CHAPTER VI

THE SUPERSTRUCTURE OF WEALTH

In our loose and indefinite way--as a result, maybe, of our defective vision--we talk of a vast superstructure of credit erected on a tiny gold basis. We gaze upon this mighty fabric and shake our heads ominously. As we gaze we see the structure grow, extending upwards and outwards, enlarging itself by some invisible and mysterious agency, and when we cast our gaze to the foundations we see that it looks like a towering edifice perched insecurely on a small, uneven piece of rock. No wonder we have feared that when storms break the whole crazy thing will come crashing down, scattering ruin and devastation in a vast area around it. It seems to us like a structure built by a madman, in defiance of the laws of architecture, and that there can be but one end, sooner or later, to so fantastic a fabric.

So have we been told time and again that our superstructure of credit has been built only for fair weather and not for foul.

Well, it has withstood much foul weather since the building of it commenced generations ago. Storms have beaten against it, and to the naked eye it has hardly swerved. The storms have made no rents in its walls, and it still stands, growing visibly, pointing its rising apex to the skies, and millions of people to this day--stolid, unimaginative Britishers, maybe--enter within its portals fearlessly and without suspicion of their peril. They heed not those who warn them that the whole thing may fall about their heads at any moment, that it needs but an earthquake, and all will be over in the twinkling of an eye.

“Foolish people!” these architectural guardians of safety cry. “We have warned you, and you have heeded us not. Let your fate be upon your own heads. Let him who is guided by the feeble, confusing light of his own folly, suffer the doom of his folly. We, at least, have done our duty, bravely, like voices crying unto the lost multitude, drunk with its ignorance and conceit.”

Well! well! Perhaps, after all, this superstructure may have no counterpart in reality. It may be but a fantastic dream, or nightmare, after all, yet seemingly so vivid to our fearsomeness that we find it almost impossible to believe that it can be but a creation of the imagination.

Would it not be more accurate to say that we have erected in our midst a vast superstructure of wealth? And cannot we say that this superstructure is based, not upon a slight foundation of gold, but upon the solid wealth of the nation, the empire, the world? If it can be proved to our nervous eyes that this is the real superstructure, after all, and not the one we have seen in disturbing visions, perhaps we shall feel more secure against and less apprehensive of the force of storms.

Let us look more closely at that balance sheet, for then we shall come into actual physical contact with the composition of this awe-striking structure. We will analyse the various ingredients which we shall describe as the assets of a bank.

First of all, we see that the cash in hand and at the Bank of England is nearly £6,000,000. This is legal tender, that which the law of the land has enacted shall be absolute, permanent wealth, not subject to the vagaries of fashion or sentiment.

Money at call and short notice is nearly as much--over five and a half millions. This forms a portion of the loan deposits, and being callable by the banks practically on demand, they show that a portion of the deposits payable on demand can also be recalled on demand. The equivalent of these loans, or deposits, the bank possesses in the shape of wealth not in the absolute category of legal tender. They are securities of the highest class, securities representing the credit or wealth of the nation. While these securities are lying in the safes of the banks they have been converted into temporary currency, and have been fulfilling all the purposes of money in circulation. They have been resurrected from dead into live capital. A similar process could be gone through by selling the securities in the market. The owner could convert them for his purposes into liquid capital. But he sells them temporarily to the bank instead of permanently in the market, and when he has employed his liquid capital temporarily, he repays it to the bank. He rechanges it, as it were, into dead or illiquid capital, until the moment comes when he desires to reconvert it into live capital, or currency. The bank possesses the wealth in bonds; he possesses the wealth in currency, and the bank’s gain consists of the interest on the accommodation, and his gain in the profit accruing from the active employment of his capital.

There is no more trust than a butcher has when he sells a leg of mutton for 4_s._ 6_d._ on the nail. His dead leg of mutton he converts into live legal tender currency. If he never sold his mutton he would starve. If the housewife’s husband earned no more salary wherewith to exchange it for future legs of mutton they would starve.

If the banker lent the borrower money without security, it would be more truly credit, for he would have no wealth that was the equivalent of the loan.

If he, at certain seasons, is compelled to call in these loans to bill-brokers and others and cannot renew them--quite a frequent, familiar operation--those who want to convert their dead wealth into currency go to the Bank of England. Machinery similar to that employed in the joint stock banks is put into operation there. The Bank takes in the securities, debits itself with the amount it empowers the borrower to withdraw in currency, and credits itself, not with words, but with valuable bonds. It insists that these bonds shall be of the highest value, and this insistence is inconsistent with the idea of what the ordinary man regards as giving credit. Otherwise, there would be greater trust in promises than in securities.

The objection borrowers have in going to the Bank of England is, they have to pay more for the services rendered. In the phraseology of Lombard Street, they have to pay higher interest for their loans, and being ordinary mortals, not too full of the milk of self-sacrifice, they prefer to go where they can deal more cheaply. This is precisely the motive that sends the housewife to the cheap butcher. She might get her leg of mutton a farthing a pound cheaper than if she went to the dear, extortionate butcher.

And there are some people in the City who have whispered that the Bank of England is extortionate. And those who have listened to them have made grimaces not altogether unlike expressions of sympathy and agreement.

Still keeping our attention on the balance sheet, and turning it for a moment from the stern, unbending business men at the Bank of England, we find that the legal tender and the call loans total over eleven millions and a half, and the deposits are thirty-seven millions and a half.

Next, investments exceed £6,000,000. The balance sheet says these investments consist of Consols and other securities of, or guaranteed by, the British Government, Indian, Colonial, and other securities.

I do not think any critics, not even financial journalists--for do not the public ask their advice what to invest in?--will deny that here we have the cream of investments. We could not, not the brainiest critic of us all, imagine anything creamier. Why, these are the creamiest things that make a hungry City editor’s mouth water. I dare say the most humble of them would confess that if a kind-hearted employer would only give him a few thousand pounds’ worth, he would not waste his intellectual resources in writing another line of financial criticism. He would be so content with this wealth that he could till his death-moment repose in absolute idleness and enjoy contemplation of the continued labours of less fortunate City journalists.

Here, then, is an aggregation of approximately £18,000,000 of first-class wealth, or nearly 50 per cent. of the total pure and loan deposits.

Bills discounted approach £7,000,000. I need not spend much labour in analysing and describing what bills of discount are. Those who wish a detailed description must consult other works dealing more fully with elementals. It is sufficient to say here that these bills represent also the best class of wealth, distinct, of course, from gilt-edged securities, but wealth, nevertheless, of the highest character. They represent produce, raw materials, manufactures of a vast and varied character, and when the bank has in its possession these bills which it has discounted, it practically has the varied wealth they represent.

Cheques are to be regarded as our national currency, bills of exchange are to be regarded as international currency. Cheques are wealth converted into national currency. When a bank discounts bills it enables them to perform also all the functions of our national currency. Until they are so discounted their functions are limited to their international purposes.

This is one of the purposes served in re-discounting them with the joint stock banks.

The great bill-broking firms and discount houses discount them on behalf of customers and re-discount them with banks. It is in the re-discounting that they make their profits and continue their existence. They cannot tie up their capital in these investments. They must re-discount them in order to liquefy them and restore their capital. And all the vast wealth behind the bills thereby becomes liquid capital that can continue fructifying instead of becoming stagnant.

Now this wealth, I say, the banks indirectly possess. It is theirs. They buy it. And if they buy it and it comes into their possession and they exchange money for it, as merchants and tradesmen do, how do they grant credit? When the wealth is eventually sold the proceeds go into the coffers of the banks, and the banks hand over the promises to pay. But the promises to pay are more tangible than the promises of the schemer who flits from suburb to suburb and town to town living on what is called credit.

Then there is the other composite wealth amounting to over £16,000,000. These are advances to tradesmen, merchants, and other persons well known to bank managers, who deposit some kind of wealth as security.

They are loans to all sorts of people who have pledged all sorts of wealth with banks. This wealth, in other words, they have liquefied and the banks have been paid consideration for liquefying it. People have parted with the wealth, sold it, if you like, and it has been passed over into the possession of the banks.

Adding these to the other loans we make a total of nearly £22,000,000, which compose that portion of the deposits which we call loan deposits. If we add the bills discounted as another form of loan the total is raised to £28,700,000 out of a total of £37,600,000 of deposits. This leaves a residue of £9,000,000 of pure deposits against which the bank holds £6,000,000 of legal tender, or over 60 per cent. If we add the £6,000,000 of investments, the total considerably exceeds the aggregate of the pure deposits.

Ought the position to be made clearer to the public, to the unsophisticated man in the street, by segregating the deposits and showing their component elements? What is the objection? Will some great bank start reform in this direction if it be earnestly and sincerely desired to show the public exactly what the position of affairs is; if it be sincerely desired to surround the groping man in the street with a bright light? Why not extend reform here after commencing with the segregation of a bank’s legal tender reserve?

I can imagine, however, that the refusal would be strenuous.

Are the pure deposits credit? If they are not credit, entirely distinct from the loan deposits, but consist of money in some form or other lodged with the banks, they cannot form a part of what is described as the credit superstructure of the banks. The so-called credit superstructure must be composed, then, of the loan deposits which are at one and the same time loans by the bank, and loans to the bank. If they are other people’s liabilities and at the same time the bank’s liabilities, whose credit are they? The borrower trusts the bank and the bank trusts the borrower; whose credit comes first? Who is the first creator of the credit? It is as difficult to answer as the question which came into the world first, the egg or the chicken?

No matter how we answer the conundrum, it seems to me indisputable that what we gaze upon is a superstructure of wealth. And it is indisputable that the banks furnish machinery vital to the progress of humanity. And it seems to me vital to the interests of national well-being that every resource should be ready to prevent the collapse of any sound banking establishment.