The knowledge we have acquired of the working of the Act will tend to give additional force to these recommendations. The attention of practical bankers will also be called to other points besides those which are here named.
It will become a question with them to what extent they should continue to allow interest on their deposits. Some of the joint-stock banks in London allow interest on the minimum balance of a current account. Others allow interest only on deposit receipts. But most London bankers, whether private or joint-stock, allow interest on the daily balance to their country connections.1 In seasons of abundance, however, they usually limit the amount on which they allow interest, to prevent themselves being glutted with money from the country banks. But should the Act of 1844 produce those frequent alterations from abundance to pressure, and again from pressure to abundance, which we think it will produce, then it will become a matter of consideration how far the practice of allowing interest on deposits can be continued. It can never be worth a banker's while to allow interest on money which remains in his hands only so long as it cannot be employed, and is taken from him the moment it becomes valuable. During the year 1847 vast sums were withdrawn from both the London and the country bankers, not from any distrust of these bankers, but with a view to make more profitable investments. The rate of interest had been for some time previously very low. Consols had been at par; and when consols fell so low as to yield 3 1/2 per cent. interest, and the railway companies issued debentures bearing interest at 5 per cent., large sums were withdrawn from all the banks, as well as from the savings' banks, for the purpose of being invested in these securities. The bankers had no right to complain of this, as they were called upon only to fulfil their engagements; but they will probably be unwilling in future to allow interest on deposits of this description.
1 Since 1877 all the leading London bankers hare ceased to allow interest on current accounts, while continuing to allow it on deposit receipts or deposit accounts. The allowance of interest on the daily balances to country connections is now the exception rather than the rule.
Another circumstance which the operation of the Act of 1844 will lead practical bankers to reconsider, will be the extent to which they should invest their surplus funds in Government securities. Many bankers have considered it as a sound principle to invest a certain portion of their funds in Government securities. We have laid before our readers extracts from evidence given before parliamentary committees, in favour of this principle, and we expressed our own convictions respecting the same doctrine. But we must acknowledge the operation of the Act is sufficient to show that this principle should be acted upon with caution, and should be limited in its application. The Act will cause money to be alternately abundant and scarce. "When money is abundant, the funds are high; and when money is scarce, the funds are low. In seasons of abundance the banker will be full of deposits; in seasons of pressure his deposits will be withdrawn, and he will, moreover, be asked to assist his customers by farther advances. He will, therefore, always have occasion to sell out of the funds when the price is low, and thus he will sustain loss. It will, consequently, be his interest to employ his surplus funds in other investments, or even to keep his money unemployed in his till, rather than invest it in Government securities. His risk will be greater if the Act should be capriciously suspended. In October, 1847, several banks are said to have sold out of the funds only a few days before the appearance of the Government letter. After the issue of that letter the money was not wanted; but, as the funds immediately rose, the money could not be replaced but at considerable loss. The reports and proceedings of the joint-stock banks brought to light some transactions of this kind, and it is probable that the private banks sustained heavy losses by similar transactions.
Another lesson that will be more deeply impressed upon the minds of practical bankers, will be to conduct their establishments in such a way as to be self-dependent in seasons of pressure.
The events of the year 1847 are sufficient to show to what extent dependence can be placed on the Bank of England. Several of the directors complained that everybody looked for assistance to the Bank of England. No expectation could be more complimentary to the bank, nor show more strongly the confidence it had inspired under its previous government. In no preceding pressure had the bank refused assistance upon the ground that it was unable to grant it. But in former pressures there was no separation between the issuing and the banking departments. The bank's great strength lay in the power it possessed of expanding the circulation. That power was surrendered to the Act of 1844. The bank then became like "any other banking concern issuing Bank of England notes." Her locks are now shorn.1
The Bank of Liverpool had been one of the oldest and most respectable of the connections of the Bank of England. They had, from their commencement, never issued any but Bank of England notes, and had always a pretty large discount account with the branch at Liverpool. Yet, in the year 1847, their minute-book contains several entries similar to the following: - "The manager stated he had seen the agent of the branch bank this morning, and that he would not discount anything for us to-day." Even in the comparative light pressure of April, 1847, the bank suddenly restricted their discounts; and in October, 1847, they were quite unable to meet the public demand, although in some cases they lent consols instead of money. Indeed, it was because the means of the bank were unable to supply the demand for notes, that the Act of 1844 was suspended; yet the governor and all the other witnesses who supported the Act of 1844, stated their opinion that the pressure of 1847 was not so severe as some preceding pressures. How much sooner, then, would the means of the bank have been exhausted, if the pressure had equalled its predecessors in severity!