BANKING
During the last two hundred and fifty years there has arisen, among other modern economic institutions, the institution of Banking.
It has origins much older; indeed, people did something of the kind at all times, but Banking as a fully developed institution grew up in this comparatively short time: since the middle of the seventeenth century. It began in Holland and England and spread to other countries.
Like other modern institutions, it only became really important in the latter half of this period, that is, during the last hundred years or so; quite recently—in the last fifty years—it has become of such supreme importance by the mastery it has got over the whole commonwealth that everybody ought to try to understand its character. The Power of the Banks comes to-day into the lives of all of us and largely affects the relations between different nations. Indeed, it has become so powerful quite lately that one of the principal things we have to watch in politics is the enmity which the power of the Banks has aroused and the way in which that power is being attacked.
The essential of banking lies in these two combined ideas: (1) that a man will leave his money in custody of another man when that other man has better opportunities for keeping it safe than he has; (2) that the money so left in custody may be used by the custodian of the money without the real owner being very anxious what is being done with it, so long as he is certain to get it when he wants it.
The putting together of these two ideas—which are ideas naturally arising in everybody’s mind—is the origin of all banking, and the moral basis upon which banking reposes.
A man has £1,000 in gold. He has to travel or to go abroad on a war, or is not certain of the safety of so large a sum if it is kept in his house. He therefore gives it into the custody of a man whom he can trust, and who, on account of special circumstances, can keep it more securely than he himself can. What the owner of the £1,000 wants in the transaction is to be certain of getting a part or the whole of his money whenever he may need it. He does not want the individual pieces of money. So long as he can get the value of them or of part of them at any moment from the man to whom he gave custody of the original sum he is satisfied.
A good many other people feel the same necessity. The man who has special opportunities for looking after all their sums of money collects them together and has them in his strong box in safe keeping. Those who have acted thus would be very angry if they found their money had been lost, or that when they came to ask for £20 or £100 out of their thousand pounds—needing such a sum for the transactions of the moment—the man in whose custody the whole lay was unable to let them have the £20 or £100 required. But so long as the depositor (as he is called, that is, the man who hands over his money for safe custody) finds himself, in practice, always getting the whole or any part of his deposit on demand, he is content; and will not be annoyed to find that the person in whose custody he left the money has been using it in the meantime.
For instance: I might leave £1,000 in gold in the custody of someone who is better able than I to prevent its being stolen. I am saved all the trouble of looking after it, and I can call on a part of it or all of it whenever I like. If there were only myself leaving it thus with one friend, and it was a particular transaction between us two, that friend would be acting wrongly if he were to take my £1,000 and buy a ship with it, say, and do trade. No doubt he would earn a profit, and could say to me when I came back for £100 of it: “I am sorry that I cannot give you your £100, but I have used the money, without telling you, to buy a ship. The ship will earn a profit of £200 at the end of the year, and then you can have back your £100 if you like, and if you press me, I will even sell the ship and you shall have back the whole of your £1,000.”
In that case I should naturally answer: “No one gave you leave to use my money. You have embezzled it, and you have acted like a thief.”
But when a very great number of men entrust their money in this fashion, and do not specially stipulate that it should be left untouched, when there is a sort of silent understanding that, if whenever they want it, the money will be forthcoming, then they do not ask too closely what has been done with the whole of the sum in the custodian’s hands. For if very many people are thus “banking” their money with one safe custodian only a certain proportion will at any one time want their money, and the rest can be used without danger of the “banker’s” failing to meet any particular demand. Thus banking, that is, the use of other peoples’ money, arises and becomes a natural process because it is of mutual advantage. The Banker can earn profits with that average amount of money which always remains in his hands, the depositors have their money safely looked after and may even share in the profit.
A hundred men, let us say, have given £1,000 each into the hands of such a custodian, who has come to be called their “Banker.” The total sum of money in this man’s hands is £100,000. It is found in practice, over the average of a number of years, that this hundred men do not “draw” upon (that is, ask for their money to be paid out to them by) their banker more than to the extent of, let us say, £100 every month each, and it is also found that, while they need this £100 to pay wages or bills or what not, they also come back with the money they earn (say, £120 per month, on the average) and give it back to their banker for safe keeping. In several years of this practice the banker discovers that he must have about 100 times £100, that is £10,000, in free cash to meet the demands upon him, and that he gets rather more put into his custody in the same period of a month, year in and year out. It follows that he always has about £90,000 in gold doing nothing the whole time. He says to himself: “Why should I not use this money to buy instruments of production—ships or ploughs, or machinery or what not—and produce more wealth? It will not hurt those who have deposited it with me, for I have found that, on the average, they never want more than a tenth of their money out at the same time (and they are also perpetually paying in more money to me—so that they and I are quite safe), and if I make a good profit by the use of the things I shall have bought with this £90,000 I can offer them part of the profit. So we are both benefited.”
That is what the banker began by doing at the very origins of this institution of banking. It was a little odd. It was not quite straightforward. But the depositors, most of them, knew what was going on, and at any rate did not protest. And if, when a profit was made out of their combined money, they got some of that profit, they were glad enough to see that their money had been put to some use and that they had become richer by its use; while if they had kept it to themselves in scattered small amounts it would not have made them any richer.
In England we can trace the origins of a great many banks, and of the fortunes of their owners, proceeding along these lines. For instance: there was a family of silversmiths rather more than two hundred years ago. They had a shop in which silver objects were bought and sold, and they also had gold plate to buy and sell. They had strong-boxes in which these things were kept, and they paid money to men who guarded these strong-boxes. It was a natural thing for people to go to this shop and say: “I have here a thousand pounds in gold which is not very safe at home. Will you look after it for me, on condition of course that I may call for any amount of it when I want it and what will you charge for your trouble?” The silversmiths said: “Yes, we will do this, we will charge nothing,” and in that way they got hold of very large sums which people left with them. They found, as we have just seen, that in practice, year after year, only a certain amount of the sums were required of them at any one time, and rather than leave the big balance lying idle they used it for buying useful things which would produce more wealth. They lent the money sometimes to the State for its purposes, that is, to the King of the time. Sometimes they employed it in other ways which earned a profit. The people who left the money with them always found that they could get back whatever they wanted when they asked for it, and they were content. That is how banking arose.
Another example of which I know the history and which is very interesting is that of a squire in the West of England who lived rather less than two hundred years ago and has given his name to one of our great banks still existing to-day. This squire was a rich man who had many friends coming to his table. He had the reputation of good judgment and his friends would say: “I will leave this sum of money in your custody,” for they knew that he would be able to put it to good use and give them part of the profit. Thus, looking after the money of neighbours, he came to look after the money of a great many people whom his neighbours recommended, and at last had hundreds of “clients,” as the phrase went—that is, of people who would leave their money with him, knowing that he would earn a profit both for himself and for them; at the same time the money would be safely kept, and they might call for a portion of it whenever they wanted it.
From such origins the banking system gradually extended until, about a hundred years ago, or rather more, every rich family in this country had a considerable sum of money left at a bank, and paid into the banker’s coffers further sums of money which they received. Each had a book of accounts with the bank showing exactly how much had been put in and therefore how much they could “draw” upon. At first the clients, or depositors, would “draw” some portion of their money which they might immediately need by way of a letter. Thus, if their banker’s name was Mr. Smith, they would write this note: “To Mr. Smith. Please pay my servant who brings this letter £20 out of the £1,000 which I left with you the other day.” They would sign this letter and send the servant with it; the banker would give the £20 to the servant and the servant would give a receipt against it.
That was the origin of what are nowadays called “cheques.” The letter giving authority for the messenger to draw the money grew more and more formal and was drawn up more and more in the same terms to save trouble. Then the bankers would have the forms printed, so that the client who wanted to draw would have the least possible trouble. If you look at a cheque to-day you will see that it is nothing but the old letter put into the simplest terms. At the head of the cheque is the name of the bank; then there is the word “Pay,” and after that the client adds the sum which he wants paid and signs his name to prove that it is really he who is entitled to have the sum and who is asking for it. The words “or bearer” are sometimes printed after the word “Pay,” so that anyone bringing the cheque for the client can get the money for him.
But to prevent people using these pieces of paper to get money without having the right to it the word “order” was more often substituted for the word “bearer”; and this word “order” means that the owner, who is drawing his money out, says: “Do not pay it to me; pay it to this other person whom I desire to receive the money and whose name I have mentioned above, who will sign to show that his order for payment has been met.”
For instance: I have £1,000 deposited with my banker, Mr. Smith. I write a letter: “Pay £20 to John Jones or order.” This means: “Do not, dear Mr. Smith, send the money back to me, but give it to Mr. Jones who will bring this letter with him, or, if he cannot come himself, will send a signed letter order that it should be paid to him.” At the beginning of the system, Mr. Jones, to whom I gave the cheque, would write a little letter saying: “Dear Mr. Smith, Mr. So-and-So, who banks with you, has given me the accompanying letter by which I can get £20 of his by my order. I therefore send you this letter to tell you that whoever brings this cheque bears my order to give the money to him.” He signs the letter “John Jones” and the banker hands over the money to whomever it may be that brings the letter for John Jones.
In process of time the thing was simplified. In place of the letter came the shortened form, the cheque, and you wrote: “Pay £20 to John Jones or order,” and John Jones, instead of sending a letter signed by himself, merely put his signature at the back of the cheque. This was called “endorsement,” which is a Latin form of the English meaning “putting one’s name on the back of anything.” A cheque “endorsed” with the name “John Jones,” that is, with John Jones’s name signed on the back of it, was paid by the bank to whomever John Jones might send to receive the payment. My cheque asking for £20 to be paid to John Jones having fulfilled its object, and the £20 being paid to whomever John Jones had sent after he had “endorsed” that cheque, the cheque was said to have been “honoured” by the bank. The word “honoured” meant that the bank had admitted that I had the money banked with them, and that they were bound to hand it over on seeing my signature asking that it should be handed over.
The convenience of cheques used in this way for business was obvious. If I owed a man £20 and I had £1,000 with my banker, instead of having to draw out twenty sovereigns myself and take them to him, all I had to do was to write out a cheque to the order of this man, who would endorse it and get the money.
Now as banking grew and came to deal with more and more people, it was probable that this man, Jones, would have a banking account too with somebody. If Mr. Smith was not his banker, then Mr. Brown would be. As we have seen, people not only drew out money from the original sum they had deposited at the bank, they also paid in money as they got it, on account of the convenience of having it looked after safely. So when John Jones got my cheque for £20, he often did not get the actual cash from my banker, Mr. Smith, but simply gave in the cheque, endorsed by him, to Mr. Brown, his banker, and said: “Get this from Mr. Smith, the other banker, and add it to the sum which I have banked with you, Mr. Brown.” The banker Brown did this, and the cheque which I had originally signed in favour of John Jones, having gone the rounds, was sent back to me to prove that the transaction was complete.
As banking continued to grow this system took on a vast extension. Thousands and thousands of people paid, and were paid, by cheques, of which only a small part were turned into cash, and of which much the greater part were paid into the bankers’ offices and then settled by the bankers among themselves.
After many years of this system it became apparent that the enormous transactions, thousands of cheques all crossing each other daily in hundreds of ways, could be simplified by the establishment of what came to be called the “Clearing House.”
Thus, suppose three bankers—Mr. Smith, Mr. Brown and Mr. Robinson. I bank with Mr. Smith, and sign a cheque in favour of Mr. Jones who banks with Mr. Brown, because I owe Jones a bill which I can thus pay. I also sign a cheque in favour of Mr. Harding (that is, to the order of Mr. Harding), to whom I also owe money. He banks with Mr. Robinson. Meanwhile Harding perhaps owes money to Jones and pays him a cheque ordering Mr. Robinson (Harding’s banker) to pay Jones a sum of money. Jones hands this over to his banker, Mr. Brown. At the end of a certain time—say, a month—the three bankers, Smith, Brown and Robinson, get together and compare the various cheques they have received. It is obvious that a great many will cancel out.
For instance: I have given Jones a cheque for £20 which Mr. Smith, my banker, has to pay to Mr. Brown, Jones’s banker. But Mr. Brown has a cheque of Mr. Harding’s asking Mr. Robinson to pay £20 to Jones, and Jones has given that to Brown too. Meanwhile Jones has given me a cheque later on, for something which he owed me, of £10. The bankers compare notes and see that Smith need not pay £20 to Brown, and then ask Brown for £10. It is simpler to pay the difference only. Mr. Smith hands to Mr. Brown what is called the “balance.” The difference between £10 and £20 is £10, and Brown hands over £10 to Smith. At the end of another month perhaps it is Robinson, Harding’s banker, who finds that on comparing notes he has a balance against him of £10 to Brown: and so on.
When dozens of bankers came to be established with thousands of clients, or “depositors,” the convenience of this system was overwhelming. There would perhaps be in a week as many as 10,000 cheques out, and instead of having to make 10,000 separate transactions of paying from Brown to Smith, Smith to Robinson, Robinson back to Brown, and so on, through dozens of bankers, the cheques were compared and only the balances were paid over—or, as the phrase goes, “cleared.”
The Clearing House was the place where all the cheques of different banks were put in at regular intervals and compared one with another, so as to see what balances remained over, owing by particular bankers to others.
Meanwhile, as the banking system grew, most of the ready money in the community came into the hands of the bankers. There was a perpetual coming and going, and paying in and paying out, but there was always among the bankers as a community a very large sum of money lying untouched, a sort of reservoir. It was nearly always very much more than two-thirds of the whole amount which the banks could be called on to pay. That is, the depositors never wanted a third of their deposits out at any one time. The art of a banker, therefore, consisted in knowing how to purchase with this idle money left in their hands fruitful objects for producing future wealth, in other words, “investing” it in “capital enterprises,” but always prudently keeping a large reserve ready to meet any demands which their depositors might suddenly make upon them.
So far so good. The banking system up to this point in its development was an advantage to the community and to individuals. It enabled a large number of small sums which could not be used very well separately to be collected together for big enterprises.
A thousand people, depositing a thousand pounds each, left a million pounds in the hands of the bankers, of which much more than half a million could be used at any time for “development,” that is, for buying instruments with which to develop natural resources. The nation would be richer if a deep shaft were sunk and coal were got out of the earth, but it would cost half a million to make that mine. No one of the thousand small depositors could have undertaken such a task: the bank, using all their monies together, could undertake it—and did so.
The banking system thus rapidly increased the wealth of the country, and that was all to the good. People meanwhile felt their money to be secure, and they had the great advantage of being able to draw cheques for payments they had to make to those to whom they owed money, and of receiving cheques for money due to them instead of perpetually handling and carrying about large sums in metal—the whole passing through the bank and helping to keep this reservoir of wealth perpetually filled and available for use in investment.
That state of affairs lasted to within the memory of men now living, and, as I have said, the banking system during that time was an advantage to everybody. There was nothing to be said against it.
But then came (as there comes upon every human institution after a certain time) a further phase of development, in which the institution of banking produced certain perils and evils. Those perils and evils are increasing, and are producing the antagonism to the banks and to their power which everybody is beginning to express to-day, all over Europe and America, and which we must understand if we are to follow modern political economy. I will show you how these evils in the Banking system arose.
A man having £1,000 in the bank could draw upon it up to the total amount. He could sign a cheque for £100 and then for £500 (making £600) and then for another £400. Supposing he put nothing in during that time, he would have exhausted the whole of what he had in his bank; he would have come to an end of what is called, in the terms of banking, his “balance.” There, you might think, was an end of his power to draw cheques. He had got back all his money, so the bank and he had nothing more to do with each other. At first, of course, that was the regular state of affairs. A man could draw out all that he had in the bank, but no more. It seems common sense.
But the banks had plenty of other people’s money lying about which had not been drawn out, and much of which had not yet been invested in capital enterprises, such as mining, or what not. They would say to the man who had once put £1,000 into their hands and who had now drawn it all out: “You still want to carry on your business; but you have exhausted all the money you had with us. You will probably want to borrow some money to tide you over until the time when further sums begin to come in to you through what you sell in your business. We are prepared to lend you money out of what we have to use from other people’s deposits. You will pay a certain ‘interest’ upon it (that is, so much a year on each hundred pounds we lend you—say £5 a year for every £100), and you shall pay us back when you can.” The bank accompanied this offer with the right to draw further cheques to, say, another thousand pounds, which the bank would “honour”—that is, for which the bank would pay out money which did not really belong to their client but was lent to him by the bank out of other people’s balances. And this extra amount, which the bank thus allowed their client over and beyond what was his own money was, and is, called an “over-draft.”
At first, before the banks would allow anybody an “over-draft” (that is, a loan), they required the borrower to give security. He had to leave with them gold or silver plate or a mortgage upon his land, so that if, in the long run, he found himself unable to pay back, the banker, could sell the security and recoup himself.
But it was obviously convenient and useful when a client was in a big way of business to grant him an “over-draft” from time to time although he had no security to offer. The bank said to itself: “Here is a merchant making very large profits every year. It takes him some time to get his money in from the foreigners to whom he sells goods oversea, but he is bound to get it sooner or later. So, without asking him for any security (for perhaps he has no plate or title deeds or what not to give), it is still well worth our while to let him have an over-draft (that is, a loan) out of the other people’s money. He will pay us interest upon it, we shall make a profit, and when the foreigners pay him he will be able to pay us back.”
In this way the banks became on all sides lenders of money to persons without security, and it became exceedingly important to any trader whether he could or could not get the banks to back him up in this fashion.
The thing went farther. A man might have no capital at all, but a good idea. He might have discovered, for instance, a mine of copper-ore in some colony. He would come to the banks and say: “I have not the money to pay labourers to dig for this ore, but if you will advance the money to me and go shares in the profit the ore can be got out.” The banks would look at the “proposition,” as it is called, and if they thought it a good thing they would advance the money and share the subsequent profits with the borrower. All over the world the banks were thus “financing,” as it is called, every kind of enterprise.
The system went farther still—and here it is that we come upon the modern trouble. Hitherto when they gave an over-draft to anybody, whether with or without security, or even when they gave a loan to a man who had no capital at all, and “backed” him in his enterprise which they thought likely to prove successful, they had used the money which other clients had left with them. But it occurred to the banks after a certain time that there was no need to use anybody else’s money at all. They could themselves offer to honour the cheques of the man to whom they lent the money, without having any real money with which to pay those cheques.
Why was this? It was because, with the growth of the banking system, hardly any of the payments were, by this time, actually made in gold. Real money only passed in a very small degree. Of the myriad transactions all but a tiny proportion were “instruments of credit.” Just as a bank-note issued by the Bank of England is a promise to pay in gold, and yet a promise to pay a million pounds in bank-notes could always be made with much less than a million real pounds to redeem the notes so the banks could create paper money, or its equivalent, in the form of over-drafts. If they said to a man who had no money deposited with them: “We will honour your cheques up to £1,000” what they were really doing was increasing the paper currency to the extent of £1,000. They were issuing promises to pay, exactly like bank-notes, knowing that of the total amount out only a small proportion at any moment would be required in real money.
There was a check on this system of creating new artificial paper money by the banks (for this is what it came to), and the check consisted in the control of the Government over the National Bank—in England the Bank of England. There was a law preventing the Bank of England from issuing more than a certain number of notes in proportion to the gold lying behind them, and the private banks could not issue over-drafts, or loans, indefinitely, because they could not get more than a certain amount of paper money from the Bank of England to meet the payments they had to make, and the Bank, in its turn, could not issue more than a certain proportion of paper money against its gold.
So ultimately the amount of real money, the gold, in the hands of the banks, both national and private, acted as a check upon this creation of false money by the banks. But when gold payments ceased with the Great War that check broke down, and even if gold payments had not ceased, the power of the banks thus to “create” as it is called,—in other words, their power to say to any individual enterprise: “You shall or you shall not have your cheques honoured: you shall or you shall not carry on”—gave them an immense and increasing power over the community.
That is why the revolt against the banking system and its control over our lives in the modern state since the war is becoming so formidable.
It has two chief forms against which men protest.
1. The bankers can decide, of two competitors, which shall survive. As the great majority of enterprises lie in debt to the banks—that is, carrying on with loans allowed them by the banks working with money made by the banks—any one of two competing industries can be killed by the bankers saying: “I will no longer lend you this money. I ‘call it in’—that is, ask for it to be paid at once. But I will not exercise the same pressure upon the man who is competing against you.” This power makes the banks the masters of the greater part of modern industry. It is argued that the banks do not act from caprice, and will naturally only back a sound enterprise and only ruin an unsound one. That is, on the whole, true. But still, those who command them have the power, if they like, to act from caprice, and whenever you give a few human beings great power of this sort over millions of others it tends to be abused.
2. The banks, especially in England, are all in one combination and keep detailed information upon all of us. Not only have they control over industry through their power to make or withhold the money which they alone can now create and hand out to those they favour, but they also keep indexes of detailed information as thorough and widespread as those of any Government office. They have a secret service more widespread and powerful than that of the State, and this hidden power of theirs, though private and concealed knowledge, irritates plain men more and more. People feel that they are not free, and that the banking system, which is international in essence, is a universal and hidden master.
Therefore all over the world to-day people are saying: “The banking system, and the few men who direct it, are altogether too powerful. They control our lives. They are beginning to control the public policy of the State, especially in England, and there ought to be a national authority superior to them and keeping them in order.”
A great many schemes have lately been on all sides proposed to establish such a superior authority. Thus, we have in England a very powerful movement in favour of what is called the “Douglas Scheme of Credit,” and of course the Socialists, with their ideas of State control of everything, would also put an end to the private power of the banking system. Then there are those who want to have a strong King who would be able to override any lesser power in the State, including the bankers.5 But the points to seize in understanding the political economy of our time are those I have just been describing to you: what the banking system is, how it arose, how unnaturally powerful it has become, and why a universal revolt is arising against it.
There will be a struggle inevitably between the banking, or financial, interest and the people all over civilised countries: but no one can tell which will win. In industrial countries the odds are in favour of the banks, or financiers. In peasant countries against them.