War-Time Financial Problems Part 3

By some curious mental process the idea of a levy on capital has come into rapidly increasing prominence in the last few months, and seems to be gaining popularity in quarters where one would least expect it.

On the other hand, it is naturally arousing intense opposition, both among those who would be most closely affected by its imposition, and also among those who view with grave concern the possible and probable economic effects of such a system of dealing with the national debt. I say "dealing with the national debt" because, as will be clear, as a system of raising money for the war the suggestion of the levy on capital has little or nothing to recommend it. But, as will also be made clear, the proposal has been put forward as a thing to be done immediately in order to increase the funds in the hands of the Chancellor of the Exchequer to be spent on war purposes.

A levy on capital is, of course, merely a variation of the tax on property, which has long existed in the United States, and had been resorted to before now by Governments, of which the German Government is a leading example, in order to provide funds for a special emergency. This it can very easily do as long as the levy is not too high. If, for example, you tax a man to the extent of 1-1/2 per cent.

to 2 per cent. of the value of his property, on which he may be earning an average of 5 to 6 per cent. in interest, then the levy on capital becomes merely a form of income tax, a.s.sessed not according to the income of the taxpayer but according to the alleged value of his property. It is thus, again, a variation of the system long adopted in this country of a special rate of income tax on what is called "unearned" income, i.e. income from invested property. But it is only when one begins to adopt the broadminded views lately fas.h.i.+onable of the possibilities of a levy on capital and to talk of taking, say, 20 per cent. of the value of a man's property from him in the course of a year, that it becomes evident that he cannot be expected to pay anything like this sum, in cash, unless either a market is somehow provided--which seems difficult if all property owners at once are to be mulcted of a larger amount than their incomes--or unless the Government is prepared to accept part at least of the levy in the shape of property handed over at a valuation.

Before, however, we come to deal in detail with the difficulties and drawbacks of the suggestion, it may be interesting to trace the history of the movement in its favour, and to see some of the forms in which it has been put forward. It may be said that the ball was opened early last September when, in the _Daily News_ of the 8th of that month, its able and always interesting editor dealt in one of his illuminating Sat.u.r.day articles with the question of "How to Pay for the War." He began with the a.s.sumption that the capital of the individuals of the nation has increased during the war from 16,000 millions to 20,000 millions. A 10 per cent. levy on this, he proceeded, would realise 2000 millions. It would extinguish debt to that amount and reduce the interest on debt by 120 millions. The levy would be graduated--say, 5 per cent. on fortunes of 1000 to 20,000; 10 per cent. on 20,000 to 50,000; up to 30 per cent. on sums over 1,000,000; and the individual taxpayer was to pay the levy "in what form was convenient, in his stocks or his shares, his houses or his fields, in personalty or realty."

Just about the same time the _Round Table_, a quarterly magazine which is usually most illuminating on the subject of finance, chimed in with a more or less similar suggestion in an article on "Finance After the War." It remarked that the difficulty of applying a levy on capital is "probably not so great as appears at first sight." The total capital wealth of the community it estimated at about 24,000 millions sterling. To pay off a war debt of 3000 millions would therefore require a levy of one-eighth. Evidently this could not be raised in money, nor would it be necessary. Holders of War Loans would pay their proportion in a simple way by surrendering one-eighth of their scrip.

Holders of other forms of property would be a.s.sessed for one-eighth of its value and be called on to acquire and to surrender to the State the same amount of War Loan scrip. To do this, they would be obliged to realise a part of their property or to mortgage it, "but," added the _Round Table_ cheerfully, "there is no insuperable difficulty about that."

The first thing that strikes one when one examines these two schemes is the difference in their view concerning the amount of capital wealth available for taxation. Mr Gardiner made the comparatively modest estimate of 16,000 millions to 20,000 millions; the _Round Table_ plumps for 24,000 millions, and, incidentally, it may be remarked that some conservative estimates put it as low as 11,000 millions. Thus we have a possible range for the fancy of the scheme builder of from 11,000 to 24,000 millions in the property on which taxation is proposed to be levied. But it is when we come to the details of these schemes that the difficulties begin to glare. Mr Gardiner tells us that millionaires would pay up to 30 per cent. of their property, and that they would pay in what form was convenient, in houses, fields, etc., etc. But he does not explain by what principle the Government is to distribute among the holders of the debt, the repayment of whom is the object of the levy, the strange a.s.sortment of miscellaneous a.s.sets which it would thus collect from the property owners of the country.

In commenting on this scheme the _Economist_ of September 15th took the case of a man with a fortune of 100,000 invested before the war in a well-a.s.sorted list of securities, the whole of which he had, for patriotic reasons, converted during the war into War Loans. He would have no difficulty about paying his capital levy, for he would obviously surrender something between 10 and 20 per cent. of his holding. But, "in exchange for nearly two-thirds of the rest, he might find himself landed with houses and bits of land all over the country, a batch of unsaleable mining shares, a collection of blue china, a pearl necklace, a Chippendale sideboard, and a doubtful t.i.tian,"

The _Round Table's_ suggestion seems to be even more impracticable.

According to it, holders of all other forms of property besides War Loans would be a.s.sessed for one-eighth of its value--it does not explain how the value is to be arrived at, nor how long it would take to do it--and would then be called on to acquire and to surrender to the State the same amount of War Loan scrip. To do this they would be obliged to realise a part of their property or to mortgage it, a process which would seem likely to produce a pretty state of affairs in the property market; and a very pleasant state of affairs indeed would arise for the holders of War Loan scrip, since there would be a large crowd of compulsory buyers in the market from whom the holders would apparently be able to extort any price that they liked for their stock.

The next stage in the proceedings was a deputation to the Chancellor of the Exchequer, concerning which more anon, of leaders of various groups of the Labour Party, to press upon Mr Bonar Law the principle of what is called "the Conscription of Wealth," and the publication at or soon after that time, which was about the middle of November, of a pamphlet on the subject of the "Conscription of Riches," by the War Emergency Workers' National Committee, 1, Victoria Street, S.W. Among what this pamphlet describes as "the three practicable methods of conscripting wealth" No. 1 is as follows:--

A Capital Tax, on the lines of the present Death Duties, which are graduated from nothing (on estates under 300, and legacies under 20) up to about 20 per cent. (on very large estates left as legacies to strangers).

If a "Death Duty" at the existing rates were now levied simultaneously on every person in the kingdom possessing over 300 wealth (every person might be legally deemed to have died, and to be his own heir), it might yield to the Chancellor of the Exchequer about 900,000,000.

It would be necessary to offer a discount for payment in cash; and in order to avoid simultaneous forced sales, to accept, in lieu of cash, securities at a valuation; and to take mortgages on land.

Here it will be seen that the Emergency Workers had improved on the _Round Table_, and agreed with Mr Gardiner, by providing that the Government should take securities at a valuation and mortgages on land in lieu of cash in order to avoid simultaneous forced sales. But they do not seem to have perceived that, in so far as the Government took securities or accepted mortgages on land, it would not be getting money to pay for the war, which was the object of the proposed Conscription of Wealth, but would only be obtaining property from which the Government would in due course later on receive an income, probably averaging about one-twentieth of its value.

Perhaps, however, it would be more correct to say that those who put the scheme forward did not ignore this drawback to it, but rather liked it, for reasons quite irrelevant to the objects that they were apparently pursuing. A good deal of prominence was given about the same time to the question of a levy on capital in the _New Statesman_ well known to be the organ of Mr Sidney Webb and other members of the Fabian Society. These distinguished and very intellectual Socialists would, of course, be quite pleased if, in an apparent endeavour to pay for the war, they actually succeeded in securing, by the Government's acquisition of blocks of securities from property owners, that official control of industry and production which is the object of State Socialists.

It will be noted, however, in this scheme that no mention is made of any forms of property to be accepted by the Government in lieu of cash except securities and mortgages on land. Items such as furniture, books, pictures and jewellery are ignored, and in one of the articles in the _New Statesman_, discussing the question of a capital levy, it was distinctly suggested that these commodities should be left out of the scheme so as to save the trouble involved by valuation.

Unfortunately, if we leave out these forms of property the natural result is to stimulate the tendency, lately shown by an unfortunately large number of patriotic taxpayers, of putting money into pearl necklaces and other such gewgaws in order to avoid income tax. If by buying fur coats, old masters and diamond tiaras it will be be possible in future to avoid paying, not only income tax, but also a capital levy, it is to be feared that appeals to people to save their money and invest it in War Bonds are likely to be seriously interfered with.

Unfortunately, the _Statesman_ was able to announce that the appeal for this system of taxation had been received with a good deal of sympathy by the Chancellor of the Exchequer, and the next stage in the history of the agitation was the publication on Boxing Day in several of the daily papers of what appeared to be an official summary, issued through the Central News, of what the Chancellor had said to the deputation of Labour Leaders introduced by Mr Sidney Webb, which waited on him, as already described, in the middle of November. Having pointed out that he had never seen any proposal which seemed to him to be practicable for getting money during the war by conscripting wealth, Mr Bonar Law added that, though "perhaps he had not thought enough about it to justify him in saying so," his own feeling was that it would be better, both for the wealthy cla.s.ses and the country, to have this levy on capital, and reduce the burden of the national debt when the war was over. It need not be said that this statement by the Chancellor has been very far from helpful to the efforts of those who are trying to induce unthrifty citizens to save their money and put it into National War Bonds for the finance of the war.

"Why," people argue, "should we go out of our way to save and take these securities if, when the war is over, a large slice of our savings is to be taken away from us by means of this levy on capital?

If we had been doubting between the enjoyment of such comforts and luxuries as are possible in war-time and the austere duty of thrift, we shall naturally now choose the pleasanter path, spend our money on ourselves and on those who depend on us, instead of saving it up to be taken away again when the war is over, while those who have spent their money as they liked will be let off scot free." Certainly, it is much to be regretted that the Chancellor of the Exchequer should have let such a statement go forth, especially as he himself admits that perhaps he has not thought enough about it to justify him in saying so. If the Chancellor of the Exchequer has not time to think about what he is going to say to a Labour deputation which approaches him on an extremely important revolution in our fiscal system, it is surely high time that we should get one who has sufficient leisure to enable him to give his mind to problems of this sort when they are put before him.

In the course of this review of the forms in which suggestions for a levy on capital have been put forward, some of the difficulties and injustices inherent in it have already been pointed out. Its advocates seem as a rule to base the demand for it upon an a.s.sumption which involves a complete fallacy. This is that, since the conscription of life has been applied during the war, it is necessary that conscription of wealth should also be brought to bear in order to make the war sacrifice of all cla.s.ses equal. For instance, the Emergency Workers' pamphlet, quoted above, states that, "in view of the fact that the Government has not shrunk from Compulsory Conscription of Men," the Committee demands that "for all the future money required to carry on the war, the Government ought, in common fairness, to accompany the Conscription of Men by the Conscription of Wealth."

This contention seems to imply that the conscription of men and the conscription of wealth apply to two different cla.s.ses; in other words, that the owners of wealth have been able to avoid the conscription of men. This, of course, is absolutely untrue. The wealthiest and the poorest have to serve the country in the front line alike, if they are fit. The proportion of those who are fit is probably higher among the wealthy cla.s.ses, and, consequently, the conscription of men applies to them more severely. Again, the officers are largely drawn from the comparatively wealthy cla.s.ses, and it is pretty certain that the proportion of casualties among officers has been higher during the war than among the rank and file. Thus, as far as the conscription of men is concerned, the sacrifice imposed upon all cla.s.ses in the community is alike, or, if anything, presses rather more heavily upon those who own wealth. Conscription of wealth as well as conscription of life thus involves a double sacrifice to the owners of property.

This double sacrifice, in fact, the owners of property have, as is quite right, borne throughout the war by the much more rapid increase in direct taxation than in indirect. It is right that the owners of property should bear the heavier monetary burden of the war because they, having more to lose and therefore more to gain by a successful end of the war, should certainly pay a larger proportion of its cost.

It was also inevitable that they should do so because, when money is wanted for the war or any other purpose, it can only be taken in large amounts from those who have a surplus over what is needed to provide them with the necessaries and decencies of life. But the argument which puts forward a capital levy on the ground that the rich have been escaping war sacrifice is fallacious in itself, and is a wicked misrepresentation likely to embitter still further the bad feeling between cla.s.ses.

Nevertheless, Mr Bonar Law thinks that, since the cost of the war must inevitably fall chiefly upon the owners of property, and since it therefore becomes a question of expediency with them whether they should pay at once in the form of a capital levy or over a long series of years in increased taxation, he is inclined to think that the former method is one which would be most convenient to them and best for the country. This contention cannot be set aside lightly, and there can be no doubt that if, by making a dead lift, the wealthy cla.s.ses of the country could throw off their shoulders a large part of the burden of the war debt, such a scheme is well worth considering as long as it does not carry with it serious drawbacks.

It seems to me, however, that the drawbacks are very considerable.

In the first place, I have not seen any really practicable scheme of redeeming debt by means of a levy on capital In so far as the levy is paid in the form of surrendered War Loans, it is simple enough. In so far as it is paid in other securities or mortgages on land or other forms of property, it is difficult to see how the a.s.sets acquired by the State through the levy could be distributed among the debt holders whom it is proposed to pay off. Would they be forced to take securities, mortgages on land, furniture, etc., as the Government chose to distribute them, or would the Government have to nurse an enormous holding of various forms of property and gradually realise them and so pay off debt?

Again, a great injustice would surely be involved by laying the whole burden of this oppressive levy upon owners of acc.u.mulated property, so penalising those who save capital for the community and letting off those who squander their incomes. A characteristic argument on this point was provided by the _New Statesman_ in a recent issue. It argued that, because ordinary income tax would still be exacted, the contrast between the successful barrister with an Income of 20,000 a year and no savings, who would consequently escape the capital levy, and the poor clergyman who had saved 1000 and would consequently be liable to it, fell to the ground. In other words, because both lawyer and parson paid income tax, it was fair that the former should escape the capital levy while the latter should have to pay it!

But needs must when the devil drives, and in a crisis of this kind it is not always possible to look too closely into questions of equity in raising money. It is necessary, however, to look very closely into the probable economic effects of any suggested form of taxation, and, if we find that it is likely to diminish the future wealth production of the nation, to reject it, however attractive it may seem to be at first sight. A levy on capital which would certainly check the incentive to save, by the fear that, if such a thing were once successfully put through, it might very likely be repeated, would dry up the springs of that supply of capital which is absolutely essential to the increase of the nation's productive power. Moreover, business men who suddenly found themselves shorn of 10 to 20 per cent. of their available capital would find their ability to enter into fresh enterprise seriously diminished just at the very time when it is essential that all the organisers of production and commerce in this country should be most actively engaged in every possible form of enterprise, in order to make good the ravages of war.

VI

OUR BANKING MACHINERY

_February_, 1918

The Recent Amalgamations--Will the Provinces suffer?--Consolidation not a New Movement--The Figures of the Past Three Decades--Reduction of Compet.i.tion not yet a Danger--The Alleged Neglect of Local Interests--Shall we ultimately have One Huge Banking Monopoly?--The Suggested Repeal of the Bank Act--Sir E. Holden's Proposal.

Banking problems have lately loomed large in the financial landscape.

It will be remembered that about a year and a half ago a Committee was appointed to consider the creation of a new inst.i.tution specially adapted for financing overseas trade and for the encouragement of industrial and other ventures through their years of infancy, and that the charter which was finally granted to the British Trade Corporation, as this inst.i.tution was ultimately called, roused a great deal of opposition both on the part of banks and of traders who thought that a Government inst.i.tution with a monopoly character was going to cut into their business with the help of a Government subsidy. In fact, there was no subsidy at all in question, and the fears of the trading world of compet.i.tion on the part of the new chartered inst.i.tution only arose owing to its unfortunate name, which was given to it in order to allay the apprehensions of the banks which had been provoked by the t.i.tle originally designed for it, namely, the British Trade Bank. There seems no reason why this Company should not do good work for British trade without treading on the toes of anybody. Although naturally its activities cannot be developed on any substantial scale until the war is over, its Chairman a.s.sured the shareholders at the end of January that its preliminary spadework was being carefully attended to.

After this small storm in a teacup had died down those interested in our banking efficiency were again excited by the rapid progress made by the process of amalgamation among our great banks, which began to show acute activity again in the last months of 1917. The suddenly announced amalgamation of the London and South-Western and London and Provincial Banks led to a whole host of rumours as to other amalgamations which were to follow; and though most of these proved to be untrue a fresh sensation was aroused when the union was announced of the National Provincial Bank of England and the Union of London and Smith's Bank. All the old arguments were heard again on the subject of the objections, from the point of view of industry in the provinces, to the formation of great banking inst.i.tutions, with enormous figures on both sides of the balance-sheet, working from London, often, it was alleged, with no consideration for the needs of the provincial users of credit. These latest amalgamations, which have united banks which already had head offices in London, gave less cause than usual for these provincial apprehensions, which had far more solid reason behind them when purely provincial banks were amalgamated with inst.i.tutions whose head office was in London. Nevertheless, the argument was heard that the great size and scale on which these amalgamated banks were bound to work would necessarily make them more monopolistic and bureaucratic in their outlook, and less elastic and adaptable in their dealings with their local customers.

It seems to me that there is so far very little solid ground for any apprehension on the part of the business community that the recent development of banking evolution will tend to any damage to their interests. The banks have grown in size with the growth of industry.

As industry has tended more and more to be worked by big battalions, it became necessary to have banking inst.i.tutions with sufficiently large resources at their command to meet the great requirements of the huge industrial organisations that they had to serve. Nevertheless, the tendency towards fewer banks and bigger figures has grown with extraordinary celerity, as the following table shows:--

MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC., SINCE 1886.

December No. of Number of Capital Deposit and Total 31st Banks Branches Paid up Current Liabilities Accounts 1886 109 1,547 38,468,000 299,195,000 376,808,000 1891 106 2,245 43,406,000 391,842,000 486,632,000 1896 94 3,051 45,203,000 495,233,000 599,518,000 1901 74 3,935 46,631,000 584,841,000 698,150,000 1906 55 4,840 48,122,000 647,889,000 782,353,000 1911 44 5,417 47,265,000 748,641,000 885,069,000 1916 35 5,993 48,237,000 1,154,877,000 1,316,220,000

This table is taken from the annual banking numbers of the _Economist_. It will be noticed that in 1886 there were in England 109 joint-stock banks with 1547 offices, whose accounts were tabulated in the _Economist's_ annual review. Their total paid-up capital was 38-1/2 millions, their deposit and current accounts were just under 300 millions, and their total liabilities were 377 millions. In the course of thirty years the 109 banks had shrunk by the process of amalgamation and absorption to thirty-five, that is to say, they had been divided by three; the number of their offices, however, had been multiplied by nearly four, while their deposit accounts had grown from 300 millions to 1155, and their total liabilities from 377 to 1316 millions. By the amalgamations announced at the end of 1917, and that of the County of Westminster with Parr's announced on February 1st, the number of joint stock banks will be reduced to 32. The picture would be still more striking if the figures of the private banks were included, since their number has been reduced, since 1891, from 37 to 6. These figures are eloquent of the manner in which the number of individual banks has been reduced, while the extent of the banking accommodation given to the community has enormously grown, so that the power wielded by each individual bank has increased by the force of both these processes.

The consequent reduction in compet.i.tion which is causing some concern among the trading community has not, as it seems to me, gone far enough yet to be a serious danger. The idea that the big banks with offices in London give scant consideration to the needs of their local customers seems to be so contrary to the interests of the banks that they would be extraordinarily bad men of business if those who were responsible for their management allowed it to be the fact. It is probably nearer the truth that banking compet.i.tion in the provinces is still so keen that the London management is very careful not to allow anything like bureaucratic stiffness to get into the methods by which their business is managed. By the appointment of local committees they are careful to do all they can to see that the local interests get all the credit that is good for them. That local interests get as much credit as they want is probably very seldom the case, because it is a natural instinct on the part of an eager business man to want rather more credit than he ought to have, from a banking point of view.

Business interests, as long as they exist in private hands, will always want rather more credit than there is available, and it will always be the duty of the banker to ensure that the country's industry is kept on a sound basis by checking the tendency of the eager business man to undertake rather more than is good for him. From the sentimental point of view it is certainly a pity to have seen many of the picturesque old private banks extinguished, the partners in which were in close personal touch with their customers, and entered into the lives of the local communities in a manner which their modern counterpart is perhaps unable to do. Nevertheless, it is difficult to get away from the fact that if these inst.i.tutions had been as efficient and as well managed as their admirers depict them to have been they would hardly have been driven out of existence by the stress of modern developments and compet.i.tion. Whatever we may think of modern compet.i.tion, in certain of its aspects, we may at least be sure of this--that it does not destroy an inst.i.tution which is really wanted by the business community. And if the complaint of local interests is true, that they are swamped by the cosmopolitan aspirations of the great London offices, they always have it in their power to create an inst.i.tution of the kind that they want, and by giving it their business to ensure for it a prosperous career. As long as no such tendency is visible in the banking world we may be pretty sure that the views expressed concerning the neglect of local interests by the enormous banks which have grown up with London centres in the last thirty years is to a great extent a myth. It has now announced, however, that the whole problem involved by the amalgamation process is to be sifted by a committee to be appointed for this purpose.

Another apprehension has arisen in the minds of those who view with critical vigilance the present tendencies of business and the present development of economic opinion among a great section of the community. If, it is urged, the banks continue to swallow one another up by the process of amalgamation, how will this tendency end except in the creation of one huge bank working a gigantic money monopoly which the Socialistic tendencies of the present day will, with some reason, insist ought to be taken over by the State for the profit of the taxpayer? This view is frankly put forward by those advocates of a Socialistic organisation of society, who say that the modern tendency of industry towards combinations, rings and trusts is rapidly bringing the Socialistic millennium within their reach without any effort on the part of Socialistic preachers. They consider that the trust movement is doing the work of Socialism, much faster than Socialism could do it for itself; that, in short, as has been argued above in regard to banking, the tendency towards centralisation and the elimination of compet.i.tion can only end in the a.s.sumption by the State of the functions of industry and finance. If this should be so, the future is dark for those of us who believe that individual effort is the soul of industrial and financial progress, and that industry carried on by Government Departments, however efficient and economical it might be, would be such a deadly dull and unenterprising business that all the adaptability and tendency to variation in accordance with the needs of the moment, which are so strongly shown by individual enterprise, would be lost, to the great detriment of the material progress of mankind.

As things are at present, there is little need to fear that Socialistic organisation of industry could stand up against competent individual effort. Anybody who has ever had any business dealings with a Government Department will inevitably shudder when he tries to imagine how many forms would have to be filled up, how many divisions of the Department the inevitable ma.s.s of papers would have to go through, and how much delay and tedium would be involved before the simplest business proposition could be carried out. But, of course, it is argued by Socialists that Government Departments are only slow and tied up with red tape because they have so long been encouraged to do as little as possible, and that as soon as they are really urged to do things instead of pursuing a policy of masterly inactivity, there is no reason why they should not develop a prompt.i.tude and elasticity quite as great as that hitherto shown by the business community.

That such a development as this might take place in the course of generations n.o.body can deny; at present it must be admitted that with the great majority of men the money-making incentive is required to get the best out of them. If the process of education produces so great a change in the human spirit that men will work as well for the small salary of the Civil Service, with a K.C.B. thrown in, as they will now in order to gain the prizes of industry and finance, then perhaps, from the purely economic point of view, the Socialisation of banking may be justified. But we are a long way yet from any such achievement, and if it is the case that the rapid centralisation of banking power in comparatively few hands carries with it the danger of an attempt to nationalise a business which requires, above all, extreme adaptability and sensitiveness to the needs of the moment as they arise, this is certainly a danger which has to be carefully considered by those who are responsible for the development of these amalgamation processes.

And now another great stone has been thrown into the middle of the banking pond, causing an ever-widening circle of ripples and provoking the beginning of a discussion which is likely to be with us for some time to come. Sir Edward Holden, at the meeting of the London City and Midland Bank shareholders on January 29th, made an urgent demand for the immediate repeal of the Bank Act of 1844. This Act was pa.s.sed, as all men know, in order to restrict the creation of credit in the United Kingdom. In the early part of the last century the most important part of a bank's business consisted of the issue of notes, and banking had been carried on in a manner which the country considered unsatisfactory because banks had not paid sufficient attention to the proportion of cash that they ought to hold in their tills to meet notes if they were presented. Parliament in its wisdom consequently ordained that the amount of notes which the banks should be allowed to issue, except against actual metal in their vaults, should be fixed at the amount of their issue at that time. Above the limit so laid down any notes issued by the banks were to be backed by metal. In the case of the Bank of England the limit then established was 14,000,000, and it was enacted that if any note-issuing bank gave up its right to a note issue the Bank of England should be empowered to increase its power to issue notes against securities to the extent of two-thirds of the power enjoyed by the bank which was giving up its privilege. By this process the Bank of England's right to issue notes against securities, what is usually called its fiduciary issue, has risen to 18,450,000; above that limit every note issued by it has to be backed by bullion, and is actually backed by gold, though under the Act one-fifth might be in silver. It was thus antic.i.p.ated by the framers of the Act that in future any credit required by industry could only be granted by an increase in the gold held by the issuing banks. If the Act had fulfilled the antic.i.p.ations of the Parliament which pa.s.sed it, if English trade had grown to anything like the extent which it has done since, it could only have done so by the ama.s.sing of a mountain of gold, which would have lain in the vaults of the Bank of England.

Fortunately, however, the banking community had at its disposal a weapon of which it was already making considerable use, namely, the system of issuing credit by means of banking deposits operated on by cheques. Eight years before Peel's Act was pa.s.sed two Joint Stock Banks had been founded in London, although the Bank of England note-issuing monopoly still made it impossible for any Joint Stock Bank to issue notes in the London district. It is thus evident that deposit banking was already well founded as a profitable business when Peel, and Parliament behind him, thought that they could sufficiently regulate the country's banking system so long as they controlled the issue of notes by the Bank of England and other note-issuing banks. It is perhaps fortunate that Parliament made this mistake, and so enabled our banking machinery to develop by means of deposit banking, and so to ignore the hard-and-fast regulations laid upon it by Peel's Act.

This, at least, is what has happened; only in times of acute crisis have the strict regulations of Peel's Act caused any inconvenience, and when that inconvenience arose the Act has been suspended by the granting of a letter of indemnity from the Treasury to the Governor of the Bank.

Under Peel's Act the present rather anomalous form of the Bank of England's Weekly Return was also laid down. It shows, as all men know, two separate statements; one of the Issue Department and the other of the Banking Department. The Issue Department's statement shows the notes issued as a liability, and on the a.s.sets side Government debt and other securities (which are, in fact, also Government securities), amounting to 18,450,000 as allowed by the Act, and a balance of gold.

The Banking Department's statement shows capital, "Rest" or reserve fund, and deposits, public and other, among the liabilities, and on the other side of the account Government and other securities, all the notes issued by the Issue Department which are not in circulation, and a small amount of gold and silver which the Banking Department holds as till money.

Sir Edward Holden's proposal is that the Act should be repealed practically in accordance with the system which has been adopted by the German Reichsbank. The principles which he enumerates, as those on which other national banks of issue work, are as follows:--

1. One bank of issue, and not divided into departments.

2. Notes are created and issued on the security of bills of exchange and on the cash balance, so that a relation is established between the notes issued and the discounts.