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The Pamphlet Collection of Sir Robert Stout: Volume 71

State Banking

State Banking.

The use of that which is mine own.

AAbout the year 1858 the Land League of Victoria put forwards policy for the acceptance of the Liberals of the Colony, and amongst the planks of this political platform were two lines which ran together as follows:

The Establishment of a Royal Mint.
The Establishment of a State Bank.

The organisation of the Land League extended all over the colony, and when the great Convention met in Melbourne under the presideney of Mr. Wilson Gray the policy which it had submitted was adopted. As everyone knows, a branch of the BoyaJ Mint was established; best the plank which had been associated with it has been a lifeless things this hour. Now, as this writer happened to be an enthusiastic member of the committee of a branch of the Land League, it became his duty to study the various principles which it advocated, and amongst the rest to bestow some consideration upon the State Bank proposal. He did so, with the result that he not only saw no reason at the time to dissent from the principle, but in various ways has advocated, it ever since.

As most people are aware, Banks are of three kinds, namely:—(1) A Bank of deposit, which receives money to hold safe for a depositor until his requirements constrained him to take it hack again. The page 41 goldsmiths of London, in early times, were bankers of this descriptbn; they took tbe money, bullion, plate. &c, of customers and friends for safer custody than their own homes afforded. (2) A Bank of Discount, which advances certain amounts, not being the full value, shown upon promissory notes and bills of exchange, or upon mortgages or other securities. (3) A Bank of Circulation issues bills or notes of its own, intended to be the circulating currency or medium of exchange, insead of gold and silver. Generally, however, the banking institutions of today combine all these branches of business. Strictly, when the Government of a people, or the municipal authorities of a city, such as Amsterdam, have the direct management of a bank, the credit of wlich is bound up and associated with the Government of that of public authorities, and used for assistance in the collection and disbursements of the revenue, it is a public bank; banks carrying on business under the authority of a charter have, however, come to be considered as also public banks. There is in England but one public bank, where as in the United States most of the banks are public, but in some of the States private banks of circulation are permitted by law. The Savngs Banks established in connection with Post Offices throughout the colonies are banks of deposit only.

During the Crusades the principle of banking first came into development, the necessities of warriors pledged to the redemption of the Holy Sepulchre constraining them to enter into other pledgess. It will occur to memory that the hatred Shylock bore to Antonio was very greatly founded on the fact that "in low simplicity, he lends out money gratis, and brings down the rate of usance here with us in Vence." The Bank of Venice was established in 1171, for the express purpose of lending assistance to Crusaders. It was strictly a public bank of deposit only; the Government became responsible for the deposits, and the whole capital was derived from a public loan; the funds of the bank being made use of by the Government which established it. This bank continued in successful operation until the dissolution of the Venetian Republic in 1798. The Bank of Amsterdam, established in 1609, was brought into operation in consequence of the clipped and worn state of the currency, which, being of uncertain and fluctuating value, affected exchange and the operations of trade. The object of the bank was to give definite and unquestionable value to a bill drawn on Amsterdam, coin being received on deposit at the institution, and credit given according to its weight and fineness, a trifling deduction for seigniorage being made. It is a noteworthy fact that during the whole period which has passed since the establishment of this bank, no peculation, or breach of trust, or attempted fraud of any kind, has ever happened on the part of any director, and the management is in the hands of four burgomasters or aldermen, who count and give receipts for the money in the institution on coming into office at the beginning of every year. The Bank of Hamburg was established ten years later than that of Amsterdam, and, like it, was merely a bank of deposit and page 42 transfer, the deposits being made in coin or bullion at a certain fixed rate, and the expenses of the institution being detrayed by a charge of a certain rate per page of the bank-book of every depositor. This bank was plundered by the French General, Davoust, in 1813, but in anticipation of that event many of the depositors had remitted their valuables to England or Copenhagen. Those who remitted to England were exceedingly fortunate, for they nearly doubled the amount of their capital by the subsequent rise of exchange.

The Bank of England, as every one knows, is a bank of deposit, discount, and circulation. It was established in 1693, under an Act which secured to such persons as should advance £1,500,000 certain advantages and recompenses. The subscribers became stockholders to the amount of their respective subscriptions; eight per cent interest was paid by the Government for the money (£1,200,000) advanced, and an additional bonus of £4,000 annually was allowed for the management of the loan, which, as matter of fact, constituted the capital of the institution. The amount of loans to the Government of course increased with the capital of the Bank, which, unlike the Banks of Amsterdam and Hamburg, was from its inception an engine of the Government, and not a mere commercial institution. In addition to the Bank's importance to the State as a public creditor, and in the management of the finances and National debt, the collection of taxes, and the payment of interest and annuities, it is without doubt a most powerful auxiliary to commerce and industry. In 1787 the capital of the Bank was £11,642,400, and of this amount no less than £10,672,490 had been permanently loaned to the Government, leaving only £669,910 available for loans to the public, but the means for additional loans were derived from deposits and circulation, and the means derived from these sources were ample. The payment of the revenue through the Bank at this time, if the money were supposed to remain in the institution for one day only, gave a fund equal to £166,666; the deposits of individuals and companies of coarse added immensely to this fund. In addition to these considerations the Bank of course has the advantage of the excess of the circulation over that of the specie necessary to be kept in the vaults to redeem bills presented for payment, and for a State Bank, like that of England, it is held to be quite an ample provision for its circulating notes and bills to keep 20 or 25 per cent of the amount of such circulation where its discounts are for short periods of three months. Fifty years ago the Bank of England had an available capital of £20,000,000 in addition to the money lent to the Government. Thus on a capital stock of eleven millions, the Bank received interest on between thirty and forty millions, including the interest of the Government loans, besides the sums annually paid to the Bank for its agency in financial concerns. On the 21st October of last year the capital of the Bank was £14,553,000; its reserve was £3,200,000; its notes in circulation, £25,851,563; notes unemployed, £12,332,230; and the gold and silver, coin and bullion at the head office and all page 43 branches, £22,796,402. The dividend for the year was at the rate of 11 per cent., and the price of bank stock £388.

The Bank of the United States was incorporated by Act of Congress approved February, 1791, The beginning words of its charter ran as follows:—" Whereas the establishment of a bank will be very conducive to the conducting of the national finances, will tend to give facilities to the obtaining of loans for the use of the Government in sudden emergencies, and will be productive of considerable advantages to trade, and industry in general, &c." Instead, therefore, of this bank being merely a commercial institution, it was from the first designed as essentially and mainly of a financial and political character, and it was upon that ground that its constitutionality was defended. In short, the origin of the Bank was in all respects similar to that of the Bank of England, and immediately upon the institution coming into operation it exerted a potential influence in establishing the credit of the Government. In 1811 Congress refuged to renew the charter, which thereupon expired by its own limitation, and, as a consequence, during the war which ensued the want of a national Bank was most severely felt, not only as an agency for the collection of revenue, but more especially as a medium for the transmission of funds from one part of the country to another, and also as an important basis for the sustentation of the public credit. So powerfully did the absolute necessity for such an institution force itself upon the public mind, that the members of the same political party which had refused to renew the charter of the old Bank passed an Act of Congress (approved April 10, 1816) chartering the present Bank of the United States with a capital of 35,000,000 dollars.

Of course the information contained in the foregoing observations has been taken from a reliable source, almost in the actual words employed, and it is only necessary to add that whilst the Bank of the United States is representative of the financial interests of the General Government, so highly are these institutions esteemed, and so necessary are they held, that almost every State in the Union boasts its State Bank.

During the mighty struggle for the maintenance of the Union of the States, not only the Bank of the General Government but all the State Banks then in existence played a not inconsiderable part. At the time hostilities began nearly the whole of the ammunition and stores had been thoughtfully removed to the Southern States, which were also the possessors of great wealth. The Northern States therefore were suddenly brought face to face with the necessity of not only immediately raising large armies but of finding absolutely everything that was requisite to enable those armies to take the field. One at least of the conditions of emergency originally contemplated in the charter of the first Bank of the United States had for the second time arisen, and for a period of four years the Government of the North was compelled to rely almost wholly upon the national bank for page 44 financial assistance. During this gigantic encounter, initiated [unclear: without] the slightest preparation and so long continued, such tremendous [unclear: calls] upon its resources the Bank of the United States had to [unclear: sustain] amounted to a strain unparalleled in the history of financial [unclear: achievements]. This will be understood more readily when it is stated [unclear: that,] before the war began by the attack on Fort Sumter on the 11th April, 1861, the debt of the United States was of the most nominal [unclear: description]; but, on August 31st, 1865, after deducting the cash in the hands of the Treasury, the National indebtedness amounted to no less than 2,756,431,571 dollars. This is to eay that, during the short period of four years four months and a half, a debt equal to about £574,256,535 was compiled. It is the truth that, in such desperate circumstances as those in which the Government of the country was placed, the Bank did continue to issue what were called "greenbacks", long after the coin and bullion which, under a sound condition of affairs, they should have represented had disappeared, and as a consequence the value of the paper circulation fell very low.

Now, it is highly important to notice these facts, because the whole, and the only, argument, as it is deemed, put forward in opposition to the proposal to establish State Banks in the Colonies, is based upon the circumstance that during the period of that terrible and unexampled strife, the ultimate end of which baffled human wisdom to foresee, the greenback circulation fell to very slight estimation. It would have been a most extraordinary manifestation indeed if it had not so fallen.

Surely those who so seriously talk and write of a State Bank as a proposal to set up a printing press and run off greenbacks ad libitum, do themselves very little honour, whilst they pay an excessively poor compliment to the intelligence of State Bank advocates. Singularly enough, it appears to have not occurred to the memory of these very wise objectors that on sunday, the 26th of February, 1797, an order arrived at the Bank of England suspending specie payments; that the order of the Privy Council was approved by Parliament the foliowing day; and that this suspension of specie payments in England continued for no less than 22 years! During that period the value of the Bank's paper fell 14 or 15 per cent below the asserted amount in gold. Had the Bark stopped, it would have over whelmed the kingdom in one vast commercial, financial, and economical catastrophe; but, supported by the State, It carried on and brought the country through an awful crisis, just as the State Bank of the United States did.

The fact has already been referred to in these papers that in 1815 the Government of England was selling its £100 bonds bearing a high rate of interest at £50 17s 6d. What argument, therefore, is conveyed to the reasoning mind by the circumstance that the purchasing power of American greenbacks fell considerably below the value represented upon their face during a fearful period of internecine paroxysm? Simply this, that the State Bnnk, in America as in England, proved page 45 the very salvation of the country; that, had it not been for the existence of the State Bank, it would have been quite impossible to offer any appearance of struggle in the face of a terrible emergency. That is the argument, and the only argument, to be found in this connection.

If it could be shown that the Oriental, the Glasgow City, the Baring's, the Real Property and Estate and many other Banks which have come to grief bringing ruin and disaster into thousands of homes, were "State Banks; that the State Banks of England and America which have helped their Governments through periods of panic and storm, and been assisted by their Governments in return, were in reality only semi-public or private Banks, and in the end had been compulsorily wound-up in hopeless insolvency, then, of course, there would be an argument. But no one to-day is in a position to assail the financial and economic advantages of State Banks in America, England, or in any other part of the world, which, if they need it, have the whole power of their Governments behind them.

No sane person now proposes to establish a printing press and reel off bank notes regardless of consequences. What is proposed is to establish a State Bank that will be governed by the same financial considerations that control the operations of other banking institutions. The simple issue is that the people shall have the advantages of the use of their own money instead of handing over those advantages to private corporations. That those advantages are considerable is proved by the anxiety of the unprivileged corporations to obtain a share of the Government account.

Only the other day, in New Zealand, a banking corpumtion showed its eagerness in this matter. When a loan is raised, for instance, it is not immediately paid away; it has to lie until contracts are entered into and completed, and so the banks have it at short interest. Again, every department of the Government necessarily requires that monies shall be lying to its credit to meet claims, and these balances not unfrequently run into hundreds of thousands of pounds. There is much profit capable of being derived from the advantageous use of this large capital. Why should not the people have that profit themselves?

Now, there are State Savings Banks—banks of deposit only—already in operation in all the Colonies. In New Zealand the amount lying to credit of depositors at December, 1891, was £2,695,447. With reference to the £2,6595,447 deposits in the hands of the New Zealand Post Office Savings Banks at the close of 1891, it should be stated that no less than £2,609,137 had been invested in securities of the Colony, the nominal value of which was set down at £2,625,939. The Government in fact has taken the money—borrowed it—and spent it on public works, and there is really nothing in its stead in the possession of tho Bank authorities except certain bits of paper called debentures, or bonds, redeemable at stated periods, and bearing interest. Of page 46 course it is not denied that this finance is perfectly safe, but it is claimed that to have held a portion of this large sum in reserve, and issued notes upon the strength of that reserve through the medium of a State Bank, would have been equally safe. A portion of this mony might even now be released and applied to State Bank purposes, but in any case there is the money in the Post Office account and in the hands of the Postmasters (£86,210), and that represents to some extent a capital.

In the same Colony there is the amount of the Sinking Fund, a considerable portion of which at one time—if it is not now—was invested in the bonds of other Colonies—such as New South Wales, Canada, &c. There are the balances lying to the credit of the various departments, and there is the whole amount of the revenue which would flow into the bank. These resources alone are sufficient to constitute a capital to justify a note circulation upon ordinary banking principles. All other banks begin operations upon a capital raised by loan; it is "subscribed" and advanced on interest, the interest taking the form of "dividends" payable annually or half-yearly. Here is a capital ready to hand, and an organisation already at work. Of course payments have to be made from Government balances, and deposits are liable to be withdrawn, but, to quote an authority, "experienced bankers cat) tell with some precision the average deposits upon which advances can be made, and upon which to regulate their note circulation." There is the statement already quoted that, "a bank having resources and advantages for collection of specie, it is quite an ample provision.for its circulating notes and bills to keep in hand 20 to 25 per cent of such circulation." It is repeated that with regard to a State Bank what is proposed is to conduct its operations upon well ascertained, regular, and definite banking principles.

In a Colony like New Zealand, where the Government already advances loans to local bodies, where private individuals are financially assisted by the Government under village settlement and other schemes, and where a considerable acreage of the public estate is held under leasehold, it must be obvious that a State Bank would be productive of very many and real advantages.

It may be confidently predicted that almost as soon as the federation of the Colonies takes place—an event that is now within a few years of consummation—a State Bank of Australia will be amongst the first of the institutions brought into operation.

By resolution carried by 39 votes to 32, the Legislative Assembly of New South Wales has decided to sweep away all limitations imposed upon the amount of money that may be deposited in the Post Office Savings Banks of that Colony; also declaring that the Government should be authorised to issue notes based upon the amount of deposites thus practically affirming the policy of establishing a State Bank.

Now, what has been put forward here is all true. What it lacks page 47 is the merit of being new. Every unprejudiced mind that has be-stowed thought upon the subject has no doubt arrived at the same conclusion as this writer.

Where then is the difficulty?

There is indeed a very definite stop; for any Government to put he establishment of a State Bank in its political programme would practically be to sign its own doom. With pain and with shame it must be confessed that the foreign banking associations which now hold the financial ground in these Colonies are too strong for both Governments and peoples. Only the other day (August 18) it was asserted in evidence that a Colonial Treasurer wanted a loan from one of the banks; the manager had no objection, but expected his institution to obtain a share of the Government Account; that, the Treasurer thought, could easily be arranged provided the management of another banking institution offered no objection. Subsequently, the managers of the two banks held an interview on the subject, when one is reported to have atated that it they agreed to act in combination, they "could command a sufficient number of votes to ensure the account being shared between them!" Now, if only two banks have such power to command votes, it is not difficult to gather some idea of the power all the banks of a colony could exercise when combined in resistance to a project they might hold to be injurious to their interests.

At various elections it has been felt that the banks could wield a tremendous power—aye, it has been realised before to-day what influence one bank alone could bring to bear. If a Government ventured to appeal to the people on such a cold-blooded, unsympathetic question as a State Bank, they would find the electors running mentally hither and thither upon all sorts of side issues in their usual sensible fashion and in the end the banks would settle the issue for them. Even if successful at the polls, the Government would still have to encounter the power banks can exert from behind the scenes in the House, In the face of such obvious facts what Government is likely to be fool-hardy enough to rush to their own destruction by taking up a question that nobody takes the slightest interest in?

The subject is dealt with here for the reason that it is properly a subject for State Socialists to consider, and even those who are not State Socialists—in view of the fact that State Banks have exised and proved most beneficial in operation for centuries—may be brought to the very simple conclusion that after all the people might just as well have the use of their own money as foreign capitalists and foreign corporations.