1 The practice in this respect is changed now. Nearly all the London hankers keep an account at the Bank of England, or with a clearing banker, and the non-clearing banks pay all bills and cheques upon them by what is called a banker's payment, which is a draft upon a clearing banker, and is settled through the London Clearing House. This practice now renders it unnecessary for non-clearing banks to keep any unusual amount of cash in their tills.
To. resume: - After a banker has furnished his till, and supplied his customers with such loans and discounts as they may require, he has a surplus of cash. This surplus may be considered as being divided into two parts - though it is never actually so divided - the permanent surplus, which the banker is not likely to require, except in seasons of extreme pressure, and the temporary surplus, arising from fluctuations in the deposits. We shall now notice those modes of investment to which we have referred.
With regard to Government securities, we have high authority from the testimony of practical bankers. The following are quotations given before the Joint-Stock Bank Committee, in the year 1836, by the late Vincent Stuckey, Esq., the founder of Stuckey's Joint-Stock Banking Company, in Somersetshire, and the late James Marshall, Esq., the Secretary of the Provincial Bank of Ireland.
Mr. V. Stuckey: -
"What is your reason for keeping so large a sum in Government stock? - I have always found from my experience, except two days in my life, that I could get money more easily upon those securities than any other.
"Is it easier, in times of emergency, to obtain money on Government stock than on good mercantile bills? - I have always found it so.
"You do not concur with any witnesses who state that they have found good negotiable bills more easy to obtain money upon than Government stock? - No: I have never found that with a good bill, even of the house of Baring, I could get money more easily than on Government stock.
"Do you consider that, generally speaking, in London the rate of interest at which you borrow money on exchequer bills and stock is notoriously lower than that at which you borrow on bills of exchange? - Yes, it is lower, and for that reason we generally adopt it."
Mr. James Marshall: -
"Will you inform the Committee whether it is the usage of the Provincial Bank to invest any portion of its funds in the public securities? - It has been its uniform practice so to do.
"By public securities, what do you understand? - The
Consols, for instance: there are various kinds of Goveren-ment stock; exchequer bills, and Bank of England stock, are generally considered as a public sort of security.
"Do you hold stock in London only, or in Dublin as well as in London? - In Dublin but to a limited amount, because it is not easily convertible there.
"On what ground is it that it is not easily convertible m Dublin? - From the limited nature of the market as compared with London; we could not sell even an immaterial sum without lowering considerably the price.
"Have there not been at various times, from various causes, runs on the Provincial Bank, which rendered it necessary to supply large amounts of specie to that country? - There have, repeatedly.
"Do you consider, from your experience, that it would have been competent to the bank to have maintained its full security, with satisfaction to the directors, if they had not been possessed of very considerable funded property in this country? - Certainly not: speaking of the last run that happened, especially, I must say that that differed from any former run in this respect.
"You were conversant with the management of the Scotch banks prior to your connection with the Provincial Bank? - Yes.
"Is it not the usage of all the Scotch banks in like manner to maintain a very considerable portion of their funds invested in the Government securities? - I believe the practice with all is generally so, but I can speak particularly to that of the three oldest banks - as they are commonly called, the three chartered banks, - the Bank of Scotland was erected by Act of Parliament, the Royal Bank of Scotland and the British Linen Company were erected by charter, but have been recognized in the same way, so that there are three public banks in distinction to any of the subsequently-formed banks.1 I can state, from personal knowledge, that these banks have had always a very large sum indeed invested in the funded property of the kingdom.
"Do you consider it would be a safe system of banking, if the capital of the bank was altogether invested in commercial bills? - Certainly not."
Of the various kinds of Government stock, consols are the best, as there is a more ready market for this kind of stock, and money can usually be borrowed on them until the next account day: so that, if a banker has only a temporary demand for money, he may thus obtain it at a moderate interest, when, by selling his stock at that time, he might sustain loss. The Bank of England has recourse, sometimes, to this mode of strengthening its reserve.
Some bankers avoid all Government stock, and give a preference to exchequer bills.2 They have some advantages. As the Government must pay the amount demanded in March or June, when they become due, there can be no loss beyond the amount of the premium at which they were purchased.
Good commercial bills, of short dates, have this advantage over Government stock or exchequer bills, that a banker is sure to receive back the same amount of money which he advanced. He can calculate, too, upon the time the money will be received, and make his arrangements accordingly. And if unexpectedly he should want the money sooner, the bills can, in ordinary times, be redis-counted in the money market.3
1 The Commercial Bank of Scotland and the National Bank of Scotland are also Incorporated by Royal Charter.