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.





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