While bankers should not depend on the Bank of England, neither should they depend on the bill-brokers. A broker, as the name implies, is an intermediate party between the borrower and the lender. When money is abundant the bill-broker has large funds at his disposal, with which he will discount at a lower rate of interest than the bankers. When a pressure arrives, these funds are withdrawn, and his occupation is gone. Some bill-brokers have large capitals of their own, and take in deposits, repayable on demand; and to this extent they may be regarded as bankers. When money is abundant, sometimes cunning people, instead of going to their own bankers, will take their bills to the bill-brokers, who will discount them at a lower rate: and when the pressure arrives, and the brokers no longer discount, they think to return to their bankers. It is said that some country banks have occa-sionally adopted the same system. But it is clearly a bad system for any bank to adopt. A bank that is dependent on re-discount will most likely feel some inconvenience in a season of pressure, even when the bills are all undoubtedly good. But if the bank has, from a desire of making large profits, been induced in seasons of abundance to re-discount inferior bills, the results may be more serious. For in a season of pressure, a large portion of those bills will not be paid, and the bank will have to provide payments for its own indorsements, while its former channels of re-discount will be closed. All the joint-stock banks that stopped payment in 1847 had been accustomed to re-discount; and though some of them were unsound in other respects, yet the immediate cause of their stoppage was the inability to re-discount. We again refer to the proceedings of the Bank of Liverpool. "The manager stated that out of two small sums of £10,000 sent to London to the brokers only one had been done." - "We had then £100,000 at call with certain bill-brokers, who were unable, when applied to, to return us more than £25,000." The governor of the bank stated that the failure of the corn speculators caused the failure of an emment discount-broker having a large country connection; and this failure, by closing one of the principal channels of discount between the country and London, caused distrust to extend into the country.
1 Commons, 769, 3223-4, 3941-2, 4566, 5389.
Banks should not only avoid depending on the Bank of England, or on bill-brokers: they should also avoid depending on other banks. Some banks in manufacturing districts are in the habit of discounting with banks in agricultural districts. A very good practice, as we think. But the banks requiring the discount should always recollect that when a pressure arrives, the discounting bank may have other ways of employing its funds. Country banks, too, should not rely too much on their London agents. Some London bankers have, no doubt, immense power. At the same time, in seasons of pressure, they have immense claims upon them.1 If free from a run upon themselves, they will endeavour so to administer their funds as to afford reasonable assistance to all their connections. And no one connection should expect to receive more than this reasonable amount of assistance. But they may themselves be exposed to danger. The panic of 1847 was not a banking panic, but a commercial panic; and therefore the London bankers were comparatively free from molestation. The panic of 1825 commenced by the failure of a country bank. In such a case the London bankers could have rendered but little assistance to their country connections. It must be recollected that the Act of 1844 was suspended upon the application of the London bankers. The governor of the bank stated to the Committee of the House of Lords: "The London bankers and discount-brokers refused to grant the usual accommodation to their customers, and necessarily obliged every one requiring assistance to resort to the Bank of England."
1 Commons, 2344-8.
The most effectual way of acquiring this self-dependence that we have been recommending, is to call up an adequate amount of capital. During a pressure, as we have already said, a banker has three additional claims on his funds. In the first place, a large amount of his deposits may be withdrawn. Secondly, many of his customers, and some probably of the wealthiest, will require additional assistance, in the way of loans and discounts. And, thirdly, he will think it prudent to keep a larger sum in his till, to meet contingent demands. On the other hand, the bills he holds will not all of them be regularly paid; the temporary loans he has granted will have to be renewed; and should he call up any of his permanent or dead loans, it will resemble calling spirits from the deep. In this case he will find the benefit of a large capital; and it is only by means of a large capital that all these operations can be performed with comfort to himself and satisfaction to his customers. But if we increase our capitals to the full extent that may be required in seasons of pressure, we must not expect to pay high dividends. It is obvious that with the same extent of business, a bank with a large capital must pay a lower dividend than a bank with a small capital. It seems therefore likely that the average rate of banking profits will be reduced.
The fluctuations in the value of money produced by attempting to regulate the currency by the foreign exchanges are injurious to both the London and the country bankers. In seasons when money is abundant, the bankers obtain but a low rate of interest on their loans and discounts - and they are tempted to make imprudent investments in order to employ their funds. And when, on the other hand, money is scarce, the amount of their lodgments is reduced - the rate of interest allowed on the permanent deposits is advanced - a larger sum is kept unemployed in the till - and there is more danger from losses, either by the failure of parties in debt to the bank, or by the necessity of realizing Government securities. Those country bankers who are in the habit of re-discounting their bills in London are induced, when money is abundant, to carry this system to a great extent, because they can obtain money at 2 or 3 per cent. in London, and lend it in the country at 4 or 5 per cent. But when money becomes scarce they have to pay an exorbitant interest or are denied discounts altogether, and they are then compelled to refuse their customers their usual accommodation, and then great distress is occasioned in the provinces. Except under peculiar circumstances, both the extremes of abundance and scarcity of money are unfavourable to large banking profits. A state in which money is easy without being abundant, and valuable without being scarce, is the most conducive to the prosperity of both the banking and the commercial interests of the country.