The above statements made in the Bank's three Annual Reports for the years ending March 31st 1956 to 1958 make allusion to the difficulties faced by the Bank's management in obtaining the Income Tax concession granted by the government to savers in the Post Office Savings Bank and the Ordinary Department of Trustee Savings Banks. Details of the problems overcome were outlined in contemporary newspaper reports:
Birmingham Mail - April 25th 1956:
A ruling on the position of the Birmingham Municipal Bank over the budget proposals to exempt the first £15 of interest from tax is being sought by the Bank Management Committee.
Their case will be put to the Chancellor shortly by a deputation of MPs of both parties led by Mr Julius Silverman, MP for Aston.
It is confidently expected that the Chancellor will say that the Municipal Bank qualifies for the allowance.
The chairman of the Bank Committee (Alderman A H Cooper), the City Treasurer (Mr J P Eames), the general manager (Mr H Carver), and the Deputy Town Clerk (Mr T H Parkinson) today met a a group of city MPs to discuss the matter.
It was pointed out that although the Chancellor's concession was obviously intended to benefit depositors in the Post Office Savings Bank, and the ordinary departments of trustee savings banks, the Birmingham Municipal Bank had not been specifically mentioned.
It is the only bank of its kind in the country.
A statement after the meeting said that the Management Committee was convinced that the Chancellor did not wish to deny to Birmingham citizens a concession granted to those living in other towns.
MPs seen by the deputation were Mr W E Wheeldon, Mr Denis Howell, Mr J Silverman, Mr Donald Chapman, Miss Edith Pitt, Mr Victor Yates, Mr Harold Gurden, Mr Henry Osborne, and Mr Percy Shurmer.
It was agreed that these MPs should approach the Chancellor and ask him "to confirm that it is his clear intention to grant the tax concession to depositors in the Municipal Bank."
Birmingham Post - June 9th 1956:
The "star" Back-bencher in the Commons this week has been Mr Roy Jenkins, the Member of Parliament for Stechford, who alternately scintillated and was wittily pungent in what might have been dreary debates on the Finance Bill in committee.
Mr Jenkins was instrumental, furthermore, in effecting acceptance by the Chancellor of the Exchequer of a basis for a comprise which will include the greater part of the Birmingham Municipal Bank's business within the concession of the Budget whereby the first £15 of interest will be tax-free to the depositor. This was done in a polished manner and with an impressive mastery of a mass of figures which left Sir Edward Boyle, who was answering for Mr Macmillan, with little to recapitulate.
The case of the Municipal Bank, as it happened, attracted a fairly large House, for besides being a traditional Socialist point of interest as a form of municipal enterprise, the principle of municipal savings banks held an interest also for Conservatives.
There was pleasure also in seeing how the Chancellor was to get through this eye of a needle, for the anomaly, though patent, seemed difficult to solve. Mr Jenkins has taken a leading part in the behind-the -scenes discussions with Members on the claim of the Birmingham bank to inclusion, and has been the member with whom the Chancellor has communicated, since three of the four Conservative Members for Birmingham are now Ministers and so are somewhat inhibited from being publicly concerned in pressing such issues on the Government. Mr Jenkins, therefore, has jocularly become known as "The Man Who Saved the Bank."
It is now becoming evident that Mr Jenkins is an economist whom the Opposition would be well advised to employ more fully. He is industrious in the thankless business of trying to improve Finance Bills. He took first-class honours in politics, philosophy and economics at Balliol, and though there are several former presidents of the Oxford Union in Parliament, he is one of the few former secretaries and librarians of the Union in the House.
He is still a prominent Fabian, and to his well-known biography of Mr Attlee has added his entertaining account of the events of 1909-11, when the Peers rejected the "People's Budget" in his book Mr Balfour's Poodle.
Birmingham Mail - July 5th 1956:
The Chancellor of the Exchequer, Mr Harold Macmillan, has decided he cannot allow the Budget savings concession of no tax charges on the first £15 interest to depositors in the Birmingham Municipal Bank.
The decision was being given by the Chancellor today to a deputation from the City Council, who were hoping to get the ruling reversed in a personal meeting with Mr Macmillan.
The Chancellor's decision, I understand, is based on the consistent advice of Treasury officials who have maintained all along that the Finance Bill could not be amended to help the Birmingham Bank.
The Treasury has argued that any clause added to the Bill could not be drafted in any way other than that which would leave a loophole for other savings organisations and banks to enjoy the same protection.
The Chancellor, in finally deciding against the Birmingham Bank's claim, appears to have gone back on his promise during the committee stage of the Finance Bill.
He then undertook to consider, granting to Birmingham the £15 allowance on certain conditions. These would include some re-organisation of the bank to ensure adequate Treasury control - in line with Government monetary policy - over a suitable proportion of the investments.
The Chancellor's change of mind is taken badly by city Socialist MPs and some outspoken exchanges could be expected at today's meeting if the Minister refuses to budge.
The report stage of the Finance Bill, on which changes would have to be made if the Municipal Bank is to get the allowance, takes place in the Commons next Wednesday.
It can be seen therefore that precious little time is left for a new clause to be drafted even if today's deputation succeeds in persuading the Chancellor to take yet one more look at the Bank's case.
Birmingham Mail - July 5th 1956:
An all-party deputation from Birmingham Corporation, strengthened by Socialist and Conservative MPs for the city, this afternoon met Mr Harold Macmillan, the Chancellor of the Exchequer, to hear his decision on the Birmingham Municipal Bank's application to be allowed the Budget tax-free allowance on the first £15 interest on all savings accounts.
Before they left for London, members were informed by The Birmingham Mail of the news that the Chancellor had decided not to include the Municipal Bank in his scheme.
Members refused to make any statement and indicated that they were going to the meeting with Mr Macmillan in the firm hope that the technical position of Birmingham's application was that it was still undecided.
If, however, it was found that the Chancellor had made up his mind to say "No", then it was agreed that an all-out attempt should be made to retrieve the case for the Bank at the last minute.
The claim by the Municipal Bank to benefit from this concession has been supported throughout by the National Savings Movement, of which the Municipal Bank forms an integral part.
Under the constitution of the Municipal Bank the Corporation is permitted to draw on the Municipal Bank for capital expenditure, but it was officially emphasised today that for many years now there has been no excess of deposits.
In this respect the Municipal Bank's receipts have been in line with the general trend of savings throughout the country.
Before the 1939-45 war, the Corporation was able to use money deposited in the Municipal Bank, and, since this money was "call money", it was obtained at a low rate of interest - though the exact rate was never disclosed.
The Corporation accounts for the year ended March 31, 1955, the latest available, show that the total Municipal Bank deposits on call with the Corporation in accordance with the regulations of the Bank at that date amounted to £36,400,000.
Present rate of interest paid by the Municipal Bank is 2¾ per cent, and individual depositors may only deposit amounts up to £3,000. There are certain exceptions to this rule, notably friendly societies.
Birmingham Mail - July 15th 1956
To qualify for the tax-free concession given in the April Budget, the Birmingham Municipal Bank will have to set up a separate department for depositors wishing to participate in the scheme.
This was advice likely to be given by its experts to the City Councils' Bank Committee which met this afternoon to discuss the conditions laid down by the Chancellor of the Exchequer for including the Bank in the savings scheme.
In political circles in Birmingham today it was considered that the Chancellor seemed to be reluctant to include the Municipal Bank in the tax-free concession, but having given way before the combined pressure from Birmingham and the entire National Savings movement, had insisted on the strictest safeguards for Government savings certificates and bonds.
The terms under which the Chancellor is prepared to grant the tax-free concession to the Municipal Bank are such that in the long run it may not be a business proposition for the Bank to accept them.
The Chancellor's amendment to the Finance Bill provides that a certificate may be granted to a savings bank to qualify for the concession on two main conditions:
1 Interest on deposits does not exceed 2½ per cent
2 Deposits must be invested with the National Debt Commissioners
In the case of existing depositors, they would be required to transfer their accounts to the new department will depend largely upon individual tax assessments, and it is envisaged that a lot of large depositors such as trustees and institutions will not bother, but will prefer to draw the present rate of interest of 2¾ per cent paid by the Municipal Bank.
The Bank envisages another difficulty. In respect of existing depositors who want to secure the tax-free concession, the Municipal Bank will have to pay cash to the National Debt Commissioners, Mr Macmillan and his treasury advisers having refused to accept securities and other investments.
The Municipal bank always has money on "call" with the Corporation, which in the past has used the money for capital expenditure. With the existing level of high interest rates, the Corporation would be reluctant to go into the money market for very short term loans in order to pay cash to the National Debt Commissioners.
One reaction among small savers in Birmingham today was a message to 'The Birmingham Mail' from 56 employees of a wholesale manufacturing business. All bank with the Municipal Bank.
The message said: "We think that the Chancellor should give the tax relief on all savings in the Municipal Bank, and if it is not forthcoming we intend to send 56 telegrams to the Chancellor.
"We intend to tell him that we consider that he is not encouraging saving by this sort of thing, and we will withdraw our savings from the Municipal Bank and spend them before the value of money drops any further."
Birmingham Mail - July 15th 1956
The Government today publishes the term upon which it would accept eligibility of a section of the Birmingham Municipal Bank for the lifting of tax on the first £15 of interest granted to approved savings in the Budget.
Although the Chancellor has not finally rejected the Bank's claim for the allowance, the Treasury conditions are strict enough to make acceptance by the Management committee appear at any rate far from automatic.
The Chancellor has demonstrated clearly that he has no intention of relaxing his control over any investments which qualify for the allowance.
The Treasury conditions seem to have been aimed at keeping out other savings organisations which, if the municipal banks were granted easy concessions, might have followed up with similar claims.
In the event, the proposals by Whitehall are severe enough to prevent the Birmingham bank with difficulties.
Under the proposed scheme a section of the bank would qualify for the concession.
While future deposits present no problem, old securities transferred from the main section to the new approved section would require the investment of equivalent cash with the National Debt Commissioners. To do this the Bank would have to realise certain securities which have to be sold at a loss substantial enough to make the whole transaction unprofitable.
The Bank holds a wide variety of securities which could be realised for this purpose, but generally speaking the more valuable ones are short term. Already the liquidity ratio of the Bank is such that further sale of short term securities would be undesirable.
The Bank may therefore be faced with the problem of shedding long term securities at a discount. The most obvious way to have accomplished this would have been to return them to the Government at par.
But the Treasury has declined firmly to co-operate in this way. The Bank now has to decide if and how in these circumstances the Treasury's guarded offer can be implemented.
No further Parliamentary action in the matter will be needed. The amendment to the Finance Bill can take advantage of it or not according to its own decisions.
Two debates in the House of Commons concerning the clause in the Finance Act 1956, that was designed to 'Provide Relief from Income Tax on Certain Savings Bank Interest' were held on June 7th and July 10th 1956. In the first of these two debates, the case for ensuring that the BMB's customers should enjoy the tax relief was put by the Stechford MP, Roy Jenkins, who tabled an amendment:
It may seem that this is a slightly parochial Birmingham Amendment, but there is no reason for thinking that. The Birmingham Municipal Bank is to some extent a unique institution, in that it is not incorporated under the Comapnies Act, as are other municipal banks, but under the Birmingham Corporation Act, 1919. No other corporation has exactly such powers, although I believe that Cardiff and Birkenhead have slightly more restricted powers under an Act of 1929, which, I believe, they have not used.
The Birmingham Municipal Bank, therefore, stands in a position slightly different from that of any other institution. It was founded in 1919 and has since had a very successful 37 years of history. Its deposits at present are approximately £88 million. That is a very large sum indeed, because it is equivalent to an average deposit of practically £80 for every man, woman and child in the area which it serves, and that does show for a bank for small savers of that sort a high rate of coverage. There are 720,000 depositors.
There is a great deal of civic pride in the fact that this is, to some degree, a unique and very successful institution, and it is also, without doubt, a most important part of the savings movement in Birmingham. School savings groups and factory savings groups are to a large extent conducted through the Birmingham Municipal Bank. There is a further important point which to some extent underlines the uniqueness of the Birmingham Municipal Bank. There is within the city of Birmingham not a single branch of the trustee savings banks. They do not exist in Birmingham. The Birmingham Municipal Bank acts in their place.
The large question which then arises is as to what department of the trustee savings banks is the Municipal Bank more akin. Is it more akin to the ordinary department of the trustee saving banks, to which the Chancellor's concession applies, or to the special investment department to which the concession does not apply? It is my belief that the Birmingham Municipal Bank is a great deal more analogous to the ordinary department of the trustee savings banks. Those banks get £2 17s. 6d. per cent. from the National Debt Commissioners and pay 2½ per cent., the Municipal Bank earns a little more—£2 19s. per cent. and pays depositors slightly more, 2¾ per cent.
There can be no question, however, of the Birmingham Municipal Bank, with its present investment policy—which is pretty tightly controlled by the Treasury—earning substantially more and getting round the disadvantage of not being able to offer the Income Tax concession by offering a higher rate of interest to depositors. The ordinary department of the trustee savings banks automatically has all its deposits with the National Debt Commissioners.
This is not the theoretical position with the Birmingham Municipal Bank, but the practical position is not very different. Of the £88 million of assets, more than £60 million—£66 million, I believe—are held in the form of Government securities. The remainder is partly cash, partly small amount advances to house purchasers in Birmingham—£6 million—and the rest is represented by loans to the Birmingham municipality which are backed by physical assets
This last item has not increased for many years. There is no question of increasing it at present, and, indeed, except for that small proportion of advances to house purchasers, all surplus money goes, as with the trustee savings banks, into Government securities. Over this investment policy generally there is, as I indicated earlier, a close degree of Treasury control. It therefore seems to me that as the position now stands the Municipal Bank is at least 90 per cent. analogous to the ordinary department of the trustee savings banks rather than to the special investment department.
I think that there is a most strong case for the inclusion of the Municipal Bank, as it stands, within the Chancellor's present concession, but I and those associated with me in this Amendment recognise the Chancellor's difficulties here. One of the difficulties about making the concession is that a lot of others would want it as well. Therefore, in order to try to make the Chancellor's position rather easier, the Birmingham City Council is prepared—if we cannot get this direct inclusion, for which, as I have said, there is a very strong case, and which would be much more welcome than anything else—to go further and to set up a new department to which it is suggested that the tax concession should be applied and which would in all relevant respects be the equivalent of the ordinary department of the trustee savings banks.
The essence of such a scheme would be this. In the first place, the interest to depositors in this new department would be only 2½ per cent., and all excess deposits would be automatically paid over to the National Debt Commissioners. The Municipal Bank would receive from the National Debt Commissioners the same return, £2 17s. 6d. per cent., which the ordinary department of trustee savings banks at present gets. There would be a limit to deposits, whether new or transfers from the existing department of the Municipal Bank of, perhaps, £1,000—or whatever figure was thought to be appropriate. With the exception of these new regulations as to investment policy, interest on deposits and limitation of deposits, which would, I think, meet all the Chancellor had in mind when he first introduced the concession, all the present regulations of the Municipal Bank would continue to apply equally to the new department.
That is to say, for the purpose of every consideration relevant to what the Chancellor had in mind when he introduced the general concession, the department would be an ordinary department of the trustee savings banks, but it would not be one in name or for considerations really irrelevant from this point of view. To make it one in name would raise great complications about the ownership of buildings and the showing of administrative expenses, and would also destroy a very real feeling of civic pride in the particular traditions of the Birmingham Municipal Bank.
There is another point. If the scheme were accepted, I think it should be the assumption that, of course, some of the assets backing the existing deposits would need to be taken over by the National Debt Commissioners. The assumption and the hope would certainly be that a fair cross-section of the marketable securities at present held would be taken over at book value, which is, broadly speaking, at cost, so that there would be no loss involved. On this assumption, the Birmingham Municipal Bank would be willing to negotiate a detailed scheme with representatives of the Treasury or with the National Debt Commissioners.
I hope very much that the Chancellor will be able to say that he agrees that this could be done and that any necessary Amendment can be made on Report. At the same time, I hope that the Chancellor and the Committee will be left in no doubt that from the point of view of the interest in the Bank at Birmingham of all shades of political opinion the outright application of the concession to the Bank as it stands would be a great deal more acceptable and would cause a great deal less trouble.
If necessary, however, we would have this compromise arrangement, to which I greatly hope the Chancellor will be able to agree, as there is an urgent practical problem here. There is a real danger that if the concession is not extended to the Municipal Bank, fulfilling as it so largely does in Birmingham the normal functions of the trustee savings banks, there will be withdrawals of money in order to get the Income Tax concession elsewhere.
I am afraid that the figures which are already available provide a certain amount of evidence that this is happening. For instance, in the two months April and May, 1955, there was in the municipal bank an excess of deposits over withdrawals of £70,000. In April and May this year there was an excess of withdrawals over deposits—the very opposite to 1955—of £328,000. Those are very serious figures. It may possibly be suggested that they have more to do with short-time working in the motor industry than with the tax concession. I thought of that myself when the figures were first put before me. I do not think that is so, however, because a closer examination of the figures shows that the withdrawals have taken place to a greater extent than elsewhere in those parts of the city where one would expect most depositors to be taxed fairly highly and therefore to be most sensitive to tax concessions. That is where one would also expect them to be most aware of the alternative investment opportunities.
I expect that a large part of this change since 1955 is due to the difficulty created by the Chancellor's partial concession. This is, and might become to a still greater extent, a very serious matter for the bank. But it is also to a greater extent a very serious matter for the Government, because the Chancellor's Budget was intended to be a savings Budget. When this money was withdrawn from the Birmingham Municipal Bank, we did not know where it was going. Some might go to the Post Office Savings Bank and would, therefore, get a concession. Other parts might go into building societies. That is less suitable from the Chancellor's point of view than the municipal bank. Some, in rather exceptional cases, might go into industrial ordinary shares. A lot might be spent, after being withdrawn from the bank, without being invested anywhere.
I put it to the Chancellor that this is a very serious practical problem. Paradoxically there is a real danger that his concession—no doubt, intended to help—because of a peculiar local condition in the second city of this country, far from helping savings may actually strike a very severe blow at the savings movement. I wish the Chancellor could accept the Amendment as it stands. If he cannot do that, I hope that at least he will indicate that on the basis which I have put forward, having discussed the matter with the representatives of the Birmingham City Council, discussions can go ahead and a compromise solution may be possible.
After detailed discussion, Mr Jenkins' amendment was withdrawn, with the Government agreeing to examine the option of the BMB setting up a separate savings department, the deposits of which would qualify for the tax relief.
Subsequent discussions involving the Treasury, Birmingham City Council, and the Bank, resulted in the agreement of a way forward. An Amendment to the Act was then proposed during the debate in the House of Commons on July 10th 1956. On behalf of the Government, the Amendment was detailed by Sir Edward Boyle:
The effect of the Amendment is as follows. In the first place, the extent of this concession is confined to any savings bank maintained under a local Act. The Birmingham Municipal Bank is at present the only such bank in being, having been formed under the Birmingham Corporation Act, 1919. It is true that other local authorities have similar powers, but although they have similar powers, those powers have not so far been used. Secondly, the Treasury must certify the applicant. The criterion for the certificate, if the concession is applied, is that the deposits sufficiently correspond to the ordinary deposits in a trustee savings bank to justify such treatment.
Any new department of the municipal bank formed for the purpose would function like the ordinary department of a trustee savings bank, but would operate under its own rules and under the terms of the corporation's local powers. Under the Birmingham Act the regulations governing the conduct of the bank require the approval of the Treasury, and the same arrangement would apply to any new department formed for this purpose. While the certificate is in force the interest payable to the depositors of the new department shall not exceed 2½ per cent. and the money lent with the department by the depositors must be invested with the National Debt Commissioners. In return, depositors draw the Income Tax concession.
The Amendment does not provide, and, indeed, is not intended to provide for the National Debt Commissioners to accept the book value of the securities held at present by the bank and by the corporation. It enables the National Debt Commissioners to take new deposits into the Fund for the Banks for Saving and to pay interest on them. This is done by applying Sections 25 to 38 of the Trustee Savings Banks Act, 1954. The Treasury can modify the detailed application of those provisions by Order, and, in particular—and this is the point—the Treasury can fix the rate of interest payable by the Commissioners lower than the rate paid to the trustee savings banks. The rate is at present £2 17s. 6d. per cent. That is the rate applicable to both high cost and low cost banks—if I may so put it—but the latter have the liability to contribute to the Mutual Assistance Scheme, from which the former are helped.
The only criticism which may arise of the Amendment is that the Amendment does not provide for the acceptance by the National Debt Commissioners of securities at book value in lieu of cash. The Birmingham Municipal Bank, or the corporation on its behalf, has a portfolio of securities many of which are standing at lower than book value. I quite understand that what the Birmingham Municipal Bank has in mind is that if depositors in the bank transfer to the new department the bank or the corporation may have to realise those securities at a loss to provide cash to transfer in accordance with the Amendment to the National Debt Commissioners.
Following agreement to the Amendment and the subsequent passing of the Finance Act 1956, the following subsections were added to the Act's Clause 9 (Relief from Income Tax on Certain Savings Bank Interest):
(3) Where, on the application in that behalf of any savings bank maintained under a local Act, the Treasury are satisfied, having regard to the rules to be adopted by the bank, the conditions subject to which deposits are to be accepted by it or any department to be formed by it, and such other matters as the Treasury may require to be proposed in the application, that the deposits will, if the application is granted, sufficiently correspond with ordinary deposits in a trustee savings bank to justify a certificate under this section, the Treasury may certify the bank or department for the purposes of this section, and, while the certificate is in force,-
(a) the interest payable on the deposits shall not exceed the rate of two and a half per cent. per annum, but the interest shall be treated for the purposes of this section as if it were such interest as is mentioned in subsection (1) of this section; and
(b) the deposits shall be invested with the National Debt Commissioners, and sections twenty-five to thirty-eight of the Trustee Savings Banks Act, 1954, shall apply in relation to the bank or department as they apply in relation to trustee savings banks, but subject to such modifications as the Treasury may by order provide, including, if the order so provides, a reduction of the rate which the Treasury may by order under subsection (2) of section twenty-seven of that Act fix as the rate
An order under this subsection shall be made by statutory instrument, which shall be subject to annulment in pursuance of a resolution of either House of Parliament, and may be varied or revoked by a subsequent order.
(4) If the Treasury at any time cease to be satisfied that a certificate under the last foregoing subsection is justified they may revoke the certificate and give such directions as they think fit for the withdrawal by the bank or department of any money standing to its credit in the books of the National Debt Commissioners.
A major concern of the Bank's Management was the possibility that large amounts would be transferred from the existing savings department (now known as the No 1 Department) to the new department (the No 2 Department) following its introduction on April 1st 1957. Such transfers would require matching investments of cash being deposited with the National Debt Commissioners - possibly requiring the Bank to liquidate holdings in Government Stock as a loss. In fact, the growth of the No 2 Department seems to have been manageable - in the first two years, the balances of the No 2 Department grew to £9½-million. In the same period, balances on the No 1 Department fell by £13½-million. However, in the next seven years, whilst the No 2 Department balances grew to £22.8-million, the balances on the No 1 Department remained fairly constant at about £71-million.
The rate of interest allowed to the Bank on its deposits with the National Debt Commissioners was barely sufficient to (and often did not) cover the cost of operating the No 2 Department. By March 31st 1973, the cumulative balance on the Department's Income & Expenditure Account was only £1,101.
The proportion of the Bank's costs relating to the No 2 Department were mainly determined by the ratio of transactions between the No 1 and No 2 Departments, plus specific costs such as the separately designed No 2 Department passbooks.