HOW BANKS MAKE MONEY.

King Country Chronicle, Volume VIII, Issue 673, 30 May 1914, Page 2

HOW BANKS MAKE MONEY.

A.N INTERESTING LESSON IN THE FINE ART OF FINANCE. "What splendid profits those big banks make !" is a remark often made by those envious mortals who spend their agitated lives in the dodging of the spectre of bankruptcy. "How do they do it?" There is no mystery in their success, for the best and biggest banks have many sources of profit. Hie success of a bank is based, to a considerable extent, on the laws of compound interest. As an instance of this amazing power, a banker once asserted that, it his ancestors had invested for him one humble penny in A.D. 1, at 5 per cent, interest, he would have received in 1910 a little cheque for £75,762,023,113,125,000,000,000,000,000,000t, 000. • The writer cannot claim to have checked these fantastic figures, nor does he know what bank could cash such a cheque. But, although the, demonstration is, of course, exaggerated, it serves to illustrate the illimitable possibilities of compound interest. WHERE THEY SCORE. "Finance is other people's money.'" Thus the banks score heavily because they always hold vast sums be-long-ing to customers who receive no interest, or very little, but on which the banks can earn a substantial return. The biggest bank in England holds over £78,000,000 on deposit and current account. Well, on a considerable portion of this money no interest is paid, or only a low rate. Millions of it are invested and made to yield anything from 4 \;o 6 per cent, interest, which all helps to swell the big profits earned and the fat dividends paid. Business is conducted less with ready money than cn credit, and the banks conduct these vast operations. Discounting industrial, commercial, and trade bills yields a colossal amount of business at fair profits, although competition is super-keen, especially in London and the big centres, where,an army of bill brokers divide the business with the banks. In the country districts competition! is less keen, and borrowers usually pay more for their accommodation. The charges ou these bills, etc., are regulated by ths Bank-rate, becoming higher or lower according to its fluctuations. *. Suppose a bank's customer wants to raise money on £IO,OOO of securities. He deposits them with the bank, and is allowed to overdraw his account to the extent of, say, £6,000, at interest which depends upon circumstances, his standing, and credit, etc. This system is fairly favourable to the customer, because he only pays on the money he uses. Say he overdraws to the extent of £2,000 on August Ist; he is charged on that amount one day's "interest, and so on for each day this overdraft continues, his balance being struck daily. The loan system is more expensive, ' because a borrower who does not use all the money arranged for has to pay the stipulated interest all the same. When a customer's balance falls below, say, £IOO, the bank charges from 10s. to £1 per annum for keeping the account. The Bank of England, which likes substantial customers, and can pick and choose, usually expects to make, on the average, sixpence cn each cheque negotiated. Nobody knows the exact amount lying with the banks unclaimed. But one authority connected with the Bankers' Institute has estimated that such unclaimed balances, securities, plate, valuables, etc., aggregate in value quite £20,000,000. One big bank is known to have £2,000,000 of unclaimed balances, .securities, etc. Several hold amounts varying between £1,250,000 and £-250,000. Admitting that the total amount yields only £4 per cent, yearly, this means that the banks make thereupon a profit of £BOO,OOO per annum. Not many years ago a certain joint-stock bank had as a customer an eccentric old lady, who had £28,000 0 n deposit. Once a year she would drive up to this palatial establishment, ask for the manager,, draw a cheque for the entire amount, count the notes, check the interest — and then pay it all in again, disappearing for another twelve months. For ten years this lady has not been seen. That £28,000, with its accumulated interest, is still in the bank's possession. Another source of profit for the banks is the Stock Exchange business which they do for customers, and on which brokers allow them half their commission. Foreign banks often charge unsuspecting., careless customers double commission. Then banks lend money on big blocks of shares '"pawned" with them by promoters, financiers, stockbrokers, and private speculators. When big loans are floated, famous bankers like the Rothschilds and the Speyers con3uct thci operations, and often secure superb profits. The flotation of new companies also brings grist to the mills of the big banks. They make money by " underwriting"— guaranteeing the success of a notation by taking so many shares, usually at a very profitable price. Altogether, nobody need wonder that our leading banks are so prosperous, and can pay such splendid dividendsfor they are ably man-, aged, and, practically controlling the, wealth of the country, can make a, goodly portion of it earn interest for themselves. All th'is is legal, and no drastic reformative efforts lave yet proved successful. The bankers constitute such an enormously wealthy, powerful ' corpora-' ti'on that no Government cares to. D.Teuil fhem by officious jaterferpiice. —"Answers."