54
BANKING
THE Stock Exchange is only a department of the money market. The commonest way of hiring money for business purposes is to keep an account at a bank, and hire spare money there when you want it. The bank manager will lend it to you if he feels reasonably sure that you will be able to repay him: in fact that is his real business, as we shall see presently. He may do it by letting you overdraw your account. Or if somebody with whom you are doing business has given you a written promise to pay you a sum of money at some future time (this written promise is called a bill of exchange) and the bank manager thinks the promise will be kept, he will give you the money at once, only deducting enough to pay him for its hire until your customer pays it. This is called discounting the bill. All such transactions are forms of hiring spare money; and when you read in the city articles in the papers that money is cheap or money is dear, it means that the price you have to pay your banker for the hire of spare money is low or high as the case may be.
Sometimes you will see a fuss made because the Bank of England has raised or lowered the Bank Rate. This means that the Bank of England is going to charge more or less, as the case may be, for discounting bills of exchange, because spare money has become dearer or cheaper: that is to say, because spare subsistence has become scarcer or more plentiful. If you are overdrawn at your bank, the announcement that the Bank Rate is raised may bring you a letter from the manager to say that you must not overdraw any more, and that he will be obliged to you if you will pay off your overdraft as soon as possible. What he means is that as spare subsistence has become scarce and dear he cannot go on supplying you with it, and would like you to replace what he has already supplied. This may be very inconvenient to you, and may prevent you from extending your business. That is why there is great consternation and lamentation among business people when the Bank Rate goes up, and jubilation when it goes down. For when the terms on which spare money can be hired at the Bank of England go up, they go up everywhere; so that the Bank Rate is an index to the cost of hiring spare money generally.
And now comes the question, where on earth do the banks get all the spare money they deal in? To the Intelligent Woman who is not engaged in business, or who, if she has a bank account, never overdraws it or brings a bill to be discounted, a bank seems only a place where they very kindly pay her cheques and keep her money safe for her for nothing, as if she were paying them a compliment by allowing them to do it. They will even hire money from her when she has more than enough to go on with, provided she will agree not to draw it out without giving them some days’ notice (they call this placing it on deposit). She must ask herself sometimes how they can possibly afford to keep up a big handsomely fitted building and a staff of respectably dressed clerks with a most polite and sympathetic manager to do a lot of her private business for her and charge her nothing for it.
The explanation is that people hardly ever draw as much money from the bank as they put in; and even when they do, it remains in the bank for some time. Suppose you lodge a hundred pounds in the bank on Monday to keep it safe because you will have to draw a cheque for it on Saturday! That cheque will not be presented for payment until the following Monday. Consequently the bank has your hundred pounds in its hands for a week, and can therefore hire it out for a week for a couple of shillings.
But very few bank transactions are as unprofitable as this. Most people keep their bank accounts open all the year round; and instead of paying in every week exactly what they want to spend and drawing it out again by their cheques as they spend it, they keep a round sum always at their call so as to be ready when they may happen to want it. The poorest woman who ever dreams of keeping a bank account at all is not often driven to draw the last half crown out: when her balance falls as low as that, she knows it is time to put in another pound or two. Indeed it is not every bank that will do business on so small a scale as this: the Governor of the Bank of England would turn blue and order the porters to remove you if you offered him an account of that sort. Bank customers are people some of whom keep £20 continually at call, some £100, some £1000, and some many thousands, according to the extent of their business or the rate at which they are living. This means that no matter how much money they may put into the bank or take out, there always remains in the bank a balance that they never draw out; and when all these balances are added up they come to a huge amount of spare money in the hands of the bank. It is by hiring out this money that the banks make their enormous profits. They can well afford to be polite to you.
And now the Intelligent Woman who keeps a bank account, and most conscientiously never lets her balance fall below a certain figure, may ask in some alarm whether her bank, instead of keeping her balance always in the bank ready for her to draw out if she should need it, actually lends it to other people. The reply is, Yes: that is not only what the bank does, but what it was founded to do. But, the Intelligent Woman will exclaim, that means that if I were to draw a cheque for my balance there would be no money in the bank to pay it with. And certainly that would happen if all the other customers of the bank drew cheques for their balances on the same day. But they never do. “Still”, you urge, “they might.” Never mind: the bank does not trouble about what might happen. It is concerned only with what does happen; and what does happen is that if out of every pound lodged with them the bankers keep about three shillings in the till to pay their customers’ cheques it will be quite sufficient.
Only, please remember that the woman who has a bank account should never frighten the others by letting them know this. They would all rush to the bank and draw out their balances; and when the bankers had paid to the first comers all the three shillingses they had kept, they would stop payment and put up the shutters. This sometimes actually happens when a report is spread that some particular bank is not to be trusted. Something or somebody starts a panic; there is “a run on the bank”; the bank is broken; and its customers are very angry with the directors, clamoring to have them prosecuted and sent to prison, which is unreasonable; for they ought to have known that banks, with all the services they give for nothing, can exist only on condition that their customers do not draw out their balances all on the same day.
Perhaps, by the way, you know some woman who not only always draws her full balance, but overdraws it; so that she is always in debt to the bank. Her case is very simple. The bank lends her the other customers’ money to go on with, and charges her for the hire of it. That sort of business pays them very well.
And now that you know what banking is from the inside, and how the bankers get all the spare money they let on hire, may I remind you again, if I am not too tiresome, that this spare money is really spare subsistence, mainly perishable stuff that must be used at once. One of the greatest public dangers of our day is that the bankers do not know this, because they never handle or store the stuff themselves; and the right to take it away and use it which they sell on the hire system is disguised under the name of Credit. Consequently they come to think that credit is something that can be eaten and drunk and worn and made into houses and railways and factories and so on, whereas real credit is only the lender’s opinion that the borrower will be able to pay him.
Now you cannot feed workmen or build houses or butter parsnips with opinions. When you hear of a woman living on credit or building a house on credit or having a car on credit you may rest assured that she is not doing anything of the kind: she is living on real victuals; having her house built of bricks and mortar by men who are eating substantial meals; and driving about in a steel car full of highly explosive petrol. If she has not made them nor paid for them somebody else has; and all that her having them on credit means is that the bank manager believes that at some future time she will replace them with equally substantial equivalent goods of the same value after paying the bank for waiting meanwhile. But when she goes to the bank manager she does not ask for food and bricks and cars: she says she wants credit. And when the bank manager allows her to draw the money that is really an order for so much food and so many bricks and a car, he says nothing about these things. He says, and thinks, that he is giving her credit. And so at last all the bankers and the practical business men come to believe that credit is something eatable, drinkable, and substantial, and that bank managers can increase or diminish the harvest by becoming more credulous or more sceptical as to whether the people to whom they lend money will pay them or not (issuing or restricting credit, as they call it). The city articles in the papers, the addresses of bank chairmen at the annual shareholders’ meetings, the financial debates in Parliament, are full of nonsensical phrases about issuing credit, destroying credit, restricting credit, as if somebody were shovelling credit about with a spade. Clever men put forward wonderful schemes based on the calculation that when a banker lends five thousand pounds worth of spare subsistence he also gives the borrower credit for five thousand pounds, the five thousand credit added to the five thousand spare subsistence making ten thousand altogether! Instead of being immediately rushed into the nearest lunatic asylum, these clever ones find disciples both in Parliament and in the city. They propose to extend our industries (that is, build ships and factories and railway engines and the like) with credit. They believe that you can double the quantity of goods in the country by changing the cipher 2 into the cipher 4. Whenever a scarcity of spare subsistence forces the Bank of England to raise the Bank Rate they accuse the directors of playing them a dirty trick and preventing them from extending their business, as if the Governor and Company of the Bank of England could keep the rate down any more than the barometer can keep the mercury down in fair weather. They think they know, because they are “practical business men”. But for national purposes they are maniacs with dangerous delusions; and the Governments who take their advice soon find themselves on the rocks.
What is it, then, that really fixes the price you have to pay if you hire ready money from your bank, or that you receive for lending it to the bank (on deposit), or to trading companies by buying shares, or to the Government or the Municipalities? In other words, what fixes the so-called price of money, meaning the cost of hiring it? And what fixes the price of incomes when their owners sell them for ready money in the Stock Exchange?
Well, it depends on the proportion between the quantity of spare subsistence (“saved” money) there may be in the market to be hired, and how much the people who want to use it up are able and willing to pay for the hire of it. On the one hand you have the property owners who are living on less than their incomes and therefore want to dispose of their spare stuff before it goes rotten. On the other are the business men who want what the property owners have not consumed to feed the proletarians whose labor they need to start new businesses or extend old ones. Beside these, you have the spendthrift property owners who have lived beyond their incomes, and must therefore sell the incomes (or part of them) for ready money to pay their debts. Between them all, you get a Supply and Demand according to which spare money and incomes are cheap or dear. The price runs up when the supply runs short or the demand becomes more pressing. It runs down when the supply increases or the demand slackens.
By the way, now that we are picking up the terms Supply and Demand, remember that Demand in the money market sense does not mean want alone: it means only the want that the wanter can afford to satisfy. The demand of a hungry child for food is very strong and very loud; but it does not count in business unless the mother has money to buy food for the child. But with this rather inhuman qualification supply and demand (called “effective demand”) settle the price of everything that has a price.
Banks are safe when they lend their money (or rather yours) judiciously. If they make bad investments, or trust the wrong people, or speculate, they may ruin themselves and their customers. This happened occasionally when there were many banks. But now that the big ones have swallowed up the little ones they are so few and so big that they could not afford to let one another break, nor indeed could the Government. So you are fairly safe in keeping your money at a big bank, and need have no scruple about availing yourself of its readiness to oblige you in many ways, including acting as your stockbroker, borrowing from you at interest (on deposit account), and lending you, though at a considerably higher rate, any ready money for the repayment of which you can offer reasonably satisfactory security.
As we now see why the hiring terms for money vary from time to time, sometimes from hour to hour, let us amuse ourselves by working out what would happen at the banks if the Government, misled by the practical business men, or by the millennial amateurs, were to attempt to raise say £30,000 millions by a tax on capital, and another £30,000 millions by a tax on credit.
The announcement of the tax on credit would make an end of that part of the business at once by destroying all credit. The financial magnate who the day before could raise a million at six or seven per cent by raising his finger would not be able to borrow five shillings from his butler unless the butler let him have it for the sake of old times without the least hope of ever seeing it again.
To pay the tax the capitalists would have to draw out every farthing they had in the bank, and instruct their stockbrokers to sell out all their shares and debentures and Government and municipal stock. There would be such a prodigious demand for ready money that the Governor and Company of the Bank of England would meet at eleven o’clock and resolve, after some hesitation, to raise the Bank Rate boldly to ten per cent. After lunch they would be summoned hurriedly to raise it to a hundred per cent; and before they could send out this staggering announcement they would learn that they might save themselves the trouble, as all the banks, after paying out three shillings in the pound, had stopped payment and stuck up a notice on their closed doors that they hoped to be able to pay their customers the rest when they had realized their investments: that is, called in their loans and sold their stocks and shares. But the stockbrokers would report only one price for all stocks, that price being no pounds, no shillings, and no pence, not even farthings. For that is the price in a market where there are all sellers and no buyers.
When the tax collector called for his money, the taxpayer would have to say “I can get no money for you; so instead of paying the tax on my capital, here is the capital itself for you. Here is a bundle of share certificates which you can sell to the waste paper dealer for a halfpenny. Here is a bundle of bonds payable to bearer which you can try your luck with, and a sheet of coupons which in a few years’ time will be as valuable as rare and obsolete postage stamps. Here is a transfer which will authorize the Bank of England to run its pen through my name in the War Loan register and substitute your own. And much good may they all do you! I must shew you out myself, as my servants are in the streets starving because I have no money to pay their wages: in fact, I should not have had anything to eat myself today if I had not pawned my evening clothes; and precious little the pawnbroker would give me on them, as he is short of money and piled up to the ceiling with evening suits. Good morning.”
You may ask what, after all, would that matter? As nine out of every ten people have no capital and no credit in the financial sense (that is to say, though a shopkeeper might trust them until the end of the week, no banker would dream of lending them a sixpence), they could look on and laugh, crying “Let the rich take their turn at being penniless, as we so often are”. But what about the great numbers of poor who live on the rich, the servants, the employers and employed in the luxury trades, the fashionable doctors and solicitors? Even in the productive trades what would happen with the banks all shut up and bankrupt, the money for wages all taken by the Government, no cheque payable and no bill of exchange discountable? Unless the Government were ready instantly to take over and manage every business in the country: that is, to establish complete nationalization of industry in a thunderclap without ever having foreseen or intended such a thing, ruin and starvation would be followed by riot and looting: riot and looting would only make bad worse; and finally the survivors, if there were any, would be only too glad to fall on their knees before any Napoleon or Mussolini who would organize the violence of the mob and re-establish the old state of things, or as much of it as could be rescued from the chaos, by main force applied by a ruthless dictator.