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THE NATIONAL INSTITUTE OF

ECONOMIC AND SOCIAL RESEARCH

OFFICERS OF THE INSTITUTE

PRESIDENT SIR HENRY CLAY

COUNCIL OF MANAGEMENT PROFESSOR G. C. ALLEN

PROFESSOR R. G. D. ALLEN

SIR ALEXANDER CARR-SAUNDERS

SIR HENRY CLAY

GEOFFREY CROWTHER

NOEL F. HALL

SIR HECTOR HETHERINGTON

J. R. HICKS

PROFESSOR JOHN JEWKES

PROFESSOR D. H. MACGREGOR

H. C. B. MYNORS

PROFESSOR LIONEL ROBBINS

AUSTIN ROBINSON

PROFESSOR BARBARA WOOTTON

EXECUTIVE COMMITTEE OF THE COUNCIL OF MANAGEMENT

PROFESSOR G. C. ALLEN

PROFESSOR R. G. D. ALLEN

SIR HENRY CLAY

GEOFFREY CROWTHER

H. C. B. MYNORS

PROFESSOR LIONEL ROBBINS

AUSTIN ROBINSON

SECRETARY MRS F. S. STONE

2 DEAN TRENCH STREET, SMITH SQUARE

LONDON, S.W. I

The National Institute of Economic and Social Research, London, is an independent, non-profit-making body founded in 1938. It always has had as its aim the promotion of realistic research particularly in the field of economics. It conducts research by its own research staff and in co-operation with the Universities and other academic bodies. The work done under the Institute's auspices is published by the Cambridge University Press in two series: Studies and Occasional Papers.

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Cambridge University Press978-1-107-64901-9 - Studies in Financial OrganizationT. BaloghFrontmatterMore information

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&onomic and Social Studies

VI

STUDIES IN FINANCIAL ORGANIZATION








Economic and Social Studies

I. Studies in the National Income, 1924-1938. By A. L. Bowley, Sc.D. 1942.

II. The Burden of British Taxation. By G. Findlay Shirras and L. Rostas. 1942.

III. Trade Regulations and Commercial Policy of the United Kingdom. By the Research Staff of the Institute. 1943.

IV. National Health Insurance. A critical study. By Hermann Levy. 1944.

V. The Development of the Soviet Economic System. By Alexander Baykov. 1946.

VI. Studies in Financial Organization. By T. Balogh. 1948.

VII. Investment, Location, and Size of Plant. A realistic inquiry into the structure of British and American industries. By P. Sargant Florence, assisted by W. Baldamus. 1948.

VIII. A Statistical Analysis of Advertising Expenditure and of the Revenue of the Press. By Nicholas Kaldor and Rodney Silverman. 1948.

IX. The Distribution of Consumer Goods. A factual study of the methods and costs of distribution of consumer goods in the United Kingdom in 1938. By James B. Jefferys, with the assistance of Margaret Maccoll and G. L. Levett. 1950.

The Institute assumes no responsibility for the theories and opinions expressed in the Studies and Papers prepared under its auspices.






STUDIES IN

FINANCIAL ORGANIZATION

BY

T. BALOGH

CAMBRIDGE AT THE UNIVERSITY PRESS

195 0






CAMBRIDGE UNIVERSITY PRESS

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Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK

Published in the United States of America by Cambridge University Press, New York

www.cambridge.org Information on this tide: www.cambridge.org/978II07649019

© Cambridge University Press 1947

This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written

permission of Cambridge University Press.

First printed 1947 Reprinted with corrections 1950

First paperback edition 2012

A catalogue record for this publication is available from the British Library

ISBN 978-1-I07-64901 -9 Paperback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in

this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

CAMBRIDGE UNIVERSITY PRESS

Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, Sao Paulo, Delhi, Mexico City

Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK

Published in the United States of America by Cambridge University Press, New York

www.cambridge.org Information on this tide: www.cambridge.org/978II07649019

© Cambridge University Press 1947

This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written

permission of Cambridge University Press.

First printed 1947 Reprinted with corrections 1950

First paperback edition 2012

A catalogue record for this publication is available from the British Library

ISBN 978-1-I07-64901 -9 Paperback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in

this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.






CONTENTS Preface pageix

Index to Tables Xl

PART I. THE CLEARING BANKS AND THE EVOLUTION OF BANK CREDIT IN ENGLAND SINCE THE WAR OF 1914-18

SECTION 1. THE DEVELOPMENT OF THE CLEARING BANKS

Chapter 1. The Historical Background

Chapter 2. The Structure of British Deposit Banking

Chapter 3. The Internal Organization of the Big Clearing Banks 19

A. Management, p. 19. B. The Board of Directors, p. 22. C. Interbank organizations, p. 24

SECTION II. THE BUSINESS OF THE CLEARING BANKS

Chapter 4. The Available Statistical Information

Chapter 5. The Balance Sheet: Assets 33

A. General, p. 33. B. Cash reserves, p. 37. C. The secondary liquidity reserve, p. 56; Money at call and short notice, p. 60; Discounts, p. 63; The significance of the secondary liquidity reserve, p.67. D. Investments, p. 70. E. Advances, p. 74. F. Bankpremises, buildings, etc., p. 86

Chapter 6. The Balance Sheet: Liabilities

A. Deposits, p. 87; Rate of interest, p. 90; Clearing, p. 92; The velocity of circulation, p. 93; The importance of bank deposits as assets, p. 94; Foreign deposits, p. 95. B. Capital, p. 100. C. Profits, P· 105

Chapter 7. The Ancillary Services of the Deposit Banks 108 A. Internal business, p. 109: i. Ancillary to deposit business, p. 109, ii. Trustee business, p. I 10; iii. The role of the clearing banks in the issue business, p. I 10. B. International business, p. I 12: i. International business prior to 1905, p. I 12; ii. Foreign exchange, p. I 12; iii. Acceptance credits, p. 112; iv. Foreign affiliation, p. 113






vi CONTENTS

PART II. THE MONEY AND DISCOUNT MARKET

Chapter 8. The Technique of the Discount Market page 119

A. General, p. 119. B. The eligibility of bills, p. 122. C. The operations of the Discount Market, p. 124: i. Jobbing in bills, p. 124; ii. Fixtures and day-to-day money, p. 125; iii. Collateral, p. 128. D. The structure of interest rates, p. 129. E. Changes in discount market practice after 1931, p. 132. F. The discount market syndicate, p. 136

Chapter 9. The Internal Structure of the Discount Market Firms 139

A. The members of the discount market, p. 139. B. The policies of the discount houses, p. 140: i. The public companies, p. 141; ii. The private firms, p. 145; iii. Running brokers, p. 147

Chapter 10. The Supply of Bills

A. Treasury Bills and other one-name paper, p. 148: i. Government bills other than British Treasury Bills, p. 150; ii. Bills of local authorities and other public corporations, p. 150. B. Bills of Exchange, p. 153: i. Bankers' acceptances, p. 153; ii. Fine trade bills, p. 157; iii. Hire-purchase paper, p. 158; iv. Export Credits Guarantee Department, p. 160; v. Trade bills, p. 164; vi. Foreign domiciles, p. 165

Chapter 11. The Volume of Bills

A. Commercial Bills, p. 165: i. General, p. 165; ii. Bankers' acceptances, p. 168. B. Changes in the total supply, p. 174; causes of the decline of the London bill, p. 177. C. The size of the London money market, p. 182: i. Pre-1914, p. 182; ii. Post-1918, p. 184; iii. The position at the end of 1938, p. 189

Appendices to Part II

Appendix I. The Floating Debt, 1914-39, and its Effect on the British Banking System, by F. w. PAISH 191

I. The Floating Debt since 1914, p. 191; II. The Floating Debt and the British Banks, p. 195; III. The Treasury Bill rate, p. 200

Appendix II. Tables 208

Appendix III. The London Gold and Silver Markets, by P. BARE A U 213

(a) The London gold market, p. 213; (b) The London silver market, p.222






CONTENTS

PART III. OTHER B,ANKING AND FINANCE FIRMS IN LONDON

va

Chapter 12. Introductory page 227

Chapter 13. The pre-1914 Business of the Great City Institu-tions 230

A. Acceptance credits, p. 230. B. The finance of foreign governments and other overseas borrowers, p. 232. C. Large deposits and foreign exchange business, p. 233. D. Investment advice, p. 234

Chapter 14. Other International Banking Institutions in London, pre-1914 237

Chapter 15. The War of 1914 and its Consequences 241

A. Short-term business, p. 241. B. Long-term business, p. 248. C. Investment business, p. 256. D. The rise of finance companies, p. 259

Chapter 16. The World Crisis and Mter 261

A. Short-term business, p. 262. B. Long-term business, p. 268: i. Foreign issues, p. 268; ii. Home capital issues, p. 274

Appendix to Part III Statistical material on Acceptance Houses Note on above

Index






PREFACE

THE present studies are a fragment of an international enquiry into the working of the Western European monetary and banking systems and capital markets undertaken in 1939. In this country the study was entrusted to the National Institute of Economic and Social Research and was placed under the direction of Mr N. F. Hall, whom the present author was to have assisted. The original plan envisaged studies of the 'public' Sector (the Treasury and extra-budgetary funds) of the Bank of England and the Exchange Equalization Account; and the present studies dealing with the Clearing Banks, the discount market and other private financial institutions. Further sections were to have dealt with the institutions, public and private, by which savings are canalized-such as the Post Office Savings Bank, Building Societies, Insurance Companies and so forth-as well as the Stock Exchanges.

At the outbreak of the war of 1939-45 the present studies were nearing completion. Mr Hall and his staff were called away to public service and the present author was engaged in other tasks, so that it has not been possible to complete the whole scheme. It has, therefore, been decided to publish the existing sections separately. They form a consistent whole and are of interest as providing an up-to-date survey of their subject before war conditions dislocated it and diverted its development. The complex interrelations between the different parts of the financial structure render an analytical description somewhat cumbrous. Repetitions are unavoidable and the fact that many important institutions have not been included in the analysis causes unavoidable gaps in the narrative. Nevertheless, the importance of the topic for the future, and the prevalence of misconceptions about the past, would seem to justify an attempt at a consistent treatment of the institutional organization of the financial system on the basis of modern economic doctrine.

The author wishes to acknowledge his deep gratitude to Professor Clay (now Warden of Nuffield College, Oxford) for his unfailing kindness and patience, to Mr Noel Hall for his advice, encouragement and help in writing, to Mr G. Crowther and Mrs F. S. Stone and to many friends in the City for their willingness to give information not hitherto available and for checking many of his






x PREFACE

rash statements. None but himself, however, is responsible for the shortcomings of the finished product. He is much indebted to Mr J. Packman for his scholarly reading of the proofs and for his kindness in preparing the index at very short notice.

The conclusions will certainly seem too radical for those who hanker after a status-quo which is inevitably lost and, perhaps, too conservative to those who believe that by exorcising the monetary and banking devil, by global monetary measures or by nationalizing the banking system, all our ills can be cured. The latter are, at the moment, not only more numerous but, perhaps, more influential than the former. The dangers that misconceptions of this nature will cause a violent reaction to the formerly prevalent extremes are not negligible. If the present analysis contributes-however modestly-to some disillusionment about the all-cure effect of monetary intervention it will have served its purpose.

BALLIOL COLLEGE

OXFORD

August 1945

T. BALOGH

The National Institute of Economic and Social Research is glad to acknowledge the part played by the Institut Scientifique de Recherches Economiques et Sociales, of Paris, in the origination of this work. The international enquiry referred to in the author's preface was organized and sponsored by the Institut before the 1939-45 war, and the National Institute received a small grant from the Institut towards the expenses of the study that was originally planned.

August 1947

F. S. STONE Secretary

NATIONAL INSTITUTE OF ECONOMIC

AND SOCIAL RESEARCH






INDEX TO TABLES

PART I

Table No. I. The Banking System as operating in England and Wales in 1844 page 3

Table No. II. The Banking System as operating in England and Wales in 1884 7

Table No. III. Bank Amalgamations: England and Wales 9

Table No. IV. Banking Amalgamations, 1918 9

Table No. V. Midland Bank Branch System 13

Table No. VI. Number of Inhabitants to each Banking Office 13

Table No. VII. The British Banking System, 31 December 1938 15

Table No. VIII. Directorships 23

Table No. IX. London Clearing Banks. Proportions of certain Assets to Deposits 36

Table No. X. Distribution of Bankers' Cash between Till Money and Balances at the Bank of England 38

Table No. XI. Fluctuation of Cash Ratios 49

Table No. XII. Year-end borrowing at the Bank of England 5 I

Table No. XIII. Liquid Assets of the British Banking System 57

Table No. XIV. Secondary Liquidity Reserve, 1931-8 58

Table No. XV. Bill Holdings of London Banks 59

Table No. XVI. National Debt held by Clearing Banks 74

Table No. XVII. London Clearing Banks-Classification of Advances 83

Table No. XVIII. Lloyds Bank-Classification of Advances 84

Table No. XIX. Midland Bank-Percentage of total loans 84-

Table No. XX. A. Barclays Bank-Percentage of total loans 85

Table No. XX. B. Barclays Bank-Professional and private loans (November 1936) 85

Table No. XXI. Deposit and Current Accounts of the London Clearing Banks 88

Table No. XXII. Ratio of Current Accounts to Total Deposits 89

Table No. XXIII. Banks whose Drafts passed through the London, Country, or Metropolitan Clearings, 1937 91

Table No. XXIV. Total Debits on Current Accounts of the London Clearing Banks, 1930-8 94

Table No. XXV. Rate of Turnover of Current-Account Balances in London Clearing Banks 95

Table No. XXVI. Index of Rate of Turnover 95

Table No. XXVII. Deposits of various Credit Institutions 96






xu INDEX TO TABLES

Table No. XXVIII. The Structure of Bank Capital page 98-99 Table No. XXIX. Percentage Ratio of Banks' own Resources to

their Public Liabilities, excluding Acceptances and Sundry Accounts, 1913-28 102

Table No. XXX. Percentage Ratio of Banks' own Resources to their Public Liabilities, excluding Acceptances and Sundry Accounts, 1929-37 102

Table No. XXXI. Bank Profits 106 Inset Table: Position of Joint-Stock Banks in England, December

1913 facing page 114

Table No. XXXIIA. English Joint-Stock Banks as on 31 December II6 1938

Table No. XXXII B. Scottish Banks I 17

Table No. XXXII c. Northern Ireland Banks II8

PART II

Table No. XXXIII. Rates of Interest in the London Market, 1919-27-Percentage Half-Yearly Averages 130

Table No. XXXIV. Money and Bill Rates-Yearly Averages 131

Table No. XXXV. Capital Structure of the Discount Market 140

Table No. XXXVI. Position of the London Discount Companies 142

Table No. XXXVII. Discount Company Balance Sheets, 1937-8 143

Table No. XXXVIII. Local Authorities with power to issue Bills 152

Table No. XXXIX. Bills Outstanding-Yearly Averages 167

Table No. XL. Acceptances of Joint-Stock Banks 169

Table No. XLI. Bank Acceptances 170

Table No. XLII. Bank Acceptances (Big Six) 171

Table No. XLIII. Discount Market, 1929 185

Table No. XLIV. Discount Market, 1929 (Truptil) 185 Table No. XLV A. The Utilization of Money at Call and Short

Notice 187

Table No. XLV B. Total Loans to Brokers 187

Table No. XLV c. Total Assets of Market 187

Appendices to Part II Appendix I

Table A. Amalgamated Returns of British Commercial Banks 196 Table B. Suggested Amended Figures for Banks, Cash, Call Money,

and Discounts 197

Table C. Macmillan Report Analysis of Money at Call and Short Notice and Discounts 197

Table D. Estimated Average Bill Circulation in Great Britain 202

Table E. British Treasury Bills 206-7






INDEX TO TABLES Xlll

Appendix II London Clearing Banks and Bank of England. Deposits and Sterling

Bills held, and (Clearing Banks only) Acceptances outstanding, on Account of Foreign Customers page 208

Scottish Banks. Deposits and Sterling Bills held, and Acceptances outstanding, on Account of Foreign Customers 209

Deposits and Sterling Bills held in London on Foreign Account and Sterling Bills accepted on Foreign Account 2 IO

London Clearing Banks. Summary of the Monthly Averages

Scottish Banks. Summary of the Monthly Averages

PART III

Table No. XLVI A. Analysis of New Capital Issues in the United

2 I I

212

Kingdom by Destination and Class of Borrower 249-50 Table No. XLVI B. New Capital Issues in the United Kingdom

by Groups 251-2

Table No. XLVII. The Expansion of British Capital Abroad 253

Table No. XLVIII. Geographical Distribution of British Capital Abroad 254

Table No. XLIX. Income from British Investment Abroad 255

Table No. L. National Income, Investments and Savings in Great Britain 1911,1924 and 1938 277

Table No. LI. Undistributed Profits, 1924-35 278 Table No. LII. Private Investment at Home in 1938 279

Table No. LIII. Companies Registered, with Share Capital 28 I

Table No. LIV A. Results of Subgroups 284

Table No. LIV B. Analysis of Results within Subgroups 285 Table No. LV. 'Introductions' 292

Table No. LVI. Methods of spending new capital, 1927-33 294

Table No. LVII. Percentage Cost of Issues, U.K. Industry, 1937 295

Appendix to Part III Table A. Glyn, Mills and Co.

Table B. Acceptance and Issue Houses

Table C. Figures for Seven Houses Publishing a Balance Sheet

310

311

3 13






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