Banking Department Of Bank Of England

The banking department is conducted on the same principles as those which govern the business of the joint stock and private banks. Here on the left-hand (or liability) side of its account we find an amount of "public deposits" consisting of the balances of the funds of the national exchequer, of the savings' banks, the deposits of the Commissioners of the National Debt, and the sums held for the payment of dividends on Government and other stocks which the Bank administers. The aggregate amount is stated in the return to be £7,639,534.1 There are included also "other deposits," amounting in the cited return to £44,292,844, and composed of the sums lodged with the Bank for security by its customers, and the cash balances which the banks of the kingdom retain with the Bank of England as constituting part of the entire national reserve. On the right-hand side, furnishing the assets2 which the Bank possesses to meet its liabilities, we perceive (besides Government securities) an item termed "other securities," which, though no description is furnished, are undoubtedly of the highest character;3 notes representing £26,564,120, and gold and silver coin amounting to £1,654,035. The notes here specified (sometimes termed Notes in Reserve, that is, not in the possession of the public) form part of the notes included in the issue department of £55,366,805. The notes in the banking department may clearly be regarded as equivalent to cash, since their convertibility is assured by the coin and bullion and securities which the issue department holds.

1 This amount can be increased (against securities) to the extent of two-thirds of any independent right of issue of notes possessed by other banks which may lapse from any cause from time to time. I understand that the authorised issue of notes of the banks which continue to exercise this privilege is about £5,000,000. When, accordingly, this right should completely bo abandoned, the Bank of England may augment its circulation of notes against securities to the limit of about £3,300,000. But any increase beyond this limit (when it comes into operation) is only allowable to the extent of an additional and equivalent amount of gold coin and bullion.

1The Bank, it will be remembered, receives the national revenue (for the Government) collected by the Customs and Excise officers; on the other hand, the disbursements which the Government has to make to the Army, Navy, and Civil Service are effected by cheques on the Bank; and, further, the payment of the interest upon the National Debt is also discharged (on behalf of the Government) by the Bank.

2Assets: from the Latin ad, to, and satis, enough, up to what is enough - substituted for the simple satis; the original meaning in law was that of a sufficient estate or effects (with which to discharge a debt or claim - to pay, for example, a testator's debts or legacies); it was then extended to any property or effects to be applied to the preceding purposes without regard to its sufficiency.

3 Besides the investments made by the Bank, this item includes the bills which have been discounted and the value of securities pledged for advances granted to customers.

The Active Circulation Of Notes

Here it may be remarked that what is termed the Active Circulation of Notes, - the amount of banknotes, that is to say, actually in the possession of the public and passing from hand to hand in the payment of debts - consists of the difference between the notes issued (£55,366,805) and the notes retained by the banking department (£26,564,120), or £28,802,685. In earlier times the extent of the active circulation was important in affording a measure of the volume of national commerce, since notes constituted a considerable portion of the currency employed in its conduct, but this significance is meagre now in consequence of the development of joint stock banking, whose cheques form the principal medium through which commercial and financial transactions are arranged.

The "Rest."

In the left hand (or liability) side of the banking department's account occurs an important item termed the Rest,1 and in the return under examination it amounted to £3,711,912, and represents the excess of the assets over the liabilities in the banking department.

The Rest is of the nature of a reserve fund, and consists of the accumulated and undivided profits realised during the past by banking operations. Its amount affords an index to the rate of dividend upon the bank's capital, which will probably be declared from time to time, since it is the traditional practice of the bank so to limit the dividend (which is provided from the Rest) that this fund shall never be reduced below £3,000,000.

1 Best: derived from the Latin ret back or behind, and stare, to stand: meaning that which remains or is left over. It is interesting to note that until 1722 the bank periodically divided the whole of its profits among its stockholders, and created no reserve for contingencies. Hence the dividend fluctuated widely, and varied from 18¼ per cent in 1706 to 6 per cent in 1722. Emergencies were then met by making calls upon the proprietors. But in 1722 a sounder policy prevailed, and the Rest was formed.

A practical caution is needed here. The Rest may be considered as the reserve held by the bank to the credit of the stockholders as a protecting fund for the subscribed capital, - an internal safeguard, so to speak; but it is totally distinct and different from the Reserve hereafter to be explained, which expresses the cash security for the fulfilment of our entire commercial and financial indebtedness, - furnishing, therefore, the external reserve or national protective fund.

The banking department differs in no way from ordinary banks in the conduct of its business; deposits are received for safe keeping from its customers (on which, however, unlike joint stock banks, no interest is allowed); advances are made upon securities, and bills of exchange are discounted.