The Case for Municipal Banks
by J P Hilton
An article written by the Bank's first General Manager
which was published in The Banker magazine in March 1928.
The article was written shortly after the publication of the Bradbury Committee's Report on Municipal Savings Banks
The Treasury, in September 1926, appointed a Committee consisting of Lord Bradbury, Sir Laurence Halsey, Sir Harry Haward, Col. the Hon. Sidney Peel, and Sir William Schooling, to consider whether it is desirable to permit a further examination of Municipal Savings Banks and, if so, within what limits and subject to what conditions, statutory, or otherwise.

The report of the Committee has now been made public, and the conclusion reached that "in view of the present position of national finance the extension of municipal savings banks within the next ten years would not be in the interests of the community as a whole." The Committee, however, appear to think it desirable that existing thrift institutions should be granted extended powers, and that there should be an extension of trustee savings banks in areas where they do not exist.

The Committee have taken evidence from representatives of the Birmingham Municipal Bank, which is the only such bank in existence, and they have been furnished with much information to enable them to conduct their investigations. After a searching examination into the working and achievements of the bank, it is gratifying to find eloquent testimony paid to it. The Committee refer to the "enthusiasm and efficiency of its direction," and the "sentiment of civic pride" to which the bank has appealed. They assert there can be no doubt that the bank "has achieved a success of which Birmingham is justly proud"; they pay a compliment to municipal spirit which is "unusually powerful" in Birmingham; they admit that the bank is "undoubtedly rendering very real service to thrift"; they tell us it is "a living institution with a vigorous individuality of its own," and they are satisfied it has come to hold "a high place in the minds of a great number of the citizens."

Local Government administrators elsewhere will be disappointed with the report, and will not be satisfied with the suggestion that they are less competent than Birmingham administrators, or that they cannot be relied upon to create equal enthusiasm or zeal in the cause of thrift. Local patriotism is not a monopoly of Birmingham, and those who are responsible for the Municipal administration in other areas are entitled to claim that they take as great a pride in their towns and discharge their public duties in a wise and beneficent manner.

The report states that "habits of thrift promote a certain stability of mind and outlook," and "contribute greatly to the ultimate happiness and well-being of those who practice them." Accepting that view, it is somewhat perplexing to understand why a municipality should be prevented from using its influence in connection with such good qualities through the medium of a municipal bank.

The Birmingham bank has never pretended to be anything other than what it is, and perhaps it is as well that the position should be clearly stated. It is a savings bank, having the guarantee of the municipality; it accepts deposits from the citizens and allows interest thereon; through a department of the bank advances are made to assist depositors to purchase their houses, and convenient facilities are provided for the payment of municipal accounts, such as water, gas, electricity, etc. Safeguards are introduced by way of regulations which ensure the bank being conducted on savings bank lines, a fact admitted in paragraph 136 of the report. The bank is the safe custodian of the savings of the people; it aims at developing habits of thrift; it seeks to give those who practice thrift as reasonable a rate of interest as can prudently be allowed; it cultivates a spirit of independence by encouraging house-ownership; it seeks to make the citizens happier and more contented, and it makes a contribution to economic civic administration by simplifying the collection of municipal accounts. These are worthy aims, and such as any municipality should be proud to achieve.

The advantages of a municipal bank are many: the depositor has unquestionable security in the guarantee of the municipality; he can rely upon the provision of reasonable and convenient facilities to practice thrift; he has the knowledge that the management of the bank will be in the hands of those who he elects to serve him; he knows that it is subject to the fierce light of public criticism, and that his representatives must give an account of their stewardship to the council and ultimately to the public; he feels he has a direct interest in the control of the bank; he can obtain assistance towards the purchase of his house on terms and conditions unequalled by other lending organizations, and he can save expense in remittances in settling his municipal accounts.

It can scarcely be denied that the municipality is in a stronger position to arouse an interest in thrift than any other organization, even the State. The State has realized the value of municipal interest in thrift on many occasions, and references are made in the report to "local sentiment," "local pride," etc. It is stated that "the Mayor or the chief representative of the local authority is frequently the President" of local savings committees, presumably because of the influence he can wield by virtue of his office. Again, it is urged that trustee savings banks should be brought into "closer touch with municipal and other important local interests." There being common agreement on the importance of municipal influence in the cause of thrift, it is remarkable that objections should be raised when it is suggested that this influence should be exerted by the municipality directly instead of indirectly.

Witnesses on behalf of municipalities contended that a municipal bank would encourage "new thrift" and "appeal to a sentiment that was not reached by any of the existing organizations." One cannot doubt that such would be the case, and it is difficult to imagine any conflict of evidence on that point amongst those who represented the municipalities.

The report, in appendix 2, seeks to demonstrate the effect of the Birmingham Municipal Bank on other forms of savings; but it is impossible to estimate the source of the deposits in the bank, or to trace their destination by way of withdrawals. Only hypothetical conclusions can be arrived at, and because of their uncertainty they are not convincing; but even if the low estimate of one million pounds represents "new thrift" in the Birmingham Municipal Bank, is not that sufficient testimony in itself as to the value of the bank?

As regards the country generally, it is suggested that the ground is "well covered” by existing organizations; but it is also suggested that there is considerable scope for the further encouragement of thrift." Surely the people best qualified to judge of the need or otherwise of a municipal bank are the municipalities themselves; and when it is known that scores of municipalities are without savings-bank facilities, other than the Post Office, the statement that the ground is "well covered" can scarcely be accepted.

The opinion expressed that the establishment of a municipal bank would mean the closing down of existing trustee savings banks may or may not be a correct one, but it cannot be advanced as an argument against the setting up of municipal banks. If the latter can be more effective in the cause of thrift, the denial of the power to establish such banks must be attributed to causes other than that of thrift. The people concerned would prove in due time whether they preferred the one or the other type of savings bank.

It is admitted that "a ready supply of capital is in itself a convenience to local authorities," and it is appreciated as important that "local authorities should be able to finance their requirements without undue difficulty." Some help in this direction would be forthcoming as the result of a municipal bank, and it is ungracious to deny municipalities that assistance. The report admits that the amount available for use in capital expenditure would be "comparatively small," and any risk must therefore be "comparatively small”. It should be remembered that the extent to which municipalities can embark on capital expenditure is largely regulated by Government departments, who must satisfy themselves before sanctioning the expenditure.

The suggestion that the accumulation of savings in a municipal bank may lead to extravagance in municipal expenditure is somewhat ‘thin’, and one can but express regret at the suggestion. It is all the more difficult to understand in face of the statement that the available amount would be "comparatively small." The fact that depositors, on the one hand, would seek as high a return as possible for their money, and ratepayers (many of whom would be depositors) would, on the other hand, seek to obtain as low a payment as possible in respect of rates, should tend towards stability and not towards extravagance. The Committee are a little unjust in suggesting that, because a municipality cannot go bankrupt, precautions would not be taken against the possibility of running short of ready money. Those who control the finances of a municipality are entitled to a higher testimony than that; and, indeed, the Committee appear to realize, to some extent, their value by stating in paragraph 131, "We are much impressed with the great vigour of municipal life in this country, the general efficiency of local government, and the immense value of the civic spirit . . ." If municipal extravagance would be encouraged by municipal banks, is it not reasonable to assume that national extravagance operates as the result of national or semi-national forms of thrift?

Objection is taken to municipal banks on the ground that investments might be made in long-term Government securities, or that the money would be used for corporation purposes, and we are told that borrowing short and lending long is a practice "repugnant to sound principles of banking." The State apparently does not adhere to that sound principle, as it is admitted that savings-bank deposits are used for capital expenditure in connection with telephone construction, loans to local authorities, etc. The only difference between the State following such a practice, and a municipality observing a similar practice, is one of comparison, and not one of principle. It is obvious that the risk in the case of the State would be spread over a larger area than would be the case with a municipality, but that is no argument against a municipality copying the example of the State, and it should not be beyond the ability of the Legislature to safeguard the risk by way of regulations.
The doubt as to the ability of a municipality to meet large and sudden withdrawals presupposes that prudence would not be exercised in dealing with the matter of investments; but that is hardly fair to those who have financial obligations to discharge. The experience of the Birmingham bank in this matter shows that in the short space of seven and a-half years over eleven and a-half million pounds have been repaid to depositors out of liquid funds of the bank, and without any necessity to call upon the corporation to realize any security which it holds, or to advance any portion of the money. Presumably, what Birmingham has done other municipalities can also do. It would be the duty of the municipality to meet sudden and heavy withdrawals, and to do so it would, in the first place, fall back upon the liquid funds which it controls; should these fail to meet the demand the municipality could obtain assistance from its bankers with whom it would be able to deposit securities sufficient to cover the advance. If these measures would not meet the situation it can reasonably be assumed that "foul financial weather," referred to in the report, would, indeed, have been encountered, and the position in which a municipal bank might find itself would be the position in which the commercial banks and other institutions would be found. The report states that "every bank has a responsibility not merely to its own depositors, but to all other banks, and to the whole community." This being so, it is inconceivable that a banker to a municipality would refuse to lend such assistance as may be necessary to tide over the temporary embarrassment, which would be relieved immediately confidence was restored. The restoration of confidence, it is believed, would be more quickly established by the municipality than by any other organization. Would it be wrong to say that the municipality is the best customer of a joint stock bank, and is it likely that such a bank would decline to assist its best customer? Would it be wrong to say that the joint-stock bank is the friend of the municipality, and, if so, would not that friendship result in co-operation in times of difficulty?

While it is wise that precautions should be taken to guard against an extraordinary happening, it is hardly justifiable to say that a municipal bank should not be established because of the necessity for taking precautions. The risk which a municipal bank might run in not being able to meet the demands of depositors would be a slight one, as the report admits, and that being so, undue emphasis should not be laid on the risk.
The objection to an extension of municipal banks on the ground of "embarrassment to national finance” would appear to be the real reason for the conclusions reached by the Committee, but even in this respect it is difficult to follow the line of reasoning in the report. Trustee savings banks, according to the report, invest 80 per cent. of the funds of their special investment departments in mortgages on local rates, and it is suggested that still closer contact should be obtained by these banks with the municipality, presumably by way of further investments. Any such policy must tend towards diverting money from national finance to local finance, and would, therefore, be an embarrassment to the former. Similarly, the greater use by municipalities of the funds available through the National Savings Certificate system would also cause embarrassment, and yet these two methods appear to be advocated.

In one part of the report we find it stated that the establishment of municipal banks might result in the downfall of trustee savings banks, and in another part of the report it is stated that the latter banks are "firmly established," and that they inspire confidence in the minds of depositors. It is not easy to understand why the downfall of "firmly established" banks should be suggested as the result of the setting up of another type of bank.

The Committee state that they "do not claim any detailed knowledge" of the position and activities of trustee savings banks, but proceed to recommend an extension of their activities and even the establishment of new banks. The absence of direct representation on the management of these banks is drawn attention to, and the suggestion of closer contact with the municipality is urged. The reason for this suggestion is not sufficiently clear, but the report would appear to suggest that direction and control by elected representatives is objected to. This will come as a surprise to many who hold to the view that those who are most keenly interested by way of depositorship should have a more direct voice in the control.

The paragraph in the report which deals with municipal banking companies, such as have been established in certain Scottish towns, suggests a change of name. While it may be desirable to eliminate the word "municipal," it is unlikely that those who have evolved a scheme for setting up these banks will be at a loss for an alternative title, and it is doubtful whether any such change will affect the depositorship of these banks.

It is in the interests of commercial banks to support the establishment of properly constituted municipal banks with whom they direct association. After all, the municipal bank would be complementary, and not alternative, to the commercial bank. Although very briefly referred to, it is stated in the report that joint-stock banks have devoted considerable attention to attracting small savings and to developing savings bank departments. One is familiar with the efforts which have been made, but it is extremely doubtful whether commercial banks will ever induce working classes in the mass to use their machinery. The possibility of masses of the workers being seen at the same bank counters as their employers is remote; the system of a commercial bank, the atmosphere associated with it, and the inconvenient hours of business, all tend to detract rather than attract the working classes. To be successful, even to a limited degree, a commercial bank must be prepared to open its doors during evenings when the workers have the money available. It has been found necessary in Birmingham to open the Municipal Bank during Saturday and Monday evenings, and on these two days 75 per cent. of the business is transacted.

Some twelve months ago certain newspapers made comments as to the high management costs of municipal banks, and compelled the Birmingham bank authorities to issue a denial. The figures which the Birmingham bank submitted at that time have proved to be well founded, and the evidence contained in appendix 4 (section 3) disposes of this 'bogy.'

Although the functions of a municipality are "already many and varied," there seems to be no end to new duties and responsibilities being placed upon them by the Legislature; and although the Committee think that savings-bank work is not such as a municipality should undertake, it is difficult to defend that view. The education of children, the health of the inhabitants, the housing of people and the maintenance of essential public services are no less important than the provision of a safe harbour for the savings of the people; and if it is admitted that municipalities are competent to discharge the important public services now devolving upon them, there seems to be little ground for objecting to the addition of municipal savings banks.