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The English System








In the English system, the central bank is the Bank of England, with
the possible exception of a few private banks, the oldest financial
institution in the country. It is privately owned and privately
governed. Its board of directors, chosen by the stockholders, consists
of twenty-four persons, a portion of whom are practically life
members, being regularly reelected when their terms of office expire.
The others usually serve alternate years only, vacancies being filled
by promising young men selected from the business houses of London.
The oldest director is regularly elected to the office of governor of
the Bank, and the next oldest to that of deputy governor, both serving
two years, the deputy governor regularly succeeding to the office of
governor, and the ex-governors forming the life members of the board
and constituting a kind of advisory council to the governor, and known
as the Board of Treasury.

The head office of the Bank of England is in London, and there are
eleven branches, two in London and nine in the provinces. By a law
passed in 1844, the Bank was divided into two departments, called
respectively the banking and the issue departments, the latter having
exclusive charge of the issue of notes, and the former of all other
branches of the bank's business.

This same law prescribed the conditions under which notes could be
issued. It provided that the Bank of England might issue L14,500,000
of notes in exchange for securities, and any amount in addition in
exchange for an equal amount of coin or bullion. Additions to the
amount issued in exchange for securities might be made by order of the
government to the extent of two-thirds the amount of issues
relinquished by the other issuing banks, all such banks in existence
at the time the act was passed being permitted to retain, without
increasing, their existing issues. Most of these other issues having
been abandoned since 1844, the Bank of England is now permitted to
issue in exchange for securities L18,450,000. The securities against
which these issues are made were transferred to the issue department
by the banking department, and consist of the debt owed by the
government to the bank and of other government or governmentally
guaranteed securities. The issue department freely issues additional
notes in exchange for an equal amount of gold coin or bullion, and on
demand redeems notes in gold coin. Since the amount of notes all the
time outstanding greatly exceeds L18,450,000, the business of the
issue department is confined to the exchange of notes for gold coin
and bullion and the redemption of notes in gold.

The banking department receives and disburses the funds of the
government, manages the public debt, and serves as the government's
agent in most of its other financial operations; receives on deposit
from other financial institutions the money which comes into their
possession, and supplies them with such money funds as they need from
day to day in payment of checks drawn against their balances;
discounts bills of exchange with a minimum maturity of four, and in
exceptional cases six, months; and to a limited extent makes advances
on and invests in high-grade public and other securities. Besides the
English government and financial institutions, it has other customers,
but it is to be presumed that these are of a special character, since
the conditions under which it does business with private persons are
in most cases more onerous than those prescribed by other banks, and
consequently not attractive to the ordinary business man.

The so-called English Joint-Stock Banks are classified into three
groups, known as metropolitan, metropolitan and provincial, and
provincial banks. The metropolitan banks have their head offices in
London, and do not, as a rule, extend their branches beyond the
suburbs of the metropolis. The metropolitan and provincial banks have
their head offices in London and branches scattered throughout the
provinces, as well as in various parts of the city and suburbs, and
the provincial banks have their head offices in the larger provincial
cities, and each one confines its branches usually to the town and
country districts tributary to the city in which its head office is
situated. Often the provincial banks establish branches in London.

For banking purposes, these banks are the chief reliance of the
agriculture, industry, and commerce of the country, but competing with
and supplementing them are the bill brokers and discount houses, the
private banks, and the foreign and colonial banks. The bill brokers
and discount houses make a business of dealing in foreign and domestic
bills of exchange. They buy in the first instance a large percentage
of the bills brought to market, keep some of them until maturity, and
sell the remainder to the other banks, usually indorsing them first. A
large part of the capital employed in their business is obtained by
loans made from the other banks, subject to call and secured by the
bills they purchase deposited as collateral.

The private banks are the remnant left of the oldest group in the
country. There were private banks in London centuries before the Bank
of England was incorporated, and previous to 1826 the Bank of England
was their only competitor. Since 1844 their number has steadily
diminished. Those which remain have, as a rule, built up a special
constituency, to the special interests of which they cater. Among them
are strong institutions, but as a class their importance in the system
is not great, and is waning.

The foreign and colonial banks are branches of important institutions
in foreign countries and the English colonies which have a
considerable volume of business to transact in London. They serve as
intermediaries between their respective countries and the English
money market, and on account of the enormous volume of foreign
commerce which is financed in London, their number is large, and the
role they play on that market is important.

In the operation of this machinery, the most noteworthy features are
the reserve system, and the administration of the discount rate of the
Bank of England. There is no law on the English statute books
prescribing the amount of cash which banking or other financial
institutions shall keep in their vaults. The custom of these
institutions regarding that matter is to keep on hand relatively small
sums and to rely upon the Bank of England or some other London banking
house for the replenishment of their supply as needed. For this
purpose, London and many provincial banks keep balances with the Bank
of England, and other banks maintain balances with other London
institutions. These balances may be obtained by the deposit of coin or
Bank of England notes or by rediscounts. Another widely used resource
is the calling of loans made to bill brokers or discount houses. Such
loans or a considerable volume of bills of the kind discounted by the
Bank of England, or both, are regularly carried by London banks and
counted as a part of their reserves.

On account of these practices, surplus cash not needed in the conduct
of the current business of the country speedily finds its way into the
vaults of the Bank of England, and additional supplies, when needed,
come from this source. The administration of the cash reserves of the
country thus becomes one of the important duties of the Bank of
England, in the performance of which variation of the rate charged on
discounts is the most important device.

Many years' experience has enabled the Bank to determine with a
considerable degree of accuracy the volume of the demands for cash
likely to be made upon it from day to day, and consequently the amount
that it should keep on hand in the vaults. Whenever this amount
approaches the minimum regarded as consistent with safety, the
directors raise the rate of discount, and when the amount on hand
becomes excessive, they lower it. The efficiency of this procedure in
increasing the reserves in the one case and in decreasing them in the
other is due to certain conditions and practices which deserve
attention at this point.

Long-established custom has made the rate of interest paid on deposits
in London and other parts of England vary with the discount rate of
the Bank, and on this account the market rate of discount also varies
in the same manner. The Bank of England is thus ordinarily able to
regulate the market for commercial paper. Since paper payable in
London is a favorite form of investment for continental bankers, by
raising its rate of discount and with it the market rate above the
level of the rates of some or all of the continental centers, the
Bank of England is able to induce these bankers to send money to
London for investment and thereby to increase her reserves, and by
lowering its rate below the level of the rates in these continental
centers, she is able to induce them to sell some of the paper they
already hold, and thus to furnish a market for her surplus funds and
diminish her reserves.

On account of the readiness with which the international gold movement
responds to variations in the discount rate of the Bank of England,
the need for an elastic system of bank note issues is not felt in
England to the same extent as in other countries. It is this fact,
doubtless, which explains the retention to the present day of the
essentially inelastic bank note system created by the act of 1844.





Next: The French System

Previous: Common Features



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