A few weeks I had the please sure to read Lombard Street: A Description of the Money Market
by Walter Bagehot (1873, my edition a reprint of the 1910 Dutton Edition).
Insightful, incisive and straightforwardly written in the kind of limpid, but
expressive, prose that seems to have gone out with the 19th century. It also
included some very useful data points, some of which are included in the
excerpts below.

Excerpts from the Gutenberg text at
http://www.gutenberg.org/cache/epub/4359/pg4359.html (not clear what
edition). All emphasis added.

Dividends of Banks (p.39)

This is the natural desire of all directors to make a good dividend for their
shareholders. The more money lying idle the less, caeteris paribus, is the
dividend; the less money lying idle the greater is the dividend. And at
almost every meeting of the proprietors of the Bank of England, there is a
conversation on this subject. Some proprietor says that he does not see why
so much money is kept idle, and hints that the dividend ought to be more.

Indeed, it cannot be wondered at that the Bank proprietors do not quite like
their position. Theirs is the oldest bank in the City, but their profits do
not increase, while those of other banks most rapidly increase. In 1844, the
dividend on the stock of the Bank of England was 7 per cent, and the price of
the stock itself 212; the dividend now is 9 per cent, and the price of the
stock 232. But in the same time the shares of the London and Westminster
Bank, in spite of an addition of 100 per cent to the capital, have risen from
27 to 66, and the dividend from 6 per cent to 20 per cent.[^1] That the Bank
proprietors should not like to see other companies getting richer than their
company is only natural.

[^1]: In 1905 the Bank of England paid a dividend of 9 per cent, and the
London and Westminster Bank a dividend of 13 per cent. At the end of
1905 the sshares ofthe Bank of England were quoted at 293.5 and the
those of the London and Westminster Bank at 58.

Some part of the lowness of the Bank dividend, and of the consequent small
value of Bank stock, is undoubtedly caused by the magnitude of the Bank
capital; but much of it is also due to the great amount of unproductive
cash—of cash which yields no interest—that the Banking Department of the Bank
of England keeps lying idle. If we compare the London and Westminster
Bank—which is the first of the joint-stock banks in the public estimation and
known to be very cautiously and carefully managed—with the Bank of England,
we shall see the difference at once. The London and Westminster has only 13
per cent of its liabilities lying idle. The Banking Department of the Bank of
England has over 40 per cent. So great a difference in the management must
cause, and does cause, a great difference in the profits. Inevitably the
shareholders of the Bank of England will dislike this great difference; more
or less, they will always urge their directors to diminish (as far as
possible) the unproductive reserve, and to augment as far as possible their
own dividend.

Origin of Banking in Ensuring Currency Quality (pp. 80-82)

The real history is very different. New wants are mostly supplied by
adaptation, not by creation or foundation. Something having been created to
satisfy an extreme want, it is used to satisfy less pressing wants, or to
supply additional conveniences. On this account, political Government—the
oldest institution in the world—has been the hardest worked. At the beginning
of history, we find it doing everything which society wants done, and
forbidding everything which society does not wish done. In trade, at present,
the first commerce in a new place is a general shop, which, beginning with
articles of real necessity, comes shortly to supply the oddest accumulation
of petty comforts. And the history of banking has been the same. The first
banks were not founded for our system of deposit banking, or for anything
like it. They were founded for much more pressing reasons, and having been
founded, they, or copies from them, were applied to our modern uses.

The earliest banks of Italy, where the name began, were finance companies.
The Bank of St. George, at Genoa, and other banks founded in imitation of it,
were at first only companies to make loans to, and float loans for, the
Governments of the cities in which they were formed. The want of money is an
urgent want of Governments at most periods, and seldom more urgent than it
was in the tumultuous Italian Republics of the Middle Ages. After these banks
had been long established, they began to do what we call banking business;
but at first they never thought of it. The great banks of the North of Europe
had their origin in a want still more curious. The notion of its being a
prime business of a bank to give good coin has passed out of men’s memories;
but wherever it is felt, there is no want of business more keen and urgent.
Adam Smith describes it so admirably that it would be stupid not to quote his
words:—’The currency of a great state, such as France or England, generally
consists almost entirely of its own coin. Should this currency, therefore, be
at any time worn, clipt, or otherwise degraded below its standard value, the
state by a reformation of its coin can effectually re-establish its currency.
But the currency of a small state, such as Genoa or Hamburgh, can seldom
consist altogether in its own coin, but must be made up, in a great measure,
of the coins of all the neighbouring states with which its inhabitants have a
continual intercourse. Such a state, therefore, by reforming its coin, will
not always be able to reform its currency. If foreign bills of exchange are
paid in this currency, the uncertain value of any sum, of what is in its own
nature so uncertain, must render the exchange always very much against such a
state, its currency being, in all foreign states, necessarily valued even
below what it is worth.

‘In order to remedy the inconvenience to which this disadvantageous exchange
must have subjected their merchants, such small states, when they began to
attend to the interest of trade, have frequently enacted, that foreign bills
of exchange of a certain value should be paid, not in common currency, but by
an order upon, or by a transfer in, the books of a certain bank, established
upon the credit, and under the protection of the state, this bank being
always obliged to pay, in good and true money, exactly according to the
standard of the state. The banks of Venice, Genoa, Amsterdam, Hamburgh and
Nuremburg, seem to have been all originally established with this view,
though some of them may have afterwards been made subservient to other
purposes. The money of such banks, being better than the common currency of
the country, necessarily bore an agio, which was greater or smaller,
according as the currency was supposed to be more or less degraded below the
standard of the state. The agio of the bank of Hamburgh, for example, which
is said to be commonly about fourteen per cent, is the supposed difference
between the good standard money of the state, and the clipt, worn, and
diminished currency poured into it from all the neighbouring states.

‘Before 1609 the great quantity of clipt and worn foreign coin, which the
extensive trade of Amsterdam brought from all parts of Europe, reduced the
value of its currency about 9 per cent below that of good money fresh from
the mint. Such money no sooner appeared than it was melted down or carried
away, as it always is in such circumstances. The merchants, with plenty of
currency, could not always find a sufficient quantity of good money to pay
their bills of exchange; and the value of those bills, in spite of several
regulations which were made to prevent it, became in a great measure
uncertain.

‘In order to remedy these inconveniences, a bank was established in 1609
under the guarantee of the City. This bank received both foreign coin, and
the light and worn coin of the country at its real intrinsic value in the
good standard money of the country, deducting only so much as was necessary
for defraying the expense of coinage, and the other necessary expense of
management. For the value which remained, after this small deduction was
made, it gave a credit in its books. This credit was called bank money,
which, as it represented money exactly according to the standard of the mint,
was always of the same real value, and intrinsically worth more than current
money. It was at the same time enacted, that all bills drawn upon or
negotiated at Amsterdam of the value of six hundred guilders and upwards
should be paid in bank money, which at once took away all uncertainty in the
value of those bills. Every merchant, in consequence of this regulation, was
obliged to keep an account with the bank in order to pay his foreign bills of
exchange, which necessarily occasioned a certain demand for bank money.’

Appointment of the Governor (& comments on the French Manner of Doing Things) (pp. 231)

… In France the difficulty of finding a good body to choose the Governor of
the Bank has been met characteristically. The Bank of France keeps the money
of the State, and the State appoints its governor. The French have generally
a logical reason to give for all they do, though perhaps the results of their
actions are not always so good as the reasons for them. The Governor of the
Bank of France has not always, I am told, been a very competent person; the
Sub-Governor, whom the State also appoints, is, as we might expect, usually
better. But for our English purposes it would be useless to inquire minutely
into this. No English statesman would consent to be responsible for the
choice of the Governor of the Bank of England. After every panic, the
Opposition would say in Parliament that the calamity had been ‘grievously
aggravated,’ if not wholly caused, by the ‘gross misconduct’ of the Governor
appointed by the ministry. Or, possibly, offices may have changed occupants
and the ministry in power at the panic would be the opponents of the ministry
which at a former time appointed the Governor. In that case they would be apt
to feel, and to intimate, a ‘grave regret’ at the course which the nominee of
their adversaries had ‘thought it desirable to pursue.’ They would not much
mind hurting his feelings, and if he resigned they would have themselves a
valuable piece of patronage to confer on one of their own friends. No result
could be worse than that the conduct of the Bank and the management should be
made a matter of party politics, and men of all parties would agree in this,
even if they agreed in almost nothing else.

I am therefore afraid that we must abandon the plan of improving the
government of the Bank of England by the appointment of a permanent Governor,
because we should not be sure of choosing a good governor, and should indeed
run a great risk, for the most part, of choosing a bad one.

Echoes of Today’s Extensive Attention to Deliberations of the “Fed” of the MPC (p. 243)

It has been said, with exaggeration, but not without a basis of truth, that
if the Bank directors were to sit for four hours, there would be ‘a panic
solely from that.’ ‘The court,’ says Mr. Tooke, ‘meets at half-past eleven or
twelve; and, if the sitting be prolonged beyond half-past one, the Stock
Exchange and the money market become excited, under the idea that a change of
importance is under discussion; and persons congregate about the doors of the
Bank parlour to obtain the earliest intimation of the decision.’ And he
proceeds to conjecture that the knowledge of the impatience without must
cause haste, if not impatience, within. That the decisions of such a court
should be of incalculable importance is plainly very strange.

Profitability of Banks and its Cause (pp. 247-248)

‘But the main source of the profitableness of established banking is the
smallness of the requisite capital. Being only wanted as a “moral influence,”
it need not be more than is necessary to secure that influence. Although,
therefore, a banker deals only with the most sure securities, and with those
which yield the least interest, he can nevertheless gain and divide a very
large profit upon his own capital, because the money in his hands is so much
larger than that capital.

‘Experience, as shown by plain figures, confirms these conclusions. We print at
the end of this article the respective profits of 110 banks in England, and
Scotland, and Ireland, being all in those countries of which we have sufficient
information—the Bank of England excepted. There are no doubt others, but they
are not quoted even on local Stock Exchange lists, and in most cases publish no
reports. The result of these banks, as regards the dividends they pay, is—

                               No. of Companies    Capital (L)
    Above 20 per cent             15                5,302,767
    Between 15 and 20 per cent    20                5,439,439
       " 10 and 15 per cent       36               14,056,950
       " 5 and 10 per cent        36               14,182,379
    Under 5 per cent               3                1,350,000
                           -----------------------------------
                                 110               40,331,535

that is to say, above 25 per cent of the capital employed in these banks pays
over 15 per cent, and 62 1/2 per cent of the capital pays more than 10 per
cent. So striking a result is not to be shown in any other joint stock trade.

Management and Supervision of Banks (pp. 262-263)

And an effectual supervision by the whole board being impossible, there is a
great risk that the whole business may fall to the general manager. Many
unhappy cases have proved this to be very dangerous. Even when the business
of joint stock banks was far less, and when the deposits entrusted to them
were very much smaller, a manager sometimes committed frauds which were
dangerous, and still oftener made mistakes that were ruinous. Actual crime
will always be rare; but, as an uninspected manager of a great bank has the
control of untold millions, sometimes we must expect to see it: the magnitude
of the temptation will occasionally prevail over the feebleness of human
nature. But error is far more formidable than fraud: the mistakes of a
sanguine manager are, far more to be dreaded than the theft of a dishonest
manager. Easy misconception is far more common than long-sighted deceit.
And the losses to which an adventurous and plausible manager, in complete
good faith, would readily commit a bank, are beyond comparison greater than
any which a fraudulent manager would be able to conceal, even with the utmost
ingenuity. If the losses by mistake in banking and the losses by fraud were
put side by side, those by mistake would be incomparably the greater. There
is no more unsafe government for a bank than that of an eager and active
manager, subject only to the supervision of a numerous board of directors,
even though that board be excellent, for the manager may easily glide into
dangerous and insecure transactions, nor can the board effectually check
him.

Bill-broker commissions and operations (pp. 287-288)

As is usually the case, this kind of business has grown up only gradually. In
the year 1810 there was no such business precisely answering to what we now
call bill-broking in London. Mr. Richardson, the principal ‘bill-broker’ of
the time, as the term was then understood, thus described his business to the
‘Bullion Committee:’

…

Mr. Richardson was only a broker who found money for bills and bills for
money. He is further asked:

‘Do you guarantee the bills you discount, and what is your charge per
cent?—No, we do not guarantee them; our charge is one-eighth per cent
brokerage upon the bill discounted, but we make no charge to the lender of
the money.

‘Do you consider that brokerage as a compensation for the skill which you
exercise in selecting the bills which you thus get discounted?—Yes, for
selecting of the bills, writing letters, and other trouble.

‘Does the party who furnishes the money give you any kind of
compensation?—None at all.

‘Does he not consider you as his agent, and in some degree responsible for
the safety of the bills which you give him?—Not at all.

‘Does he not prefer you on the score of his judging that you will give him
good intelligence upon that subject?—Yes, he relies upon us.

‘Do you then exercise a discretion as to the probable safety of the
bills?—Yes; if a bill comes to us which we conceive not to be safe, we return
it.

‘Do you not then conceive yourselves to depend in a great measure for the
quantity of business which you can perform on the favour of the party lending
the money?—Yes, very much so. If we manage our business well, we retain our
friends; if we do not, we lose them.’

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