Money and the Mechanism of Exchange
The Cheque Bank
The Cheque and Clearing System, so far as we have hitherto considered it, is mainly restricted to the arrangement of considerable payments. No one can enjoy its advantages unless he keeps a banking account, and for this purpose he must be able to command a certain sum of money, and must have a sufficiently good position and credit to be entrusted by a banker with a cheque book. The result is that the larger part of the population is entirely outside the banking system, and must either use coin, postage stamps, or post-office orders in making payments.
A very ingenious attempt is now being made to extend the area of banking to the masses by the institution of the Cheque Bank. When preparing materials for this book, I was so much struck by the way in which this new bank seems to be adapted to complete the cheque and clearing system in a downward direction, that I applied to Mr. James Hertz, the able inventor of the scheme, for information upon the subject, and have been enabled to inquire minutely into it.
The weak point of the present ordinary cheque book is, that a person once getting a book full of blank cheques, can fill them up for any amounts, irrespective of the balance against which they are supposed to be drawn. Here is an opening for easy fraud, if cheques were generally received from strangers without inquiry. The Cheque Bank proceeds on the new principle of issuing cheques which can be filled up only to limited amounts, as shown by printed and indelible perforated notices upon the forms. These cheques, too, are only to be had in exchange for the utmost sum for which they can be drawn, which sum is retained as a deposit until each corresponding cheque has been presented. It follows that each cheque, when duly filled up and signed by the owner, is as good as a bank-note issued against a documentary reserve. It is true that cheque books or forms may be lost or purloined, and then fraudulently signed and issued; but, being drawn to order and crossed, these documents are very dangerous to meddle with in a criminal manner, and, in the only instance in which fraud has yet been attempted, swift punishment followed.
Relation of the Cheque Bank to other Banks.
We have seen how much has been accomplished establishing relations between banks, as branches agents, or correspondents of each other. The Cheque Bank carries out a similar system to the utmost extent by establishing relations with almost all the banks of the United Kingdom, as well as with most foreign banks of importance. Already 984 English, Irish, or Scotch banks, have entered into relations with the Cheque Bank, and 596 colonial or foreign banks cash the cheques. One advantage of this arrangement is, that the sphere of the cheque system can be greatly extended without any equal increase of trouble and risk. Whenever a bank opens a new account with an individual, that account has to be kept apart in the ledger, and constantly watched. But a bank can sell Cheque Bank cheques to any amount, without opening separate accounts with the purchasers, and may also pay such cheques when presented without risk. The Cheque Bank thus aims at becoming a great institution of accountants, operating for the most part through other banks, but relieving them of much of the risk and trouble of small transactions. The Bank of England is a bankers' bank in the sense that it holds the reserves of other banks, and makes those final payments of cash which close the general balance of transactions. The Cheque Bank seems to be a bankers' bank in the opposite sense of making deposits in all other banks and employing them as agents.
A peculiar feature of the Cheque Bank is that it entirely abstains from using, or even holding, the money deposited. All money received for cheque books is left in the hands of the bankers, through whom they are issued, or transferred to other bankers, as may be needed for meeting the cheques presented. The interest paid by these bankers will be the source of profit, and as the money thus lies in the care of the most wealthy and reputable firms in the kingdom, it could not be lost in any appreciable quantity, except by the break-down of the whole banking system of the country. It would hardly be true to say that these cheques correspond to notes issued on the deposit of government funds, because each agent-bank can use at its own discretion the portion of the funds of the Cheque Bank in its possession. Nevertheless, as the portion in the hands of any one bank will usually be a small fraction of the whole, and there is, moreover, a guarantee fund of consols in the background, the system of issue is more closely analogous to that of a documentary reserve than any other.
The Cheque Bank as a Monetary Agent.
The Cheque Bank appears to aim at becoming the medium for the accomplishment of an immense mass of small payments. Small pensions and annuities, small dividends, small disbursements by officers of departments, by agents, clerks, or even domestic servants are made through it. A book of the Cheque Bank cheques can be safely trusted to almost any servant or agent who can write, and the cheque when presented forms a record of the way in which he has applied the money. No one can venture in like manner to give signed blank cheques to a servant, as they may be filled up for unlimited amounts, and the Cheque Bank cheques are evidently better than a sum of metallic money, which may be mere readily misapplied, purloined, or lost.
The recipient of such cheques finds them one of the most convenient possible forms of remittance, because they will be cashed by almost any banker, and will therefore be received as cash by any person who has acquired sufficient knowledge of their nature. Thus the Cheque Bank seems to be capable of replacing with great advantage the money-order system of the English Post-Office.
To procure a post-office order it is requisite to apply at an office and wait while certain forms are being filled up. A definite office of payment must be selected, and the receiver of the order can obtain payment, as a general rule, only by applying personally at the office, and giving the name of the sender. Even if a person cannot afford to purchase a book of Cheque Bank cheques, he can, in towns where agencies are established for the purpose, buy single cheques filled up for any odd sum with less formality than at the post-office, and these cheques are payable not at one office, but at almost any bank in the United Kingdom and in most foreign towns. They can afterwards be restricted in payment, if desired, to any particular bank. The cost of remittance by cheques will on the average be lower than by money orders, since the Post-Office makes charges for inland orders, increasing from 1d. for sums under 10s. to 1s. for a £10 order, with much higher charges for orders to be paid in certain colonies or foreign countries. The Cheque Bank cheque costs only one penny and one-fifth of a penny in excess of the sum remitted, and of this charge the penny is for the government stamp duly and represents so much public revenue.
The government can have no reason for opposing the Cheque Bank, because if successful it must earn for the Chancellor of the Exchequer a large annual revenue. The money-order system, on the other hand, in spite of the higher charges, is understood to yield no profit, and is rather a burden upon the department. It is said that the issue of every money order involves the filling up of eight or nine forms, and the amount of labour rendered requisite swallows up the revenue. It is a very striking instance of the comparative inefficiency of government industry, except in special cases, that a single banking company can bring into use a form of remittance available in all parts of the world, and far cheaper than post-office orders, and yet pay duty upon their transactions.
The Cheque Bank also aims at becoming a collecting as well as a paying agency. Any public institution needing to collect a subscription, for instance, has only to procure a "paying-in" form, or credit note, and the sum inserted therein will be received by any of the numerous banks in relation. Thus small debts and subscriptions may be readily collected without trouble or expense in any part of the country.
Payment of Wages by Cheques.
The managers of the Cheque Bank hope to substitute their cheques for the coin now used by manufacturers in payment of wages. If this could be accomplished it would be convenient rather than otherwise to bankers, who are weekly called upon to furnish large sums in gold and silver coin, and have the trouble and cost of holding and counting a sufficient stock. Now, if a master in paying his men presented them with small cheques, or, perhaps better still, with cheques for even sums, and the balance in silver, the cheques would be cashed by shopkeepers, and would be deposited by them in the banks, or might even be bought back in large sums by the masters for further use. It was at one time the practice of great railway contractors to issue tally checks in the form of one, two, or five-shilling cards, which were paid to their workmen, and circulated among the publicans and tradesmen of the neighbourhood, until taken back by the contractor in wholesale. Such cheques constituted true representative money, but would be of doubtful legality. The Cheque Bank cheques might serve the same purpose, and have been declared legal, but it is yet very doubtful how far the wholesome practice of immediately presenting ordinary cheques will stand in the way of the continued circulation of other cheques, for which there is no need of immediate presentation. Time after time we have found that habit and custom exercise an immense and very unmanageable influence in monetary affairs, and it will probably take a long time to teach the public to look upon a cheque as a safe document to keep.
The Cheque Bank as a Savings Bank.
Already the Cheque Bank serves as a savings bank into which persons may put surplus money for security, receiving as an acknowledgment the cheque forms by which it can be drawn out or paid away with ease. No interest, however, is paid on such deposits. It seems to me, however, that the bank, if successful in its present aims, might readily become the most admirable of savings banks. Instead of issuing cheques payable at any moment, it might issue through its agent-banks, deposit receipts, bills, or, what comes to much the same thing, post-dated cheques, the interest to be paid at the time of deposit as a discount at the rate of 2 or 2½ cent. This receipt could be retained, transferred by endorsement, or again discounted by the Cheque Bank. If retained until maturity it would become payable like a cheque at any bank in relation with the Cheque Bank. The money deposited in this way might be invested in consols at 3¼ per cent., and the cost of the documents and accountants' work, being slight, might leave a fair margin of profit.
The Post-Office Savings Bank system as established by Mr. Gladstone is an admirable institution; it has been very successful, and has done great service in increasing providence. But it is troublesome and costly in working, and leaves no profit to the state. Already the Scotch banks serve almost in the capacity of savings banks by receiving small fixed deposits; and it is well worthy of consideration whether, by the assistance of the Cheque Bank, almost all the English banks might not be converted savings banks, to the advantage of every one.
Results of the Cheque Bank System.
I have thought it quite suitable to this book to enter somewhat minutely into the actual and possible work done by the Cheque Bank, because, if successful, the institution opens an indefinite sphere for financial improvement. The institution is, indeed, at present a mere experiment, undertaken at the risk of shareholders, and it can only succeed by offering conveniences to the public and the body of bankers. It may succeed in some of its schemes, and not in others, but in any case it will tend to replace coin payments by cheque payments, to be balanced off in the general London clearing. The profits of the bank depend upon the very small charge of 1/5 of a penny for each cheque, and the interest on deposits. The amount of deposits remaining undrawn depends upon three circumstances: (1) the time before the cheque is utilized; (2) the time it is in circulation, or travelling about, and (3) the difference between the sum drawn and that deposited. The average duration of circulation, I am informed, was lately ten days, but many cheques have already been out a year.
I should add that, in describing with some detail the operations of the Cheque Bank, I have no interest in the success of the institution other than a strictly scientific interest. In any case it is a most ingenious innovation, and if successful cannot fail to benefit the community in a high degree, adding a new feature to a banking system already wonderfully organized.
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