January 27, 1916. 
LAND AND WATER 
BRITAIN'S BANKING SYSTEM.- 1. 
By Arthur Kitson. 
IN his remarkable book " Germany and the next 
War," Bernhardt mentions the following as 
one of the many advantages gained by war : — 
" All the sham reputations which a long spell of 
peace nndoubtedly fosters, are unmasked." The pre- 
sent war has undoubtedly " tmmasked " the " sham 
reputations ' ' of several of our most venerable— and 
hitherto admired — institutions — both politico! and 
economic. Among these may be mentioned the doctrine 
of " laissez faire " which has long been the accredited 
gospel of our Governing classes. Free trade appears 
also to have fallen from its lofty pedestal during the past 
few months, judging from the recent parliamentary 
debates and editorials in certain Liberal journals. But 
our one idol that is at present in the greatest disrepute 
is Britain's banking system. 
Scathing Criticisms. 
Nowadays, it is almost impossible to peruse either a 
trade journal or newspaper without noticing some scathing 
criticism of the system which has hitherto been hekl 
up as a shining example of iinancial strength and efficiency. 
The Daily News, which prior to the war never expressed 
anything but blind and absolute faith in this national 
idol, publishes an article (January 15th) by the Kditor, 
entitled " Monej' for all," in which he says :— 
When the war came, the false bottom fell out of our banking 
system and we made a ' startling discovery. We found 
that the banks were an imposing fair weather structure 
which tottered like a house of cards when the storm came 
and only survived because in one swift hour Mr. Lloyd 
George gave them the security of the nation. It was 
discovered that behind all the appearances of strength, 
the banks woie a fiction and the reality on which they 
traded was the credit of tlie State, yours and mine and 
everybody's. Gold disappeared from circulation and 
there flowed forth a torrent of notes issued by the 
Treasury and represented nothing but the credit of the 
Nation. 
Writer Besant once said tliat " the art of banking was to 
get otiicr people's money and use it for your own ad- 
vantage." There has been no more illuminating revelation 
during the war, and the question for us to ask is whether 
this private monopoly of the national credit can be per- 
mitted to continue ? Can we start the future with a 
" corner " in money? Or must we not see that money 
like political power must be democratised ? If money is 
only a symbol representing the whole credit of the com- 
munity why should that symbol not be at the command 
of +Vif w'hnip ^oi-r-rviii-itv whose credit it represents ? " 
Now the remarkable thing about this article is not 
that it should be written at this time when " sham repu- 
tations " are falling in all directions, but that the writer 
did not make these discoveries and disclosures sooner. 
During the past forty years quite a library of publications 
have appeared, exposing the rotten foimdation of Britain's 
financial system and predicting a collapse sooner or later. 
This danger has been the subject of many discussions and 
resolutions at various meetings of our Trade bodies and 
Chambers of Commerce all over the United Kingdom 
for the last thirty-five years. Some of the most ^•igorous 
criticisms have been written by members of the banking 
profession themselves, such as Sir William Holden, and 
by financial writers like Walter Bagehot, and on one or 
two occasions no less an authority than the late Lord 
Goschen (when Chancellor of the Exchequer) uttered 
words of warning about the volcano upon which we were 
living. But like the warnings of the late Lord Salisbury, 
Frederick Harrison, Lord Roberts, and a host of others 
to prepare for the war in which we are now engaged, these 
utterances fell on deaf ears. For it has been the policy of 
the Press, with a few exceptions, to refuse a hearing to 
prophets who foretell danger or evil. 
Now that the murder is out, it will be instructive and 
interesting to examine the wonderful financial edifice — 
the sham Gibraltar— which collapsed days before even 
hostilities had begun or a single shot had been iired. 
In his well-known work, " Lombard Street," Walter 
Bagehot wrote : — " The peculiar essence of our banking 
system is an unprecedented trust between man and 
man, and when that trust is much weakened by hidden 
causes, a small accident may greatly hurt it, and a 
great accident for a moment may almost destroy it," 
Inherently Weak. 
To an outsider who for the first time learns IKj 
true nature of banking, it will appear amazing that in- 
telligent men shoiild de\'isc a system so inherently weak 
and seriously regard it as a basis for a great nation's 
trade and industry ! That it has lasted so long speaks 
volumes for the honesty and faith of the British people — 
the most trusting people in the world. That the system 
should have been facetiously termed "The Great Confi- 
dence Game " is not surprising, for it is apparent that 
the basis of our banking business is public confidence. 
It is.however.only fair to say that the ])resent system was 
neither designed nor foreseen by its founders as we now 
know it. It is a development, a sort of monstrosity— 
an abnormal growth— like a man's body attached to an 
infant's feet and legs. 
In 184.4 Sir Robert Peel, a well meaning but narrow- 
minded statesman, placed British banking in a pair of 
iron boots. The foundation of the system was rigid and 
narrow. Little or no provision was made for the future 
development of commerce. Th(> only question that 
appears to have been considered by Sir Robert Peel was 
how to conserve the value of the sovereign. The develop- 
ment of industry and its needs was quite a side issue, 
indeed, it seems hardly to have received any considera- 
tion. Consequently as the banking needs of the nation 
increased, accommodation had to be provided by enlarg- 
ing the superstructure without any attempt to enlarge 
the foundation to a corresponding extent. The system, 
therefore, came to be likened to an inverted pyrainid. 
The system is briefly as follows :— The ^ Bank of 
England (which by the way is a private stock bank 
and is not in any way a national institution so fir as its 
control and management are concerned) is the financial 
rock upon which all other British banks and financial 
firms and institutions repose. It is known as the Bank 
of the Bankers. " All our credit system depends upon 
the Bank of England for its security " says Walter 
Bagehot ; "on the wisdom of the Directors of that one 
Joint Stock Company, it depends whether England shall 
be solvent or insolvent. This may seem too strong, but 
it is not. All banks depend on the Bank of England, all 
merchants depend upon some banker." 
Banking Laws. 
Our financial system is the result of certain Acts of 
Parliament such as our Legal Tender laws, and the 
Bank Charter Act. The former defines specifically the 
manner and form in which debts must be paid. The 
latter defines restrictions imder which the Banks arc 
permitted to supply the public demand for the debt-pay- 
ing commodity. And although the one created the neces- 
sity for an ever increasing supply of legal tender, the 
Bank Act not only made no provision for such a 
supply, it even made such provision both difficult ancl 
expensive. So that it became more profitable for 
the banks to find a substitute for legal tender— thereby 
increasing the public risks. Hence the invention 
of the cheque system. Debts beyond forty shillings, 
both public and private, were made specifically payable in 
gold on demand. The mints were opened to the coinage of 
gold in unlimited amounts at the fixed rate of £3 17s. 10 Jd. 
per ounce. The Bank of England was allowed the 
privilege of issuing notes to the extent of whatever gold 
it possessed, at the above rate. An additional issue 
of what has been termed " inconvertible " notes was 
allowed against securities and the National Debt to the 
bank (£11,000,000) at present amoimting altogether to 
about' £1^,500,000. Subsidiary coinage was also pro- 
vided for. But the main fact in the Bank Charter Act, 
ivhich constitutes the inherent weakness of the 'whole svslem 
was that the amount of legal tender available for carrving on 
the nation's trade and commerce depended not on our 
domestic needs hut upon the conditions of the tnoney markets 
