With the Bank of England thus acting as a centre to the system, there has grown up around it a circle of the great joint stock banks, which provide credit and currency for commerce and finance by lending money and taking it on deposit, or on current account. These banks work under practically no legal restrictions of any kind with regard to the amount of cash that they hold, or the use that they make of the money that is entrusted to their keeping. They are not allowed, if they have an office in London, to issue notes at all, but in all other respects they are left free to conduct their business along the lines that experience has shown them to be most profitable to themselves, and most convenient for their customers. Being joint stock companies they have to publish periodically, for the information of their shareholders, a balance sheet showing their position. Before the war most of them published a monthly statement of their position, but this habit has lately been given up. No legal regulations guide them in the form or extent of the information that they give in their balance sheets, and their great success and solidity is a triumph of unfettered business freedom. This absence of restriction gives great elasticity and adaptability to the credit machinery of London. Here is a specimen of one of their balance sheets, slightly simplified, and dating from the days before the war:—

Liabilities


Capital (subscribed)   £14,000,000
                      ----------
Paid up                  3,500,000
Reserve                  4,000,000
Deposits                87,000,000
Circular Notes, etc.     3,000,000
Acceptances              6,000,000
Profit and loss            500,000
                     -----------
                    £104,000,000
                     -----------

Assets

Cash in hand and
at Bank of England   £12,500,000
Cash at call and
short notice          13,000,000
Bills discounted        19,000,000
Govt. Securities         5,000,000
Other Investments        4,500,000
Advances and loans      42,000,000
Liability of customers
on account of
Acceptances            6,000,000
Promises                 2,000,000
                     -----------
                    £104,000,000
                     -----------

On one side are the sums that the bank has received, in the shape of capital subscribed, from its shareholders, and in the shape of deposits from its customers, including Dr. Pillman and thousands like him; on the other the cash that it holds, in coin, notes and credit at the Bank of England, its cash lent at call or short notice to bill brokers (of whom more anon) and the Stock Exchange, the bills of exchange that it holds, its investments in British Government and other stocks, and the big item of loans and advances, through which it finances industry and commerce at home. It should be noted that the entry on the left side of the balance sheet, "Acceptances," refers to bills of exchange which the bank has accepted for merchants and manufacturers who are importing goods and raw material, and have instructed the foreign exporters to draw bills on their bankers. As these merchants and manufacturers are responsible to the bank for meeting the bills when they fall due, the acceptance item is balanced by an exactly equivalent entry on the other side, showing this liability of customers as an asset in the bank's favour.

This business of acceptance is done not only by the great banks, but also by a number of private firms with connections in foreign countries, and at home, through which they place their names and credit at the disposal of people less eminent for wealth and position, who pay them a commission for the use of them.

Other wheels in London's credit machinery are the London offices of colonial and foreign banks, and the bill brokers or discount houses which deal in bills of exchange and constitute the discount market. Thus we see that there is in London a highly specialized and elaborate machinery for making and dealing in these bills, which are the currency of international trade. Let us recapitulate the history of the bill and see the part contributed to its career by each wheel in the machine. We imagined a bill drawn by an Argentine seller against a cargo of wheat shipped to an English merchant. The bill will be drawn on a London accepting house, to whom the English merchant is liable for its due payment. The Argentine merchant, having drawn the bill, sells it to the Buenos Ayres branch of a South American bank, formed with English capital, and having its head office in London. It is shipped to London, to the head office of the South American bank, which presents it for acceptance to the accepting house on which it is drawn, and then sells it to a bill broker at the market rate of discount. If the bill is due three months after sight, and is for £2000, and the market rate of discount is 4 per cent. for three months' bills, the present value of the bill is obviously £1980. The bill broker, either at once or later, probably sells the bill to a bank, which holds it as an investment until its due date, by which time the importer having sold the wheat at a profit, pays the money required to meet the bill to his banker and the transaction is closed. Thus by means of the bill the exporter has received immediate payment for his wheat, the importing merchant has been supplied with credit for three months in which to bring home his profit, and the bank which bought the bill has provided itself with an investment such as bankers love, because it has to be met within a short period by a house of first-rate standing.

All this elaborate, but easily working machinery has grown up for the service of commerce. It is true that bills of exchange are often drawn by moneylenders abroad on moneylenders in England merely in order to raise credit, that is to say, to borrow money by means of the London discount market. Sometimes these credits are used for merely speculative purposes, but in the great majority of cases they are wanted for the furtherance of production in the borrowing country. The justification of the English accepting houses, and bill brokers, and banks (in so far as they engage in this business), is the fact that they are assisting trade, and could not live without trade, and that trade if deprived of their services would be gravely inconvenienced and could only resume its present activity by making a new machinery more or less on the same lines. The bill whose imaginary history has been traced, came into being because the drawer had a claim on England through a trade transaction. He was able to sell it to the South American bank only because the bank knew that many other people in Argentina would have to make payments to England and would come to it and ask it for drafts on London, which, by remitting this bill to be sold in London, it would be able to supply. International finance is so often regarded as a machinery by which paper wealth is manufactured out of nothing, that it is very important to remember that all this paper wealth only acquires value by being ultimately based on something that is grown or made and wanted to keep people alive or comfortable, or at least happy in the belief that they have got something that they thought they wanted, or which habit or convention obliged them to possess.