The chief characteristics of the English system date back to an act of Parliament passed in 1844. At that time the banking business of the country was conducted by the Bank of England and its branches, a number of joint-stock banks, and a still larger number of private institutions. The joint-stock banks were corporations of the modern sort, whose capital was represented by stock issues, and may be classified in two groups on the basis of the privileges they enjoyed. Those which were located in the city of London and within a radius of sixty-five miles of the capital were not permitted to issue notes, but were allowed to carry on all other banking operations. Those outside of the sixty-five-mile limit were not in any way restricted in their operations, and seventy-two of them were issuing notes at the time of the passage of the act of 1844. At the same time two hundred and seven private banks in addition to the Bank of England and its branches exercised the right of issue.
The note issues of these various institutions were entirely unregulated, and it was the belief of many of the statesmen of the period that to this fact was due the severe commercial crisis through which the country had recently passed. The primary purpose of the act of 1844 was to remedy this difficulty by prescribing an absolute limit to the quantity of notes that might be put into circulation. To this end it was thought desirable, so far as possible, to concentrate the right of issue in the Bank of England. One of the clauses of the act, therefore, prescribed that private and joint-stock banks should not in the future be permitted to extend their issues beyond the point at which they stood twelve weeks preceding April 27, 1844. It was further prescribed that in case any of these banks should at any time give up their right of issue, the government might allow the Bank of England to increase the quantity of notes based upon securities. Another clause of the act aimed at the regulation of the issues of this bank and its branches. For this purpose it provided for the organization of a banking department and an issue department. To the latter was assigned the exclusive work of issuing and redeeming notes. Against securities transferred to it by the banking department it was permitted to issue notes to the amount of £14,000,000, but beyond this limit it was compelled to keep pound for pound of gold coin or bullion in its vaults, and, on demand, it was obliged to redeem all notes in coin or bullion. So far as the public is concerned the effect of this The Chief Banking Systems of the World. 191 legislation is to make the issue department merely a means of exchanging coin for notes and vice versa.
To the banking department is left the transaction of all other kinds of business which naturally belong to a great banking institution. The act of 1844 contains no special regulations pertaining to this department of banking, whether carried on by the Bank of England or the joint-stock or private institutions. Indeed, like many other English institutions, the banks are regulated chiefly by unwritten laws which custom and business experience have imposed upon them.
The centre and controlling force of the English system is the Bank of England, the central office of which is located in the city of London, with branches scattered all over the kingdom. From the beginning of its history, in the closing years of the seventeenth century, to the present day, this institution has been in very intimate relations with the English government. It owes its origin to a loan which its stockholders made to William and Mary, in return for which the privilege of conducting a banking business was conferred upon them. The charter was granted for a limited number of years only, and on each occasion of its expiration the bank has been compelled to defend its privileges before Parliament in order to secure a renewal, and thus periodically to submit its affairs to the legislative department of the government for inspection and review. During the greater part of its history, also, the bank has served as the chief financial agent of the State, receiving on deposit and disbursing the funds of the government, and frequently accommodating it with loans. The negotiation of new bond issues, the payment of interest and annuities to bondholders, and indeed the general administration of the public debt is entrusted to it. The fact that the greater portion of its capital has from the beginning been invested in public securities has helped to bring its own interests and those of the government into harmony with reference to many important financial matters. This intimate connection with the State, on the one hand has given the bank a public character not possessed by any other similar English institution, and, on the other, enables the government to exert a controlling and restraining influence upon its conduct, and to come to its assistance in times of trouble. For example, during the great crises of 1847, '57, '66, and '73, when the cash reserve of the bank had fallen to so low a point as to threaten bankruptcy, the government suspended the act of 1844, and permitted it to issue notes beyond the limit fixed by that law; during the Napoleonic war she authorized, or rather compelled, the bank to suspend specie payments, and by a later act prescribed the date and the conditions for resumption.
The point of chief significance in connection with the relations of the Bank of England to the other banking institutions of the kingdom is the fact that the greater portion of their cash reserves is deposited in the London institution. The chief significance of this practice consists in the control which the bank thus gains over the metallic reserve of the entire country, and the danger to which, on this account, it is at times exposed. Whenever a new supply of coin enters the country from any source it speedily finds its way to the vaults of the bank, and, when a demand for gold for exportation or for use in the arts anywhere exists, it is speedily felt by the bank and results in a drain upon its cash reserve. Inasmuch as the extensive commercial connections of England in every part of the world have given the bank a dominant position in the conduct of foreign exchanges, it has The Chief Banking Systems of the World. 193 become the chief distributor of the precious metals for the entire world, and has thus acquired an influence which no other similar institution possesses, as well as a position of responsibility which exposes it to dangers from which less powerful institutions are exempt.
The banking system of England was the first to develop in Europe, and, with the possible exception of that of the United States, is the most extensive and highly developed one in existence. Some of its features have been copied in other countries, but most of them are incapable of application elsewhere, being essentially English in their character and deriving their strength from the peculiarities of the English nation. It is, therefore, a system very difficult to criticise. In most respects it works well in England, and can only be rightly judged in the light of English experience. The system of note issues is essentially inelastic. It was purposely made so by the authors of the act of 1844, whose minds were beclouded by the currency theory. It is interesting to observe that only bank-notes of large denominations are permitted, the smallest one issued being of the value of five pounds. Bank-notes thus play a relatively unimportant part in the English currency system. The total amount in circulation in April, 1900, was approximately £63,552,943, of which £48,271,530 were issued by the Bank of England. Of this total, £35,403,787 were represented by coin and bullion kept on hand in the tills of banks for their redemption, only £28,149,156 being issued against securities. It thus becomes evident that most of the bank-notes are simply substitutes for coin. The elastic part of the English currency system consists in its deposits, which in 1900 were estimated at the enormous figure of £500,000,000. For the same year the amount of gold in circulation was estimated at £92,460,000, and the amount of subsidiary silver at £22,380,000.