other public body, such as the Indian Government and Colonial Governments or British municipalities, and all the private customers who bank with the Bank of England, are included with the other banks in the " other deposits."
On this basis of " cash in hand and at the Bank of England " the other banks had built up the great organization which had covered England with a network of branches which collected, distributed and created cash and credit for the community. The specimen balance-sheet given above needs little explanation. On the liabilities side we have the capital subscribed by the shareholders to start the business, which is only a liability in the sense that it would have to be repaid or accounted for if the bank were wound up. The reserve fund has been accumulated out of past profits and is also a liability only in the sense that it is the property of the shareholders and has to be accounted for. A liability in a much more real sense is the item of current and deposit accounts which makes up the greater part of the total. This is money deposited by the public and liable to be withdrawn on demand in the case of current accounts, or after notice of seven days or some other short period in the case of deposit ac- counts. On the other side of the account we see: " Cash in hand and at the Bank of England," " Money at call or short notice," which has been lent, as already described, to discount houses, stockbrokers, and other professional dealers in money. The " Bills discounted " are bills of exchange, most of which are prob- ably drawn on other banks or the great London accepting houses, though they also include a considerable number of local bills discounted for industrial customers. With a portfolio of bills of this kind, arranged so that a certain proportion fell due every day, a bank could always replenish its cash by refraining from buying new bills to take the place of those maturing. " In- vestments " are the bank's holding of British Government and other securities, usually of a kind which it would expect to be able to realize by sale on the Stock Exchange in the case of any sudden demand upon it for cash. The large item of " Loans and ad- vances " expresses the activity of the bank in financing industry and trade by lending money to customers. Here again it should be noted that, just as the Bank of England, by lending money or discounting bills, increased the amount of its own deposits, so the other banks by the same process increased the aggregate of general banking deposits. The borrowing customer gets a credit (say for 10,000) from his bank A, against which he would draw a cheque to make the payment for the purpose for which he borrowed the money. If the cheque was paid to a customer of the same bank its deposits would be increased by 10,000 and its loans and advances by the same amount, its cash total being un- affected. If the recipient of the cheque banked with another bank, B, then the cheque would, through the machinery of the clearing-house, transfer 10,000 of cash at the Bank of England from bank A to bank B, and B's cash and the amount of its deposits will both have been increased by 10,000. Bank A would have had its cash at the Bank of England diminished by 10,000, but its loans and advances would have been in- creased by this amount and its deposits would be unaltered by the transaction; and as long as this loan was outstanding the increase that it had thus effected in the aggregate of banking deposits would remain. It will be noted that the item of accept- ances which appears among the liabilities is exactly balanced on the assets side by " liability of customers on account of acceptances." This item arises out of the creation of bills of exchange which had been accepted by the banks on behalf of customers who had directed those from whom they bought goods to draw upon the bank, so putting into their hands a first-class security which could be easily negotiated. By thus placing its name at the disposal of a customer the bank earned a commission, and the customer was, of course, bound to put the bank in funds before the bill fell due; and the bank's liability to meet the bill was thus offset by the customer's liability to provide it with the wherewithal. By this means home and international trade were financed by the creation of bills of exchange, which have been called the currency of inter- national trade, and the banks, as has been shown above, were
enabled, by buying these bills under discount, to provide them- selves with a convenient and liquid form of security which could be relied upon to produce cash at its due date. The special func- tion of the banks, however, and the one with which the public is most familiar, was their provision of facilities for deposit, the creation of deposits by advances, and the transfer of such deposits from one to another by cheque. By this means they provided the commercial community with a money or currency that was safer and more convenient to handle than legal-tender cash. Bank deposits thus became potential currency which could be turned into actual currency by drawing a cheque.
The function of the accepting houses has already been described when the accepting business done by the banks was explained. The accepting houses accepted on behalf of customers in exactly the same way as the banks, but in their case this business was generally their chief if not their sole activity. Some of them, however, applied the connexions which they thus acquired abroad in acting as issuers of foreign loans. By accepting bills which were used in commercial payments all over the world they also were, in a sense, creators of credit and currency as long as their paper was readily taken and discounted. Many of the bills drawn on them were against goods or securities or gold going from one foreign country to another, or were drawn in anticipa- tion of shipments of goods, or merely against the credit of the drawer and acceptor. In the two latter cases they were usually called " finance bills."
The position of the discount houses, also, is already to a great extent apparent. They, using their own capital and to a much greater extent money borrowed from banks and others, bought bills of exchange accepted by banks, accepting houses, merchants and traders, and either held them until maturity or sold them to banks and others who required a short investment that could be relied upon to become cash at due date. By the rate at which they borrowed from day to day or for short periods from the banks they established the rate for money in the market, and by the rate at which they bought bills they established the discount rate. As their most important lenders and their most important buyers of bills were the banks, it followed that the extent to which the banks were prepared to lend the money and buy bills had an important influence in fixing rates for loans and discounts.
Since there was no control by law in England over the extent to which the banks could create credit and since, as has been shown, they were able easily to increase their holding of cash at the Bank of England by calling in loans from the discount houses and so compelling them to borrow from the Bank of England, a temptation which was thus put before the banks to create too much credit had to be corrected by constant vigilance on the part of the Bank of England. In the case of all material commodities, cost of production is an influence against excessive supply at too low a price; in the case of credit, the creation of which is a matter of book-keeping, this consideration hardly arises, since no more clerical work is involved by an advance of a million than by one of a thousand pounds. Consequently an artificial check had to be provided by the regulation of the money market by the Bank of England. If the banks created too much credit, with the result that the discount rate in London declined to a point that was not justified by England's position in international trade, an excessive number of bills of exchange on London would be created and, being offered in foreign centres, would turn the foreign exchanges against London. Ultimately this process would correct itself because the depreciation of the exchanges would at a point cause exports of gold from England, so reducing the basis of credit and compelling the banks to restrict its creation. But it was not considered safe to leave the market to its own devices until this tardy remedy worked. The Bank of England, as custodian of the country's chief gold reserve, was accustomed when the exchanges threatened gold exports to raise its official rate of discount, so giving notice to the discount houses that if they were obliged to borrow from it they would have to pay more for the accommodation, and making them more careful about buying bills at too low rates. But if, owing to the flood of cheap money with which the discount houses were pro-
