A.S. banc, Ital. banco, a bench, a table) is an office or building in which the business of banking is carried on, the term being also extended to any body of persons engaged in such pursuit. A banker is a person conducting this business, sometimes individually, but more frequently in partnership with others. The business of banking has developed from that of mere money-lending and money-changing.
The earliest bank on record was kept by Egibi, at Babylon, about 700 B.C.
The Greek Trapezitae, or moneychangers, and the Roman publicani probably received deposits and made advances, but do not appear to have known the use of bank-notes. Cicero, however, remitted money from Cilicia to Rome through a firm of publicani. These publicans (a much higher class than those mentioned in the New Testament) did mercantile as well as financial business. Both classes derived their name from their contracting to collect certain of the provincial taxes.
Among the earliest banks in modern Europe was that of Venice, founded 1157, for state purposes. The Bank of Barcelona, the earliest existing bank, was established in 1401, although banking had been previously carried on by the cloth merchants of that city. Some of these early European banks were finance companies, established to raise money to lend to the government.
The Bank of Amsterdam, founded 1609, for purely commercial purposes, was instituted on account of the debased nature of the coinage. Merchants having payments to make were obliged to offer coins of different nations, some of them being greatly worn, others clipped and otherwise reduced in value. These coins therefore were paid into the bank, weighed, and credit given for their intrinsic value. This bank was one of deposit, and did not profess to advance money, but to keep all the coins deposited in its vaults. The only profit derived consisted in charges upon its customers, such as transfer fees, for transferring credits from one account to another.
The Bank of Stockholm, established 1688, was the first in Europe to issue notes. The Jews were the first English bankers. They came to this country soon after the Conquest. By dint of much labour and carefulness of living they became very rich, making use of their money by lending it at a high rate of interest to the aristocracy. After much persecution they were eventually banished from the country in the time of Edward I., and were replaced by the Lombards. In addition to being bankers, these latter were goldsmiths and pawnbrokers.
After the seizure by Charles I. of the sum of £200,000 belonging to the London merchants, and placed for security in the Tower, in the custody of the Master of the Mint, they deposited their money with the goldsmiths, who issued transferable receipts, which were called goldsmith's notes. Francis Child, one of their number, found banking so profitable that he relinquished the other branches of his business. Many others followed his example, and thus laid the foundation of modern banking.
Although banking exists primarily for the sake of profit, the advantage accruing to the public is incalculable. It would be simply impossible to carry through the business of the present day without the use of substitutes for coin in the form of notes, bills, and cheques. It is, in fact, largely to the use of these that England owes her present commercial position. To the private individual the advantage is no less great, He feels a stronger sense of Security in placing his money with a banker than in keeping it under his own care, or investing it in any enterprise of doubtful character.
A banker will allow interest for money which the depositor may have no means of otherwise employing, and this acts as a further inducement to a person to place money in his hands.
Banks may be thus classified: public or state banks, joint-stock banks, and private banks. The first are called public, being established for national purposes. They in some instances owe their origin to the debts of the State. Joint-stock banks are those which conduct their business in a corporate capacity, while private banks are of the nature of a common partnership, consisting of a limited number of partners.
Capital is the first consideration in banking. The capital of a public bank generally takes the form of a loan from the public to Government for State objects; that of a joint-stock bank being derived from the joint contributions of several persons. The capital of a private bank is furnished from the private means of the partners themselves.
But it is not with capital alone that the banker trades, since in the course of business he receives deposits, which, so long as they remain in his hands, are equivalent to capital. There are two classes of deposits, those at call, that is repayable on demand, and those placed at interest, repayable after due notice. The former kind are termed current accounts, kept by people in business, who pay in their daily receipts, as well as by independent persons, who pay in sums received, such as payments for rent, dividend warrants, etc. The latter kind of accounts, termed deposit accounts, are kept by persons having no immediate use for their money.
It is not usual for a banker to allow interest on current accounts, by reason of the trouble incurred in keeping them. Besides which, the money on such accounts being liable to withdrawal without notice, cannot be invested to the same advantage as money on deposit account. The rate of interest allowed on deposit accounts varies according to circumstances, better terms being sometimes obtainable if the length of notice agreed upon be greater than usual, or if the amount be exceptionally large. The usual rate of interest allowed in London depends upon the Bank of England rate of discount; generally it is 1-1/2 per cent. less. In the present state of affairs joint-stock banks pay from 10 to 15 per cent. dividend to their shareholders, but only allow their depositors from 2 to 4-1/2 per cent. Although at first sight this seems unfair, the reason is not far to seek. In the first place, the shareholders take all the risk of the business; secondly, they derive the profit from three sources, viz. those very deposits upon which they allow interest, those at call, and their own capital. A bank with a capital of £250,000 is able to receive deposits to £1,000,000, or even more, thus having a virtual trading capital of £1,250,000 upon which to make its profits. Receipts are issued for amounts placed on deposit account, which have to be produced before such money can be repaid. With current accounts no such receipts are given, but the amount of each deposit is entered in the customer's pass-book.
Money deposited with a banker at once becomes his property to apply to what purposes he sees fit. Thus the customer stands solely in the relation of the banker's creditor. The customer, in this relation, has frequent occasion for withdrawing money from the banker's hands in order to meet his obligations. This is effected by means of cheques, which are demand notes or orders drawn upon the banker for the repayment of money. They must bear the signature of the drawer, and must be drawn in unequivocal terms.
Cheques being peremptory orders to pay cash, it is incumbent on the banker to have always upon his premises such an amount of coin and notes as he is at all likely to be called upon to pay. It is obvious that the more money a banker keeps in reserve for this reason, the less he is able to lend or otherwise invest. His object is, therefore, to make the amount as small as possible, consistently with prudence.
In addition to keeping in reserve gold and notes, he invests a certain proportion of his deposits in such securities as will command a ready sale, in order that he may be enabled to realise gold for them in times of emergency. The reason of this is obvious, as for some reason perhaps beyond the banker's own control, there may be a very unusual demand by the depositors for the repayment of their money. If he is unable to satisfy all the demands of his creditors, his only alternative is to close his doors. This is called a suspension of payment, The banker employs money entrusted to him in various ways - by means of discounting bills, and lending upon approved securities.
It often happens that when a person engaged in business buys goods he is not in possession of ready money to pay for them at the time of purchase. He is, therefore, said to buy the goods upon credit, and as it would be most unsatisfactory to the seller of the goods to allow the debt to run on for an indefinite period, and as a mere verbal promise to pay within a certain time would not be considered binding, he draws an order, or "bill," upon the buyer ordering him to make payment of the same within a certain definite time. This order is called a bill of exchange, and, if correct, the buyer signs his name across it, which signature is an admission of the debt, and is called an acceptance of the bill. But, although selling the goods on credit, the vendor frequently requires the money represented by the bill long before it is due; he therefore takes it to his banker in order that he may obtain immediate credit for the same. The banker is said to "discount the bill," by which term is meant that he buys it from the, customer, and he gives credit for it for a less amount than the bill represents. The difference between the actual amount of the bill and the amount thus advanced is called the discount, or in other words interest on the amount for the length of time between the day of discounting the bill and its due date.
A banker should never discount a bill that does not represent an actual business transaction, as by so doing he frequently incurs serious losses. Such bills, drawn solely for the purpose of raising money by getting them discounted, are termed accommodation bills. It is difficult, however, to distinguish them from genuine bills.
As bills are sometimes not provided for by the acceptor, a banker is careful only to discount such bills as are likely to be met when presented for payment. For this purpose he makes himself acquainted as far as possible with the financial position of the acceptor. Neither will he discount bills for his own customer unless such customer's finances are in a satisfactory condition. And for this reason, that should a bill discounted by a banker be unpaid upon presentation, he charges his customer's account with the amount of the bill, which he returns to him.
Besides trade bills a banker discounts promissory notes signed by his customer, promising to pay a certain sum of money at the expiration of a definite time. But he always requires some other kind of security in addition to the mere promise to pay. The latter is termed collateral security.
Another method of lending money is by means of loans. In this case the borrower lodges securities with the banker, who has a right to sell the same if the amount advanced is not repaid at the stipulated time. Money should never be lent except upon good security, and such as can be readily realised.
The profit derived from the granting of loans depends very much upon the source from which the money is lent. Thus, for instance, it is plain that a greater profit must accrue if the advance be made from money upon which no interest is allowed, or from capital, than if drawn from deposits upon which interest is allowed; or, should the lending banker issue his own notes, the profit is greater still, as these latter, being only promises to pay, are lent instead of cash, and the longer they remain in circulation the better it is for the banker.
Another function in connection with banking is the remittance of money. This is accomplished not by sending cash from one place to another, but drafts, by which means the same purpose is served. The banker gives a draft in exchange for cash. This transaction is called an exchange. For instance, a person at Manchester wishing to remit money to London applies to a banker for a draft drawn upon his London agents, for which a small charge for commission is made, or the draft (for which ready money is given) is made payable at say twenty-one days after date, in which latter case the banker derives profit from the interest on the money for that period. Money may also be remitted to Manchester, and although London bankers cannot issue drafts upon country bankers, means are contrived by which the same purpose is effected, and business is so conducted that coin is seldom sent from place to place, except it be in large quantities.
In the course of business a banker receives a great many cheques and bills payable at other banks, and it therefore is his duty to collect payment for the same. This he does in various ways according to circumstances. Some are collected by clerks, some are presented through the post, while others are presented through the Clearing House.
The advantage of the Clearing House is the great economy it effects in the circulation of coin and bank notes. Thus each clearing banker having claims against the others sends every day one or more clerks to the House, who enter on sheets provided for that purpose the amounts of bills and cheques drawn upon the others and those drawn against their own office. At the close of each day a balance is struck and differences are adjusted by means of transfers on the Bank of England, with which each clearing banker keeps an account. The effect of this of course is that practically the whole banking reserve of the country is under the control of the Bank of England, which is a private company not under Government supervision.
Each country banker has a London agent, through whom the clearing of country cheques is also effected. The total amount passing through the Clearing House for the year ending December 31st, 1889, was £7,618,766,000, the highest amount on record. The establishment is managed by a committee, composed of representatives from among the leading bankers.
The Bank of England arose out of a loan of £1,200,000 to Government in the year 1094, and was established upon a plan proposed by Mr. W. Paterson, a Scottish merchant. In consideration of this loan a Charter was granted by William and Mary for eleven years, which Charter has been renewed from time to time, the last renewal being in 1844. The subscribers were thus incorporated as a bank, which was styled the Governor and Company of the Bank of England. The management and government of the corporation was committed to the governor and twenty-four directors, to be elected each year from among the duly qualified members. Business was commenced on the 1st of January, 1695, and notes were issued, none of which were for a less sum than a less sum than £20. The Bank also discounted bills of exchange, charging from 4-1/2 to 6 per cent. Payment was suspended in 1696, when banknotes fell considerably in value. There was a heavy run upon the Bank in 1797, when cash payments were suspended, no payments being made except in bank-notes. They were not resumed till 1823.
By the Bank Charter Act, 1844, the Bank was divided into two departments, called the Banking Department and the Issue Department. By this Act the debt due from Government, £11,015,100, was said to be due to the Issue Department, and against this they were allowed to issue notes without holding any gold. They were also empowered to issue notes against securities now amounting to £5,184,900, making a total of £16,200,000 in notes against which no gold is now required to be held. Beyond this amount all notes issued must be represented by an equal amount of gold in the Issue Department.
The amount of Bank of England notes actually in circulation is about £25,000,000, but besides this the Banking Department holds another £10,000,000 in notes in exchange for which it has given gold. The Banking Department does not keep more gold than it requires (about £1,000,000), and can only obtain notes from the Issue Department in exchange for gold and vice versa.
But Government does not allow the Bank the whole benefit of the profit upon its issue of notes, but only that upon the issue against the Government debt and securities to the extent of £15,000,000. All profit beyond this goes to Government after deducting the expenses connected with their issue. The Bank also pays £180,000 to Government annually for its privileges and in lieu of stamp duties.
For the management of the National Debt the Bank receives £247,000 per annum. At the Issue Department of the Bank persons bringing gold bullion have a right to demand notes for the same at the rate of £3 17s. 9d. for every ounce of gold. 1-1/2d per oz. or £15,000 per annum.
The Bank of England receives money on deposit, but allows no interest whatever the amount may be. It also discounts bills, but does not issue circular notes nor grant letters of credit. The Bank has two branches in London and nine in the provinces.
The London and Westminster Bank was established in 1834 in spite of much opposition from the Bank of England, which was jealous of the monopoly of joint-stock banking it had hitherto enjoyed in the metropolis.
Other banks soon followed (London Joint Stock 1836, Union 1837, London and County 1837), and recent years have seen a great increase in their number.
Banking in Scotland differs somewhat from English banking. There are no private banks, but all are joint-stock, and they issue their own notes, some of so small an amount as £1. A great feature of Scottish banking is the system of lending money by means of cash credits, in which case the banker becomes the creditor of the customer, who keeps an overdrawn account, and pays interest on the daily amount thus overdrawn. The Bank of Scotland was established by an Act of the Scottish Parliament in 1695. The Scottish banks have a note circulation of £5,000,000, against which they hold £4,000,000 in gold.
The Bank of Ireland was established by an Act of the Irish Parliament in 1782. It is very similar to the Bank of England, and like that bank does not allow interest on deposits. The total amount of Irish notes in circulation exceeds £6,000,000.
Note Issue. A bank note is not really money, but only a promise to repay on demand money that has been previously advanced. Nevertheless, bank notes have come to be regarded almost as gold itself, and pass from hand to hand as freely.
Notes issued by the Bank of England are legal tender except at the Bank itself. Country notes are not a legal tender, although they are a good discharge for debts if not objected to at the time. No bank is allowed to issue notes which was not issuing the same prior to the 6th of May, 1844, and any bank discontinuing to issue them is not allowed to resume the issue. A bank-note being a promise to pay, it is obvious that no person will accept it from a banker unless he believes he will be able to get cash for it on demand. Notes are put into circulation either as payment for cheques or in exchange for gold, or in making advances.
The Bank of France, founded 1800, placed on a solid basis 1806, is a commercial enterprise. It receives deposits, discounts bills, and issues notes. It is next in importance and magnitude to the Bank of England, and has a capital of 182,000,000 francs. It has made large advances to Government. It also has the monopoly of the bank-note issue for the whole of France. It has many branches throughout the country. Discounts are very numerous. It will discount bills upon three responsible signatures, such bills not being drawn at more than three months. It lends money on stocks, railway shares, and pawns, and charges no commission for keeping accounts. In 1848 it suspended cash payments. In 1857, after the war with Russia, its capital was doubled. Its charter expires in 1897; the terms of renewal are now (1891) under discussion. The administration is vested in a council of 21 members, the governor and deputy-governor being appointed by the chief of the State.
The Imperial Bank of Germany was founded 1875 with a capital = £6,000,000 sterling, and an uncovered paper issue of 250,000,000 marks. This issue may be increased if one-third of such increase be represented by cash in hand, and two-thirds in bills not having more than three months to run. Thirty-two other banks were recognised with a right to issue 135,000,000 marks in notes of the Imperial Bank, which issue might be exceeded if excess be covered in cash and 5 per cent. interest per annum be paid on the excess amount. This bank acts gratuitously for the State, which participates in profits after a minimum of 4-1/2 per cent. has been paid to the shareholders.
The Bank of Russia was formed in 1856 after the costly Crimean war, with a capital of 25,000,000 roubles, supplied by Government. The capital and reserve of this bank is at the mercy of the State. It is well organised, but does not belong to itself. It has an inconvertible paper currency with no metallic reserve. It will discount bills with two signatures at six months' date.
The Austro-Hungarian Bank was founded in 1815, there being a deficiency in the exchequer owing to the war against France. It is the national bank. The capital, 110,000,000 florins, was supplied by the shareholders. It is very much hampered by loans to Government. The State does not participate in the profits. The governor is appointed by the Emperor. Although commissioned by Government this bank does not act for Government, which manages its own concerns like that of France.
The Bank of the Netherlands was founded in 1814 and issues notes, which privilege is exclusive. It has a president, secretary, and a commission to assist shareholders, and is sunported by the State.
The Bank of Belgium (1850) is a national bank with a capital of 50,000,000 francs. The Treasury takes three-quarters of the profits after 6 per cent. has been paid to the shareholders.
In the United States, Congress passed an Act 1863-4 in order to allow banking associations, termed National Banks, to issue notes in the various States to the extent of 300,000,000 dols. They were to deposit interest-bearing bonds with the Treasurer of the United States, in exchange for which notes were given to the extent of 90 per cent, of the value of the bonds, the remaining 10 per cent. was laid by as security for the repayment of the notes. The practical result is that the banking reserve is invested in the National Funds, and controlled by the Treasury instead of by the Bank of England as with us. A similar system exists in Argentina, but its abolition is now (1891) under discussion. The bank-note circulation in the United States is very extensive, some notes being for so small an amount as one dollar. Treasury notes are also issued against silver, for small amounts.
The Bank "Charter Act of 1844 had for its main object the control of the bank-note circulation. It arose in consequence of the excessive issue of bank-notes, and the drain of gold from the country. The object of Government was to restrict the country note issue as well as that of the Bank of England, and also to take the oontrol of the metallic reserve out of the hands of the directors.