4. With regard to the Investments, a banker would inquire first, Are they safe? secondly, Are they convertible?
There seems no ground to question their safety - their convertibility is not so obvious. The Government stock,
Exchequer bills, and East India bonds, must be considered in ordinary times, and to a reasonable amount, as strictly convertible. But this is not the case with the Government annuities. They could not be sold in the market; and even by private negotiation few buyers would be found, except the insurance offices. Even with them the negotiations would probably occupy considerable time. As to the city bonds, railway bonds, and mortgages, they would in a season of pressure be altogether useless. It may be said, that the bank's capital being so large, a portion may, without inconvenience, be locked up in dead securities. This observation is valid to a certain extent, but not to an indefinite extent, and after giving it due weight, the amount thus invested seems too large.
The annuities form a large portion of the amount of the "Stock and annuities." The first is an annuity of £585,740, usually called the "Dead Weight," which commenced on the 5th of April, 1823, and is to continue for forty-four years from that time. Other annuities arose out of the Bank Charter Act of 1833. The Government were to pay to the bank one-fourth of the permanent debit of £14,686,830, amounting to £3,671,700. At first it was arranged that the bank should receive in payment of this sum, £4,000,000 3 per cent. reduced annuities; but it was afterwards changed to an annuity for twenty-six years, to expire in 1860, at the same time as the "Long Annuity."1
The plan of granting short loans was commenced in 1829, to obviate that tightness in the money market, which was felt for a month or six weeks before the payment of the dividends, through the gathering in of the taxes into the exchequer. The rate of interest charged was usually about one per cent. less than the discount charged on bills. The loans were repayable to the bank at about the time that the dividends were paid to the public. Notices were issued, stating the rate of interest, and the kind of securities on which loans would be made, and the time of repayment. The first notice was issued on the 3rd of December, 1829, and the practice continued until after the passing of the Act of 1844.
1 The "Long Annuity" and the "Dead Weight Annuity" expired respectively in 1860 and 1867.
Advances on deficiency bills are a kind of short loans made to the Government, whenever the taxes are less than sufficient to pay the public dividends. These advances seem to be very legitimate. The bank has one large customer. A customer who keeps large deposits will sometimes require large advances. These advances may per-adventure be wanted at a time when it may not be exactly convenient for the banker to make them. All large accounts may at times be attended with some inconvenience. But if a banker takes such accounts, he must make his arrangements accordingly. In the present case, the bank has the advantage of knowing, by the progress of the lodgments on the "Exchequer account," whether such advance is likely to be required.
When the Government requires these advances, the bank must either make them out of her reserve in the till, or sell public securities to obtain bank notes, or restrict her advances to other parties. It is peculiarly unfortunate that the Government is more likely to require these advances in seasons of pressure, inasmuch as in those seasons the taxes are usually less productive and are less punctually paid. Hence the bank may be called upon to make advances to Government at the same time that similar advances are required by the commercial classes. In some cases the bank might not have the means of making advances to both parties. Had the Government required such advances in October, 1847, the commercial distress must have been considerably increased.
5. The Reserve. - A practical banker would, at first sight, consider this reserve as too large. From the amount and character of the deposits it would not appear that so large a reserve was necessary, and a portion might well be employed in earning interest instead of lying unproductive in the till. But, before we condemn the bank directors, we must give this matter farther consideration. We have already stated that, even before the passing of the Act of 1844, the directors had been in the habit of issuing their notes against gold and silver bullion; and when a large amount of notes had been thus issued, the deposits in the bank were increased. Now, when this Act came into operation - August 31st, 1844 - the bank had in this way acquired a large amount of gold and silver bullion; indeed, it does not ever before appear to have had so large an amount in the whole course of its history. If we look to those years which preceded pressures (for in these years gold on hand is usually large), we shall find that in 1824 the amount was £13,810,080; in 1836, the highest quotation is £7,801,000; and in 1838, it is £10,126,000; but on the 7th of September, 1844, the amount returned in the issue department is, gold £12,657,208, and silver £1,694,087, while the sum of £9,032,790 was retained in the banking department. Notes of course had been issued against all this bullion, and the deposits in the bank had consequently increased "Well," it may be said, "this will account for the increase of the deposits, but not for the increase of the reserve. Why were not the deposits invested?" We will explain this. There are some classes of investments which the bank directors can make independently of other parties. For instance, they can purchase Government stock, exchequer bills, and railway bonds, just as they please. But, as we have stated, it is not prudent in a banker to invest the temporary increase of his deposits in this way, as, when the deposits are withdrawn, he may have to sell these securities at a lower price, and thus sustain loss. There are other classes of investments for which the bank is, to a certain extent, dependent on other parties; such, for example, as the discounting of bills and the granting of loans. The bank directors cannot invest their money in these ways unless there are parties willing to receive it Now, while a portion of the notes issued against gold and silver bullion are lodged with the bank in the form of deposits, another portion, and sometimes the largest portion, do not go into the bank, but are circulated among the public, and soon find their way into the hands of bankers, bill-brokers, and money-dealers, who from the abundance of money, will discount bills and grant short loans at a lower rate of interest than the bank. The bank will, therefore, have no farther applications. When its bills and loans fall due, they will be paid, and the amount will go to increase the reserve. Thus it appears that the notes which, in a favourable course of the foreign exchanges, are issued against gold and silver bullion, will tend in two ways to increase the bank reserve; first, by increasing the deposits, and secondly, by diminishing the securities. This will account for the large amount of the reserve. The rule formerly laid down by the directors was, that the reserve should be about one-third the amount of the deposits. It is now usually about 45 per cent.