The Sun.
London, England, 1860-09-10 00:00:00

JOINT STOCK BANKs.—D !AT
INTEREST.

(From the Money Market Review.)

The practice of allowing interest on deposits at
call, and to a certain extent on current accounts, is
one of the principal features of the business of our
joint-stock banks. If the system did not precisely
originate with them, they at least, with one or two
exceptions, have developed it. To those who feel
a preference for a sound steady business, instead of
a brilliant and speculative one, this circumstance
must always be a matter of regret. The innovation
in fact will not bear examination, and appears en-
tirely at variance with true banking policy.
The proper mode of conducting a bank is too
well understood to need much reference here.
A banker undertakes the custody of sums
of money, which he is ready to deliver on de-
mand. At the same time he knows that by re-
taining a certain proportion he is quite safe against
all ordinary contingencies, and the remainder he
can employ for his own profit. In the latter ease
his
chief object is to hold such securities as can be
realiseder at almost any moment, or to discount come
m
cial paper falling due at a fixed and early p
cried.
The propriety of this course is evident. As long as
a trader has numerous claims to meet, which may
come upon him at any time without notice, he must
protect himself by
having all his assets readily con-
vertible. Another important point is also is be con-
sidered. It is in the highest degree improbable that
a good bank will, even in hard times, be exposed
to a run, but it is very likely it will suffer great
pressure. Bankers, whose business it is to watch
the varying phases of the money market, are acute
enough to foresee such events. If their business is con-
ducted in the recognised mode, they can strengthen
their position gradually with the least incon-
venience to themselves and thepublic. This power
of adaptation to circumstances is of enormous
value to an institution like a bank, but appears
to be to say the least, considerably weakened by
the practice of allowing interest on deposits.
In the first place, a bank allowing interest is
no longer an entirely free agent. It may doubt
the wisdom of employing mare than a certain
proportion of the deposits it holds; but if that
limitation should involve a loss, it is sure in the
long run to be set aside. No bank would dream
of keeping idle for any appreciable time a balance
upon which it has to pay a regular rate of interest.
If money is worth 5 per cent. in the open market,
and a bank allows 4, it is clear it would be a
losing business not to lend out about £BO,OOO out
of every £lOO,OOO deposited, although prudence
might dictate the employment of a much smaller
proportion. The bank may, it is true, get
out of the difficulty by altogether refusing
to take deposits at an inconvenient moment, but
with the present competition between bankers,
the risk of disobliging a customer is carefully
avoided, and such instances of denial are conse-
quently rare. It thus follows that under the pre-
sent system it is nearly impossible for a bank to
regulate the whole of its business simply according
to the state of the money market ; and in critical
times an establishment may go on for months
keeping its connection together, but still with an
uneasy feeling that its position is by no means as
secure as it ought to be.
Secondly, the practice tends in no small degree
to foster undue speculation. This is especially
observable at a time when the rates of interest
are high. Since depositors receive a fixed rate of 1
per cent. below the Bank minimum, the proportion
of their balances that must be used is constantly
varying. Thus, with money at 3 per cent., a banker
can retain one-third of his deposits in cash, but at
6 or 7 he can afford to retain only about a sixth.
As a result of these arrangements, and of the
consequent necessity of employing money, commer-
cial paper is occasionally scrutinised less narrowly,
than it should be, and speculators take the oppor-
tunity of extending their paper transactions to the
utmost. It would be unfair to charge a disturbance
like the crisis of 1857 to nothing else than taking
deposits at interest, but by indirectly giving rise to
a hazardous style of doing business the practice
certainly tends that way.
While convinced of the inexpediency of a bank
taking deposits bearing interest and repayable at
call, we admit that, with the limitation of fixed.
periods, and at such rates as may be convenient,
there is nothing to be said against these transac-
tions. As a middle-man between the person who
has money to lend and the one who wishes to bor-
row, a banker but fulfils a part of his functions in
providing each with the requisite facilities in consi-
deration of a moderate commission. The plan,
however, of taking money at interest, repayable on
demand, and lending it out for a fixed period, is
not only unsound in itself but likely in some con-
junctures to create no small amount of difficulty.