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Title: Lombard Street: A Description of the Money Market

Author: Walter Bagehot

Posting Date: October 29, 2010

Release Date: August, 2003 [Etext #4359]
[This file last updated November 5, 2010]

Language: English

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LOMBARD STREET
A Description of the Money Market.

By WALTER BAGEHOT
CHAPTER I.
Introductory.

I venture to call this Essay 'Lombard Street,' and not the 'Money Market,' or any
such phrase, because I wish to deal, and to show that I mean to deal, with
concrete realities. A notion prevails that the Money Market is something so
impalpable that it can only be spoken of in very abstract words, and that
therefore books on it must always be exceedingly difficult. But I maintain that
the Money Market is as concrete and real as anything else; that it can be
described in as plain words; that it is the writer's fault if what he says is not
clear. In one respect, however, I admit that I am about to take perhaps an unfair
advantage. Half, and more than half, of the supposed 'difficulty' of the Money
Market has arisen out of the controversies as to 'Peel's Act,' and the abstract
discussions on the theory on which that act is based, or supposed to be based.
But in the ensuing pages I mean to speak as little as I can of the Act of 1844;
and when I do speak of it, I shall deal nearly exclusively with its experienced
effects, and scarcely at all, if at all, with its refined basis.

For this I have several reasons,—one, that if you say anything about the Act of
1844, it is little matter what else you say, for few will attend to it. Most critics
will seize on the passage as to the Act, either to attack it or defend it, as if it
were the main point. There has been so much fierce controversy as to this Act
of Parliament—and there is still so much animosity—that a single sentence
respecting it is far more interesting to very many than a whole book on any
other part of the subject. Two hosts of eager disputants on this subject ask of
every new writer the one question—Are you with us or against us? and they
care for little else. Of course if the Act of 1844 really were, as is commonly
thought, the primum mobile of the English Money Market, the source of all
good according to some, and the source of all harm according to others, the
extreme irritation excited by an opinion on it would be no reason for not giving
a free opinion. A
writer on any subject must not neglect its cardinal fact, for fear that others may
abuse him. But, in my judgment, the Act of 1844 is only a subordinate matter
in the Money Market; what has to be said on it has been said at
disproportionate length; the phenomena connected with it have been magnified
into greater relative importance than they at all deserve. We must never forget
that a quarter of a century has passed since 1844, a period singularly
remarkable for its material progress, and almost marvellous in its banking
development. Even, therefore, if the facts so much referred to in 1844 had the
importance then ascribed to them, and I believe that in some respects they
were even then overstated, there would be nothing surprising in finding that in
a new world new phenomena had arisen which now are larger and stronger. In
my opinion this is the truth: since 1844, Lombard Street is so changed that we
cannot judge of it without describing and discussing a most vigorous adult
world which then was small and weak. On this account I wish to say as little
as is fairly possible of the Act of 1844, and, as far as I can, to isolate and dwell
exclusively on the 'Post- Peel' agencies, so that those who have had enough of
that well-worn theme (and they are very many) may not be wearied, and that
the new and neglected parts of the subject may be seen as they really are.

The briefest and truest way of describing Lombard Street is to say that it is by
far the greatest combination of economical power and economical delicacy that
the world has even seen. Of the greatness of the power there will be no doubt.
Money is economical power. Everyone is aware that England is the greatest
moneyed country in the world; everyone admits that it has much more
immediately disposable and ready cash than any other country. But very few
persons are aware how much greater the ready balance—the floating loan-
fund which can be lent to anyone or for any purpose—is in England than it is
anywhere else in the world. A very few figures will show how large the London
loan-fund is, and how much greater it is than any other. The known deposits
— the deposits of banks which publish their accounts—are, in

London (31st December, 1872) 120,000,000 L

Paris (27th February, 1873) 13,000,000 L
New York (February, 1873) 40,000,000 L
German Empire (31st January, 1873) 8,000,000 L

And the unknown deposits—the deposits in banks which do not publish their
accounts—are in London much greater than those many other of these cities.
The bankers' deposits of London are many times greater than those of any
other
city—those of Great Britain many times greater than those of any other country.

Of course the deposits of bankers are not a strictly accurate measure of the
resources of a Money Market. On the contrary, much more cash exists out of
banks in France and Germany, and in all non-banking countries, than could be
found in England or Scotland, where banking is developed. But that cash is
not, so to speak, 'money-market money:' it is not attainable. Nothing but their
immense misfortunes, nothing but a vast loan in their own securities, could
have extracted the hoards of France from the custody of the French people.
The offer of no other securities would have tempted them, for they had
confidence in no other securities. For all other purposes the money hoarded
was useless and might as well not have been hoarded. But the English money
is 'borrowable' money.
Our people are bolder in dealing with their money than any continental nation,
and even if they were not bolder, the mere fact that their money is deposited in
a bank makes it far more obtainable. A million in the hands of a single banker is
a great power; he can at once lend it where he will, and borrowers can come to
him, because they know or believe that he has it. But the same sum scattered in
tens and fifties through a whole nation is no power at all: no one knows where
to find it or whom to ask for it. Concentration of money in banks, though not
the sole cause, is the principal cause which has made the Money Market of
England so exceedingly rich, so much beyond that of other countries.

The effect is seen constantly. We are asked to lend, and do lend, vast sums,
which it would be impossible to obtain elsewhere. It is sometimes said that any
foreign country can borrow in Lombard Street at a price: some countries can
borrow much cheaper than others; but all, it is said, can have some money if
they choose to pay enough for it. Perhaps this is an exaggeration; but confined,
as of course it was meant to be, to civilised Governments, it is not much of an
exaggeration. There are very few civilised Governments that could not borrow
considerable sums of us if they choose, and most of them seem more and more
likely to choose. If any nation wants even to make a railway—especially at all
a poor nation—it is sure to come to this country—to the country of banks—for
the money. It is true that English bankers are not themselves very great lenders
to foreign states. But they are great lenders to those who lend. They advance on
foreign stocks, as the phrase is, with 'a margin;' that is, they find eighty per
cent of the money, and the nominal lender finds the rest. And it is in this way
that vast works are achieved with English aid which but for that aid would
never have been planned.
In domestic enterprises it is the same. We have entirely lost the idea that any
undertaking likely to pay, and seen to be likely, can perish for want of money;
yet no idea was more familiar to our ancestors, or is more common now in
most countries. A citizen of London in Queen Elizabeth's time could not have
imagined our state of mind. He would have thought that it was of no use
inventing railways (if he could have understood what a railway meant), for you
would not have been able to collect the capital with which to make them. At
this moment, in colonies and all rude countries, there is no large sum of
transferable money; there is no fund from which you can borrow, and out of
which you can make immense works. Taking the world as a whole—either
now or in the past— it is certain that in poor states there is no spare money for
new and great undertakings, and that in most rich states the money is too
scattered, and clings too close to the hands of the owners, to be often
obtainable in large quantities for new purposes. A place like Lombard Street,
where in all but the rarest times money can be always obtained upon good
security or upon decent prospects of probable gain, is a luxury which no
country has ever enjoyed with even comparable equality before.

But though these occasional loans to new enterprises and foreign States are the
most conspicuous instances of the power of Lombard Street, they are not by
any means the most remarkable or the most important use of that power.
English trade is carried on upon borrowed capital to an extent of which few
foreigners have an idea, and none of our ancestors could have conceived. In
every district small traders have arisen, who 'discount their bills' largely, and
with the capital so borrowed, harass and press upon, if they do not eradicate,
the old capitalist.
The new trader has obviously an immense advantage in the struggle of trade. If
a merchant have 50,000 L. all his own, to gain 10 per cent on it he must make
5,000 L. a year, and must charge for his goods accordingly; but if another has
only 10,000 L., and borrows 40,000 L. by discounts (no extreme instance in
our modern trade), he has the same capital of 50,000 L. to use, and can sell
much cheaper. If the rate at which he borrows be 5 per cent., he will have to
pay 2,000
L. a year; and if, like the old trader, he make 5,000 L. a year, he will still, after
paying his interest, obtain 3,000 L. a year, or 30 per cent, on his own 10,000 L.
As most merchants are content with much less than 30 per cent, he will be
able, if he wishes, to forego some of that profit, lower the price of the
commodity, and drive the old-fashioned trader—the man who trades on his
own capital—out of the market. In modern English business, owing to the
certainty of obtaining loans on discount of bills or otherwise at a moderate rate
of interest, there is a steady bounty on trading with borrowed capital, and a
constant discouragement
to confine yourself solely or mainly to your own capital.

This increasingly democratic structure of English commerce is very unpopular

in many quarters, and its effects are no doubt exceedingly mixed. On the one
hand, it prevents the long duration of great families of merchant princes, such
as those of Venice and Genoa, who inherited nice cultivation as well as great
wealth, and who, to some extent, combined the tastes of an aristocracy with the
insight and verve of men of business. These are pushed out, so to say, by the
dirty crowd of little men. After a generation or two they retire into idle luxury.
Upon their immense capital they can only obtain low profits, and these they do
not think enough to compensate them for the rough companions and rude
manners they must meet in business. This constant levelling of our commercial
houses is, too, unfavourable to commercial morality. Great firms, with a
reputation which they have received from the past, and which they wish to
transmit to the future, cannot be guilty of small frauds. They live by a
continuity of trade, which detected fraud would spoil. When we scrutinise the
reason of the impaired reputation of English goods, we find it is the fault of
new men with little money of their own, created by bank 'discounts.' These
men want business at once, and they produce an inferior article to get it. They
rely on cheapness, and rely successfully.

But these defects and others in the democratic structure of commerce are
compensated by one great excellence. No country of great hereditary trade, no
European country at least, was ever so little 'sleepy,' to use the only fit word,
as England; no other was ever so prompt at once to seize new advantages. A
country dependent mainly on great 'merchant princes' will never be so prompt;
their commerce perpetually slips more and more into a commerce of routine.
A man of large wealth, however intelligent, always thinks, more or less 'I have
a great income, and I want to keep it. If things go on as they are I shall
certainly keep it; but if they change I may not keep it.' Consequently he
considers every change of circumstance a 'bore,' and thinks of such changes as
little as he can. But a new man, who has his way to make in the world, knows
that such changes are his opportunities; he is always on the look-out for them,
and always heeds them when he finds them. The rough and vulgar structure of
English commerce is the secret of its life; for it contains 'the propensity to
variation,' which, in the social as in the animal kingdom, is the principle of
progress.

In this constant and chronic borrowing, Lombard Street is the great go-
between. It is a sort of standing broker between quiet saving districts of the
country and
the active employing districts. Why particular trades settled in particular places
it is often difficult to say; but one thing is certain, that when a trade has settled
in any one spot, it is very difficult for another to oust it—impossible unless the
second place possesses some very great intrinsic advantage. Commerce is
curiously conservative in its homes, unless it is imperiously obliged to migrate.
Partly from this cause, and partly from others, there are whole districts in
England which cannot and do not employ their own money. No purely
agricultural county does so. The savings of a county with good land but no
manufactures and no trade much exceed what can be safely lent in the county.
These savings are first lodged in the local banks, are by them sent to London,
and are deposited with London bankers, or with the bill brokers. In either case
the result is the same. The money thus sent up from the accumulating districts
is employed in discounting the bills of the industrial districts. Deposits are
made with the bankers and bill brokers in Lombard Street by the bankers of
such counties as Somersetshire and Hampshire, and those bill brokers and
bankers employ them in the discount of bills from Yorkshire and Lancashire.
Lombard Street is thus a perpetual agent between the two great divisions of
England, between the rapidly-growing districts, where almost any amount of
money can be well and easily employed, and the stationary and the declining
districts, where there is more money than can be used.

This organisation is so useful because it is so easily adjusted. Political

economists say that capital sets towards the most profitable trades, and that it
rapidly leaves the less profitable and non-paying trades. But in ordinary
countries this is a slow process, and some persons who want to have ocular
demonstration of abstract truths have been inclined to doubt it because they
could not see it. In England, however, the process would be visible enough if
you could only see the books of the bill brokers and the bankers. Their bill
cases as a rule are full of the bills drawn in the most profitable trades, and
caeteris paribus and in comparison empty of those drawn in the less profitable.
If the iron trade ceases to be as profitable as usual, less iron is sold; the fewer
the sales the fewer the bills; and in consequence the number of iron bills in
Lombard street is diminished. On the other hand, if in consequence of a bad
harvest the corn trade becomes on a sudden profitable, immediately 'corn bills'
are created in great numbers, and if good are discounted in Lombard Street.
Thus English capital runs as surely and instantly where it is most wanted, and
where there is most to be made of it, as water runs to find its level.

This efficient and instantly-ready organisation gives us an enormous advantage

in competition with less advanced countries—less advanced, that is, in this
particular respect of credit. In a new trade English capital is instantly at the
disposal of persons capable of understanding the new opportunities and of
making good use of them. In countries where there is little money to lend, and
where that little is lent tardily and reluctantly, enterprising traders are long kept
back, because they cannot at once borrow the capital, without which skill and
knowledge are useless. All sudden trades come to England, and in so doing
often disappoint both rational probability and the predictions of philosophers.
The Suez Canal is a curious case of this. All predicted that the canal would
undo what the discovery of the passage to India round the Cape effected.
Before that all Oriental trade went to ports in the South of Europe, and was
thence diffused through Europe. That London and Liverpool should be centres
of East Indian commerce is a geographical anomaly, which the Suez Canal, it
was said, would rectify. 'The Greeks,' said M. de Tocqueville, 'the Styrians, the
Italians, the Dalmatians, and the Sicilians, are the people who will use the
Canal if any use it.' But, on the contrary, the main use of the Canal has been by
the English. None of the nations named by Tocqueville had the capital, or a
tithe of it, ready to build the large screw steamers which alone can use the
Canal profitably.
Ultimately these plausible predictions may or may not be right, but as yet they
have been quite wrong, not because England has rich people—there are
wealthy people in all countries—but because she possesses an unequalled
fund of floating money, which will help in a moment any merchant who sees
a great prospect of new profit.

And not only does this unconscious 'organisation of capital,' to use a continental
phrase, make the English specially quick in comparison with their neighbours on
the continent at seizing on novel mercantile opportunities, but it makes them
likely also to retain any trade on which they have once regularly fastened. Mr.
Macculloch, following Ricardo, used to teach that all old nations had a special
aptitude for trades in which much capital is required. The interest of capital
having been reduced in such countries, he argued, by the necessity of
continually resorting to inferior soils, they can undersell countries where profit
is high in all trades needing great capital. And in this theory there is doubtless
much truth, though it can only be applied in practice after a number of
limitations and with a number of deductions of which the older school of
political economists did not take enough notice. But the same principle plainly
and practically applies to England, in consequence of her habitual use of
borrowed capital. As has been explained, a new man, with a small capital of his
own and a large borrowed capital, can undersell a rich man who depends on his
own capital only. The rich
man wants the full rate of mercantile profit on the whole of the capital
employed in his trade, but the poor man wants only the interest of money
(perhaps not a third of the rate of profit) on very much of what he uses, and
therefore an income will be an ample recompense to the poor man which
would starve the rich man out of the trade. All the common notions about the
new competition of foreign countries with England and its dangers—notions in
which there is in other aspects much truth require to be reconsidered in relation
to this aspect. England has a special machinery for getting into trade new men
who will be content with low prices, and this machinery will probably secure
her success, for no other country is soon likely to rival it effectually.

There are many other points which might be insisted on, but it would be tedious
and useless to elaborate the picture. The main conclusion is very plain—that
English trade is become essentially a trade on borrowed capital, and that it is
only by this refinement of our banking system that we are able to do the sort of
trade we do, or to get through the quantity of it.

But in exact proportion to the power of this system is its delicacy I should
hardly say too much if I said its danger. Only our familiarity blinds us to the
marvellous nature of the system. There never was so much borrowed money
collected in the world as is now collected in London. Of the many millions in
Lombard street, infinitely the greater proportion is held by bankers or others on
short notice or on demand; that is to say, the owners could ask for it all any day
they please: in a panic some of them do ask for some of it. If any large fraction
of that money really was demanded, our banking system and our industrial
system too would be in great danger.

Some of those deposits too are of a peculiar and very distinct nature. Since the
Franco-German war, we have become to a much larger extent than before the
Bankers of Europe. A very large sum of foreign money is on various accounts
and for various purposes held here. And in a time of panic it might be asked
for. In 1866 we held only a much smaller sum of foreign money, but that
smaller sum was demanded and we had to pay it at great cost and suffering,
and it would be far worse if we had to pay the greater sums we now hold,
without better resources than we had then.

It may be replied, that though our instant liabilities are great, our present means
are large; that though we have much we may be asked to pay at any moment,
we have very much always ready to pay it with. But, on the contrary, there is no
country at present, and there never was any country before, in which the ratio of
the cash reserve to the bank deposits was so small as it is now in England. So
far from our being able to rely on the proportional magnitude of our cash in
hand, the amount of that cash is so exceedingly small that a bystander almost
trembles when he compares its minuteness with the immensity of the credit
which rests upon it.

Again, it may be said that we need not be alarmed at the magnitude of our
credit system or at its refinement, for that we have learned by experience the
way of controlling it, and always manage it with discretion. But we do not
always manage it with discretion. There is the astounding instance of Overend,
Gurney, and Co. to the contrary. Ten years ago that house stood next to the
Bank of England in the City of London; it was better known abroad than any
similar firm known, perhaps, better than any purely English firm. The partners
had great estates, which had mostly been made in the business. They still
derived an immense income from it. Yet in six years they lost all their own
wealth, sold the business to the company, and then lost a large part of the
company's capital. And these losses were made in a manner so reckless and so
foolish, that one would think a child who had lent money in the City of London
would have lent it better. After this example, we must not confide too surely in
long-established credit, or in firmly-rooted traditions of business. We must
examine the system on which these great masses of money are manipulated, and
assure ourselves that it is safe and right.

But it is not easy to rouse men of business to the task. They let the tide of
business float before them; they make money or strive to do so while it passes,
and they are unwilling to think where it is going. Even the great collapse of
Overends, though it caused a panic, is beginning to be forgotten. Most men of
business think—'Anyhow this system will probably last my time. It has gone
on a long time, and is likely to go on still.' But the exact point is, that it has not
gone on a long time. The collection of these immense sums in one place and in
few hands is perfectly new. In 1844 the liabilities of the four great London
Joint Stock Banks were 10,637,000 L.; they now are more than 60,000,000 L.
The private deposits of the Bank of England then were 9,000,000 L.; they now
are 8,000,000 L. There was in throughout the country but a fraction of the vast
deposit business which now exists. We cannot appeal, therefore, to experience to
prove the safety of our system as it now is, for the present magnitude of that
system is entirely new. Obviously a system may be fit to regulate a few
millions, and yet quite inadequate when it is set to cope with many millions.
And thus it
may be with 'Lombard Street,' so rapid has been its growth, and so
unprecedented is its nature.

I am by no means an alarmist. I believe that our system, though curious and

peculiar, may be worked safely; but if we wish so to work it, we must study it.
We must not think we have an easy task when we have a difficult task, or that we
are living in a natural state when we are really living in an artificial one. Money
will not manage itself, and Lombard street has a great deal of money to manage.
CHAPTER II.
A General View of Lombard Street.

I.

The objects which you see in Lombard Street, and in that money world which
is grouped about it, are the Bank of England, the Private Banks, the Joint Stock
Banks, and the bill brokers. But before describing each of these separately we
must look at what all have in common, and at the relation of each to the others.

The distinctive function of the banker, says Ricardo, 'begins as soon as he uses
the money of others;' as long as he uses his own money he is only a capitalist.
Accordingly all the banks in Lombard Street (and bill brokers are for this
purpose only a kind of bankers) hold much money belonging to other people
on running account and on deposit. In continental language, Lombard Street is
an organization of credit, and we are to see if it is a good or bad organization in
its kind, or if, as is most likely, it turn out to be mixed, what are its merits and
what are its defects?

The main point on which one system of credit differs from another is
'soundness.' Credit means that a certain confidence is given, and a certain trust
reposed. Is that trust justified? and is that confidence wise? These are the
cardinal questions. To put it more simply—credit is a set of promises to pay; will
those promises be kept? Especially in banking, where the 'liabilities,' or
promises to pay, are so large, and the time at which to pay them, if exacted, is
so short, an instant capacity to meet engagements is the cardinal excellence.

All which a banker wants to pay his creditors is a sufficient supply of the
legal tender of the country, no matter what that legal tender may be. Different
countries differ in their laws of legal tender, but for the primary purposes of
banking these systems are not material. A good system of currency will benefit
the country, and a bad system will hurt it. Indirectly, bankers will be benefited
or injured with the country in which they live; but practically, and for the
purposes of their daily life, they have no need to think, and never do think, on
theories of currency. They look at the matter simply. They say 'I am under an
obligation to pay such and such sums of legal currency; how much have I in
my till, or have I at once under my command, of that currency?' In America,
for example, it is quite enough for a banker to hold 'greenbacks,' though the
value of these changes as the Government chooses to enlarge or contract the
issue. But a practical New York banker has no need to think of the goodness or
badness of this system at all; he need only keep enough 'greenbacks' to pay all
probable demands, and then he is fairly safe from the risk of failure.

By the law of England the legal tenders are gold and silver coin (the last for
small amounts only), and Bank of England notes. But the number of our
attainable bank notes is not, like American 'greenbacks,' dependent on the will
of the State; it is limited by the provisions of the Act of 1844. That Act
separates the Bank of England into two halves. The Issue Department only
issues notes, and can only issue 15,000,000 L. on Government securities; for
all the rest it must have bullion deposited. Take, for example an account,
which may be considered an average specimen of those of the last few years—
that for the last week of 1869:

An account pursuant to the Act 7th and 8th Victoria, cap. 32, for the week
ending on Wednesday, the 29th day of December, 1869.

ISSUE DEPARTMENT.

Notes issued 33,288,640 L| Government debt 11,015,100 L

| Other securities 3,984,900 L
| Gold coin and bullion 18,288,640 L
| Silver bullion
33,288,640| 33,288,640 L

BANKING DEPARTMENT.

Proprietors' capital 14,553,000 L| Government Securities 13,811,953 L

Rest 3,103,301 L| Other securities 19,781,988 L
Public deposits, | Notes 10,389,690 L
including Exchequer, | Gold and silver coins 907,982 L
 Savings' Banks, |
Commissioners of |
National Debt, |
and dividend |
accounts 8,585,215 L|
Other deposits 18,204,607 L|
Seven-day and other |
bills 445,490 L|
44,891,613 L| 44,891,613 L

GEO. FORBES, Chief Cashier.

Dated the 30th December, 1869.

There are here 15,000,000 L. bank notes issued on securities, and 18,288,640
L. represented by bullion. The Bank of England has no power by law to
increase the currency in any other manner. It holds the stipulated amount of
securities, and for all the rest it must have bullion. This is the 'cast iron'
system—the 'hard and fast' line which the opponents of the Act say ruins us,
and which the partizans of the Act say saves us. But I have nothing to do with
its expediency here. All which is to my purpose is that our paper 'legal tender,'
our bank notes, can only be obtained in this manner. If, therefore, an English
banker retains a sum of Bank of England notes or coin in due proportion to
his liabilities, he has a sufficient amount of the legal tender of this country,
and he need not think of anything more.

But here a distinction must be made. It is to be observed that properly

speaking we should not include in the 'reserve' of a bank 'legal tenders,' or
cash, which the Bank keeps to transact its daily business. That is as much a
part of its daily stock-in-trade as its desks or offices; or at any rate, whatever
words we may
choose to use, we must carefully distinguish between this cash in the till which
is wanted every day, and the safety-fund, as we may call it, the special reserve
held by the bank to meet extraordinary and unfrequent demands.

What then, subject to this preliminary explanation, is the amount of legal

tender held by our bankers against their liabilities? The answer is remarkable,
and is the key to our whole system. It may be broadly said that no bank in
London or out of it holds any considerable sum in hard cash or legal tender
(above what is wanted for its daily business) except the Banking Department
of the Bank of England.
That department had on the 29th day of December, 1869, liabilities as follows:

Public deposits 8,585,000 L

Private deposits 18,205,000 L
Seven-day and other bills 445,000 L
——————
Total 27,235,000 L

and a cash reserve of 11,297,000 L. And this is all the cash reserve, we must
carefully remember, which, under the law, the Banking Department of the Bank
of England—as we cumbrously call it the Bank of England for banking
purposes
—possesses. That department can no more multiply or manufacture bank notes
than any other bank can multiply them. At that particular day the Bank of
England had only 11,297,000 L. in its till against liabilities of nearly three times
the amount. It had 'Consols' and other securities which it could offer for sale no
doubt, and which, if sold, would augment its supply of bank notes—and the
relation of such securities to real cash will be discussed presently; but of real
cash, the Bank of England for this purpose—the banking bank—had then so
much and no more.

And we may well think this a great deal, if we examine the position of other
banks. No other bank holds any amount of substantial importance in its own
till beyond what is wanted for daily purposes. All London banks keep their
principal reserve on deposit at the Banking Department of the Bank of
England. This is by far the easiest and safest place for them to use. The Bank
of England thus has the responsibility of taking care of it. The same reasons
which make it desirable for a private person to keep a banker make it also
desirable for every banker, as respects his reserve, to bank with another banker
if he safely can. The custody of very large sums in solid cash entails much
care, and some cost; everyone wishes to shift these upon others if he can do so
without suffering. Accordingly, the other bankers of London, having perfect
confidence in the Bank of England, get that bank to keep their reserve for
them.

The London bill brokers do much the same. Indeed, they are only a special
sort of bankers who allow daily interest on deposits, and who for most of their
money give security. But we have no concern now with these differences of
detail. The bill brokers lend most of their money, and deposit the remnant
either with the Bank of England or some London banker. That London banker
lends what he chooses of it, the rest he leaves at the Bank of England. You
always
come back to the Bank of England at last. But those who keep immense sums
with a banker gain a convenience at the expense of a danger. They are liable
to lose them if the bank fail. As all other bankers keep their banking reserve
at the Bank of England, they are liable to fail if it fails. They are dependent on
the management of the Bank of England in a day of difficulty and at a crisis
for the spare money they keep to meet that difficulty and crisis. And in this
there is certainly considerable risk. Three times 'Peel's Act' has been
suspended because the Banking Department was empty. Before the Act was
broken—

In 1847, the Banking Department was reduced to L 1,994,000 1857 " " L
1,462,000 1866 " " L 3,000,000

In fact, in none of those years could the Banking Department of the Bank of
England have survived if the law had not been broken. Nor must it be fancied
that this danger is unreal, artificial, and created by law. There is a risk of our
thinking so, because we hear that the danger can be cured by breaking an Act;
but substantially the same danger existed before the Act. In 1825, when only
coin was a legal tender, and when there was only one department in the Bank,
the Bank had reduced its reserve to 1,027,000 L., and was within an ace of
stopping payment.

But the danger to the depositing banks is not the sole or the principal
consequence of this mode of keeping the London reserve. The main effect is to
cause the reserve to be much smaller in proportion to the liabilities than it would
otherwise be. The reserve of the London bankers being on deposit in the Bank
of England, the Bank always lends a principal part of it. Suppose, a favourable
supposition, that the Banking Department holds more than two-fifths of its
liabilities in cash—that it lends three-fifths of its deposits and retains in reserve
only two-fifths. If then the aggregate of the bankers' deposited reserve be
5,000,000 L., 3,000,000 L. of it will be lent by the Banking Department, and
2,000,000 L. will be kept in the till. In consequence, that 2,000,000 L. is all
which is really held in actual cash as against the liabilities of the depositing
banks. If Lombard Street were on a sudden thrown into liquidation, and made to
pay as much as it could on the spot, that 2,000,000 L. would be all which the
Bank of England could pay to the depositing banks, and consequently all,
besides the small cash in the till, which those banks could on a sudden pay to
the persons who have deposited with them.

We see then that the banking reserve of the Bank of England—some 10,000,000
L. on an average of years now, and formerly much less—is all which is held
against the liabilities of Lombard Street; and if that were all, we might well be
amazed at the immense development of our credit system—in plain English, at
the immense amount of our debts payable on demand, and the smallness of the
sum of actual money which we keep to pay them if demanded. But there is
more to come. Lombard Street is not only a place requiring to keep a reserve, it
is itself a place where reserves are kept. All country bankers keep their reserve
in London. They only retain in each country town the minimum of cash
necessary to the transaction of the current business of that country town. Long
experience has told them to a nicety how much this is, and they do not waste
capital and lose profit by keeping more idle. They send the money to London,
invest a part of it in securities, and keep the rest with the London bankers and
the bill brokers. The habit of Scotch and Irish bankers is much the same. All
their spare money is in London, and is invested as all other London money
now is; and, therefore, the reserve in the Banking Department of the Bank of
England is the banking reserve not only of the Bank of England, but of all
London—and not only of all London, but of all England, Ireland, and Scotland
too.

Of late there has been a still further increase in our liabilities. Since the
Franco- German war, we may be said to keep the European reserve also.
Deposit Banking is indeed so small on the Continent, that no large reserve
need be held on account of it. A reserve of the same sort which is needed in
England and Scotland is not needed abroad. But all great communities have at
times to pay large sums in cash, and of that cash a great store must be kept
somewhere.
Formerly there were two such stores in Europe, one was the Bank of France,
and the other the Bank of England. But since the suspension of specie
payments by the Bank of France, its use as a reservoir of specie is at an end.
No one can draw a cheque on it and be sure of getting gold or silver for that
cheque. Accordingly the whole liability for such international payments in
cash is thrown on the Bank of England. No doubt foreigners cannot take from
us our own money; they must send here 'value in some shape or other for all
they take away. But they need not send 'cash;' they may send good bills and
discount them in Lombard Street and take away any part of the produce, or all
the produce, in bullion. It is only putting the same point in other words to say
that all exchange operations are centering more and more in London. Formerly
for many purposes Paris was a European settling-house, but now it has ceased
to be so. The note of the Bank of France has not indeed been depreciated
enough to disorder ordinary transactions. But any depreciation, however small
—even the liability to depreciation without its reality—is enough to disorder
exchange transactions. They are calculated to
such an extremity of fineness that the change of a decimal may be fatal, and
may turn a profit into a loss. Accordingly London has become the sole great
settling- house of exchange transactions in Europe, instead of being formerly
one of two. And this pre-eminence London will probably maintain, for it is a
natural pre- eminence. The number of mercantile bills drawn upon London
incalculably surpasses those drawn on any other European city; London is the
place which receives more than any other place, and pays more than any other
place, and therefore it is the natural 'clearing house.' The pre-eminence of Paris
partly arose from a distribution of political power, which is already disturbed;
but that of London depends on the regular course of commerce, which is
singularly stable and hard to change.

Now that London is the clearing-house to foreign countries, London has a new
liability to foreign countries. At whatever place many people have to make
payments, at that place those people must keep money. A large deposit of foreign
money in London is now necessary for the business of the world. During the
immense payments from France to Germany, the sum in transitu—the sum in
London has perhaps been unusually large. But it will ordinarily be very great.
The present political circumstances no doubt will soon change. We shall soon
hold in Lombard Street far less of the money of foreign governments; but we
shall hold more and more of the money of private persons; for the deposit at a
clearing-house necessary to settle the balance of commerce must tend to
increase as that commerce itself increases.

And this foreign deposit is evidently of a delicate and peculiar nature. It

depends on the good opinion of foreigners, and that opinion may diminish or
may change into a bad opinion. After the panic of 1866, especially after the
suspension of Peel's Act (which many foreigners confound with a suspension
of cash payments), a large amount of foreign money was withdrawn from
London. And we may reasonably presume that in proportion as we augment
the deposits of cash by foreigners in London, we augment both the chances
and the disasters of a 'run' upon England.

And if that run should happen, the bullion to meet it must be taken from the
Bank. There is no other large store in the country. The great exchange dealers
may have a little for their own purposes, but they have no store worth
mentioning in comparison with this. If a foreign creditor is so kind as to wait
his time and buy the bullion as it comes into the country, he may be paid
without troubling the Bank or distressing the money market. The German
Government
has recently been so kind; it was in no respect afraid. But a creditor who takes
fright will not wait, and if he wants bullion in a hurry he must come to the
Bank of England.

In consequence all our credit system depends on the Bank of England for its
security. On the wisdom of the directors of that one Joint Stock Company, it
depends whether England shall be solvent or insolvent. This may seem too
strong, but it is not. All banks depend on the Bank of England, and all
merchants depend on some banker. If a merchant have 10,000 L. at his
bankers, and wants to pay it to some one in Germany, he will not be able to
pay it unless his banker can pay him, and the banker will not be able to pay if
the Bank of England should be in difficulties and cannot produce his 'reserve.'

The directors of the Bank are, therefore, in fact, if not in name, trustees for the
public, to keep a banking reserve on their behalf; and it would naturally be
expected either that they distinctly recognized this duty and engaged to
perform it, or that their own self-interest was so strong in the matter that no
engagement was needed. But so far from there being a distinct undertaking on
the part of the Bank directors to perform this duty, many of them would
scarcely acknowledge it, and some altogether deny it. Mr. Hankey, one of the
most careful and most experienced of them, says in his book on the Bank of
England, the best account of the practice and working of the Bank which
anywhere exists—'I do not intend here to enter at any length on the subject of
the general management of the Bank, meaning the Banking Department, as the
principle upon which the business is conducted does not differ, as far as I am
aware, from that of any well-conducted bank in London.' But, as anyone can
see by the published figures, the Banking Department of the Bank of England
keeps as a great reserve in bank notes and coin between 30 and 50 per cent of
its liabilities, and the other banks only keep in bank notes and coin the bare
minimum they need to open shop with. And such a constant difference
indicates, I conceive, that the two are not managed on the same principle.

The practice of the Bank has, as we all know, been much and greatly
improved. They do not now manage like the other Banks in Lombard Street.
They keep an altogether different kind and quantity of reserve; but though the
practice is mended the theory is not. There has never been a distinct resolution
passed by the Directors of the Bank of England, and communicated by them to
the public, stating even in the most general manner, how much reserve they
mean to keep or how much they do not mean, or by what principle in this
important matter they
will be guided.

The position of the Bank directors is indeed most singular. On the one side a
great city opinion—a great national opinion, I may say, for the nation has learnt
much from many panics—requires the directors to keep a large reserve. The
newspapers, on behalf of the nation, are always warning the directors to keep it,
and watching that they do keep it; but, on the other hand, another less visible
but equally constant pressure pushes the directors in exactly the reverse way,
and inclines them to diminish the reserve.

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. That the Bank proprietors should
not like to see other companies getting richer than their company is only
natural.

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.

In most banks there would be a wholesome dread restraining the desire of the
shareholders to reduce the reserve; they would fear to impair the credit of the
bank. But fortunately or unfortunately, no one has any fear about the Bank of
England. The English world at least believes that it will not, almost that it
cannot, fail. Three times since 1844 the Banking Department has received
assistance, and would have failed without it. In 1825, the entire concern almost
suspended payment; in 1797, it actually did so. But still there is a faith in the
Bank, contrary to experience, and despising evidence. No doubt in every one of
these years the condition of the Bank, divided or undivided, was in a certain
sense most sound; it could ultimately have paid all its creditors all it owed, and
returned to its shareholders all their own capital. But ultimate payment is not
what the creditors of a bank want; they want present, not postponed, payment;
they want to be repaid according to agreement; the contract was that they should
be paid on demand, and if they are not paid on demand they may be ruined. And
that instant payment, in the years I speak of, the Bank of England certainly
could not have made. But no one in London ever dreams of questioning the
credit of the Bank, and the Bank never dreams that its own credit is in danger.
Somehow everybody feels the Bank is sure to come right. In 1797, when it had
scarcely any money left, the Government said not only that it need not pay away
what remained, but that it must not. The 'effect of letters of licence' to break
Peel's Act has confirmed the popular conviction that the Government is close
behind the Bank, and will help it when wanted. Neither the Bank nor the
Banking Department have ever had an idea of being put 'into liquidation;' most
men would think as soon of 'winding up' the English nation.

Since then the Bank of England, as a bank, is exempted from the perpetual
apprehension that makes other bankers keep a large reserve the apprehension
of discredit—it would seem particularly necessary that its managers should be
themselves specially interested in keeping that reserve, and specially competent
to keep it. But I need not say that the Bank directors have not their personal
fortune at stake in the management of the Bank. They are rich City merchants,
and their stake in the Bank is trifling in comparison with the rest of their
wealth. If the Bank were wound up, most of them would hardly in their income
feel the difference. And what is more, the Bank directors are not trained
bankers; they were not bred to the trade, and do not in general give the main
power of their minds to it. They are merchants, most of whose time and most
of whose real
mind are occupied in making money in their own business and for themselves.

It might be expected that as this great public duty was cast upon the Banking
Department of the Bank, the principal statesmen (if not Parliament itself)
would have enjoined on them to perform it. But no distinct resolution of
Parliament has ever enjoined it; scarcely any stray word of any influential
statesman. And, on the contrary, there is a whole catena of authorities,
beginning with Sir Robert Peel and ending with Mr. Lowe, which say that the
Banking Department of the Bank of England is only a Bank like any other
bank—a Company like other companies; that in this capacity it has no peculiar
position, and no public duties at all. Nine-tenths of English statesmen, if they
were asked as to the management of the Banking Department of the Bank of
England, would reply that it was no business of theirs or of Parliament at all;
that the Banking Department alone must look to it.

The result is that we have placed the exclusive custody of our entire banking
reserve in the hands of a single board of directors not particularly trained for
the duty—who might be called 'amateurs,' who have no particular interest
above other people in keeping it undiminished—who acknowledge no
obligation to keep it undiminished who have never been told by any great
statesman or public authority that they are so to keep it or that they have
anything to do with it who are named by and are agents for a proprietary
which would have a greater income if it was diminished, who do not fear, and
who need not fear, ruin, even if it were all gone and wasted.

That such an arrangement is strange must be plain; but its strangeness can only
be comprehended when we know what the custody of a national banking
reserve means, and how delicate and difficult it is.

II.

Such a reserve as we have seen is kept to meet sudden and unexpected

demands. If the bankers of a country are asked for much more than is
commonly wanted, then this reserve must be resorted to. What then are these
extra demands? and how is this extra reserve to be used? Speaking broadly,
these extra demands are of two kinds—one from abroad to meet foreign
payments requisite to pay large and unusual foreign debts, and the other from
at home to meet sudden apprehension or panic arising in any manner, rational
or irrational.
No country has ever been so exposed as England to a foreign demand on its
banking reserve, not only because at present England is a large borrower from
foreign nations, but also (and much more) because no nation has ever had a
foreign trade of such magnitude, in such varied objects, or so ramified through
the world. The ordinary foreign trade of a country requires no cash; the exports
on one side balance the imports on the other. But a sudden trade of import like
the import of foreign corn after a bad harvestor (what is much less common,
though there are cases of it) the cessation of any great export, causes a balance
to become due, which must be paid in cash.

Now, the only source from which large sums of cash can be withdrawn in
countries where banking is at all developed, is a 'bank reserve.' In England
especially, except a few sums of no very considerable amount held by bullion
dealers in the course of their business, there are no sums worth mentioning in
cash out of the banks; an ordinary person could hardly pay a serious sum
without going to some bank, even if he spent a month in trying. All persons
who wish to pay a large sum in cash trench of necessity on the banking
reserve. But then what is 'cash?' Within a country the action of a Government
can settle the quantity, and therefore the value, of its currency; but outside its
own country, no Government can do so. Bullion is the cash' of international
trade; paper currencies are of no use there, and coins pass only as they contain
more or less bullion.

When then the legal tender of a country is purely metallic, all that is necessary
is that banks should keep a sufficient store of that 'legal tender.' But when the
'legal tender' is partly metal and partly paper, it is necessary that the paper
'legal tender'—the bank note—should be convertible into bullion. And here I
should pass my limits, and enter on the theory of Peel's Act if I began to
discuss the conditions of convertibility. I deal only with the primary pre-
requisite of effectual foreign payments—a sufficient supply of the local legal
tender; with the afterstep—the change of the local legal tender into the
universally acceptable commodity cannot deal.

What I have to deal with is, for the present, ample enough. The Bank of
England must keep a reserve of 'legal tender' to be used for foreign payments if
itself fit, and to be used in obtaining bullion if itself unfit. And foreign payments
are sometimes very large, and often very sudden. The 'cotton drain,' as it is
called— the drain to the East to pay for Indian cotton during the American Civil
War took many millions from this country for a series of years. A bad harvest must
take
millions in a single year. In order to find such great sums, the Bank of
England requires the steady use of an effectual instrument.

That instrument is the elevation of the rate of interest. If the interest of money
be raised, it is proved by experience that money does come to Lombard Street,
and theory shows that it ought to come. To fully explain the matter I must go
deep into the theory of the exchanges, but the general notion is plain enough.
Loanable capital, like every other commodity, comes where there is most to
be made of it. Continental bankers and others instantly send great sums here,
as soon as the rate of interest shows that it can be done profitably. While
English credit is good, a rise of the value of money in Lombard Street
immediately by a banking operation brings money to Lombard Street. And
there is also a slower mercantile operation. The rise in the rate of discount
acts immediately on the trade of this country. Prices fall here; in consequence
imports are diminished, exports are increased, and, therefore, there is more
likelihood of a balance in bullion coming to this country after the rise in the
rate than there was before.

Whatever persons—one bank or many banks—in any country hold the

banking reserve of that country, ought at the very beginning of an
unfavourable foreign exchange at once to raise the rate of interest, so as to
prevent their reserve from being diminished farther, and so as to replenish it
by imports of bullion.

This duty, up to about the year 1860, the Bank of England did not perform at
all, as I shall show farther on. A more miserable history can hardly be found
than that of the attempts of the Bank—if indeed they can be called attempts—
to keep a reserve and to manage a foreign drain between the year 1819 (when
cash payments were resumed by the Bank, and when our modern Money
Market may be said to begin) and the year 1857. The panic of that year for the
first time taught the Bank directors wisdom, and converted them to sound
principles. The present policy of the Bank is an infinite improvement on the
policy before 1857: the two must not be for an instant confounded; but
nevertheless, as I shall hereafter show, the present policy is now still most
defective, and much discussion and much effort, will be wanted before that
policy becomes what it ought to be.

A domestic drain is very different. Such a drain arises from a disturbance of

credit within the country, and the difficulty of dealing with it is the greater,
because it is often caused, or at least often enhanced, by a foreign drain.
Times without number the public have been alarmed mainly because they saw
that the
Banking reserve was already low, and that it was daily getting lower. The two
maladies—an external drain and an internal—often attack the money market
at once. What then ought to be done?

In opposition to what might be at first sight supposed, the best way for the
bank or banks who have the custody of the bank reserve to deal with a drain
arising from internal discredit, is to lend freely. The first instinct of everyone is
the contrary. There being a large demand on a fund which you want to
preserve, the most obvious way to preserve it is to hoard it—to get in as much
as you can, and to let nothing go out which you can help. But every banker
knows that this is not the way to diminish discredit. This discredit means, 'an
opinion that you have not got any money,' and to dissipate that opinion, you
must, if possible, show that you have money: you must employ it for the public
benefit in order that the public may know that you have it. The time for
economy and for accumulation is before. A good banker will have accumulated
in ordinary times the reserve he is to make use of in extraordinary times.

Ordinarily discredit does not at first settle on any particular bank, still less does
it at first concentrate itself on the bank or banks holding the principal cash
reserve. These banks are almost sure to be those in best credit, or they would
not be in that position, and, having the reserve, they are likely to look stronger
and seem stronger than any others. At first, incipient panic amounts to a kind
of vague conversation: Is A. B. as good as he used to be? Has not C. D. lost
money? and a thousand such questions. A hundred people are talked about, and a
thousand think,—'Am I talked about, or am I not?' 'Is my credit as good as it
used to be, or is it less?' And every day, as a panic grows, this floating
suspicion becomes both more intense and more diffused; it attacks more
persons; and attacks them all more virulently than at first. All men of
experience, therefore, try to strengthen themselves,' as it is called, in the early
stage of a panic; they borrow money while they can; they come to their banker
and offer bills for discount, which commonly they would not have offered for
days or weeks to come. And if the merchant be a regular customer, a banker
does not like to refuse, because if he does he will be said, or may be said, to be
in want of money, and so may attract the panic to himself. Not only merchants
but all persons under pecuniary liabilities—present or imminent—feel this
wish to 'strengthen themselves,' and in proportion to those liabilities.
Especially is this the case with what may be called the auxiliary dealers in
credit. Under any system of banking there will always group themselves about
the main bank or banks (in which is kept the reserve) a crowd of smaller
money dealers, who
watch the minutae of bills, look into special securities which busy bankers
have not time for, and so gain a livelihood. As business grows, the number of
such subsidiary persons augments. The various modes in which money may be
lent have each their peculiarities, and persons who devote themselves to one
only lend in that way more safely, and therefore more cheaply. In time of
panic, these subordinate dealers in money will always come to the principal
dealers. In ordinary times, the intercourse between the two is probably close
enough. The little dealer is probably in the habit of pledging his 'securities' to
the larger dealer at a rate less than he has himself charged, and of running into
the market to lend again. His time and brains are his principal capital, and he
wants to be always using them. But in times of incipient panic, the minor
money dealer always becomes alarmed. His credit is never very established or
very wide; he always fears that he may be the person on whom current
suspicion will fasten, and often he is so. Accordingly he asks the larger dealer
for advances. A number of such persons ask all the large dealers—those who
have the money—the holders of the reserve. And then the plain problem
before the great dealers comes to be 'How shall we best protect ourselves? No
doubt the immediate advance to these second-class dealers is annoying, but
may not the refusal of it even be dangerous? A panic grows by what it feeds on;
if it devours these second-class men, shall we, the first class, be safe?'

A panic, in a word, is a species of neuralgia, and according to the rules of

science you must not starve it. The holders of the cash reserve must be ready
not only to keep it for their own liabilities, but to advance it most freely for the
liabilities of others. They must lend to merchants, to minor bankers, to 'this
man and that man,' whenever the security is good. In wild periods of alarm,
one failure makes many, and the best way to prevent the derivative failures is
to arrest the primary failure which causes them. The way in which the panic of
1825 was stopped by advancing money has been described in so broad and
graphic a way that the passage has become classical. 'We lent it,' said Mr.
Harman, on behalf of the Bank of England, 'by every possible means and in
modes we had never adopted before; we took in stock on security, we
purchased Exchequer bills, we made advances on Exchequer bills, we not only
discounted outright, but we made advances on the deposit of bills of exchange
to an immense amount, in short, by every possible means consistent with the
safety of the Bank, and we were not on some occasions over-nice. Seeing the
dreadful state in which the public were, we rendered every assistance in our
power.' After a day or two of this treatment, the entire panic subsided, and the
'City' was quite calm.
The problem of managing a panic must not be thought of as mainly a 'banking'
problem. It is primarily a mercantile one. All merchants are under liabilities;
they have bills to meet soon, and they can only pay those bills by discounting
bills on other merchants. In other words, all merchants are dependent on
borrowing money, and large merchants are dependent on borrowing much
money. At the slightest symptom of panic many merchants want to borrow
more than usual; they think they will supply themselves with the means of
meeting their bills while those means are still forthcoming. If the bankers
gratify the merchants, they must lend largely just when they like it least; if
they do not gratify them, there is a panic.

On the surface there seems a great inconsistency in all this. First, you establish
in some bank or banks a certain reserve; you make of it or them a kind of
ultimate treasury, where the last shilling of the country is deposited and kept.
And then you go on to say that this final treasury is also to be the last lending-
house; that out of it unbounded, or at any rate immense, advances are to be
made when no once else lends. This seems like saying—first, that the reserve
should be kept, and then that it should not be kept. But there is no puzzle in the
matter. The ultimate banking reserve of a country (by whomsoever kept) is not
kept out of show, but for certain essential purposes, and one of those purposes
is the meeting a demand for cash caused by an alarm within the country. It is
not unreasonable that our ultimate treasure in particular cases should be lent;
on the contrary, we keep that treasure for the very reason that in particular
cases it should be lent.

When reduced to abstract principle, the subject comes to this. An 'alarm' is an

opinion that the money of certain persons will not pay their creditors when
those creditors want to be paid. If possible, that alarm is best met by enabling
those persons to pay their creditors to the very moment. For this purpose only a
little money is wanted. If that alarm is not so met, it aggravates into a panic,
which is an opinion that most people, or very many people, will not pay their
creditors; and this too can only be met by enabling all those persons to pay
what they owe, which takes a great deal of money. No one has enough money,
or anything like enough, but the holders of the bank reserve.

Not that the help so given by the banks holding that reserve necessarily
diminishes it. Very commonly the panic extends as far, or almost as far, as the
bank or banks which hold the reserve, but does not touch it or them at all. In
this case it is enough if the dominant bank or banks, so to speak, pledge their
credit for those who want it. Under our present system it is often quite enough
that a
merchant or a banker gets the advance made to him put to his credit in the
books of the Bank of England; he may never draw a cheque on it, or, if he
does, that cheque may come in again to the credit of some other customer, who
lets it remain on his account. An increase of loans at such times is often an
increase of the liabilities of the bank, not a diminution of its reserve. Just so
before 1844, an issue of notes, as in to quell a panic entirely internal did not
diminish the bullion reserve. The notes went out, but they did not return. They
were issued as loans to the public, but the public wanted no more; they never
presented them for payment; they never asked that sovereigns should be given
for them. But the acceptance of a great liability during an augmenting alarm,
though not as bad as an equal advance of cash, is the thing next worst. At any
moment the cash may be demanded. Supposing the panic to grow, it will be
demanded, and the reserve will be lessened accordingly.

No doubt all precautions may, in the end, be unavailing. 'On extraordinary

occasions,' says Ricardo, 'a general panic may seize the country, when every
one becomes desirous of possessing himself of the precious metals as the most
convenient mode of realising or concealing his property, against such panic
banks have no security on any system.' The bank or banks which hold the
reserve may last a little longer than the others; but if apprehension pass a
certain bound, they must perish too. The use of credit is, that it enables debtors
to use a certain part of the money their creditors have lent them. If all those
creditors demand all that money at once, they cannot have it, for that which
their debtors have used, is for the time employed, and not to be obtained. With
the advantages of credit we must take the disadvantages too; but to lessen them
as much as we can, we must keep a great store of ready money always
available, and advance out of it very freely in periods of panic, and in times of
incipient alarm.

The management of the Money Market is the more difficult, because, as has
been said, periods of internal panic and external demand for bullion commonly
occur together. The foreign drain empties the Bank till, and that emptiness, and
the resulting rise in the rate of discount, tend to frighten the market. The
holders of the reserve have, therefore, to treat two opposite maladies at once—
one requiring stringent remedies, and especially a rapid rise in the rate of
interest; and the other, an alleviative treatment with large and ready loans.

Before we had much specific experience, it was not easy to prescribe for this
compound disease; but now we know how to deal with it. We must look first to
the foreign drain, and raise the rate of interest as high as may be necessary.
Unless you can stop the foreign export, you cannot allay the domestic alarm.
The Bank will get poorer and poorer, and its poverty will protract or renew the
apprehension. And at the rate of interest so raised, the holders—one or more-of
the final Bank reserve must lend freely. Very large loans at very high rates are
the best remedy for the worst malady of the money market when a foreign
drain is added to a domestic drain. Any notion that money is not to be had, or
that it may not be had at any price, only raises alarm to panic and enhances
panic to madness. But though the rule is clear, the greatest delicacy, the finest
and best skilled judgment, are needed to deal at once with such great and
contrary evils.

And great as is the delicacy of such a problem in all countries, it is far greater
in England now than it was or is elsewhere. The strain thrown by a panic on
the final bank reserve is proportional to the magnitude of a country's
commerce, and to the number and size of the dependent banks—banks, that is,
holding no cash reserve—that are grouped around the central bank or banks.
And in both respects our system causes a stupendous strain. The magnitude of
our commerce, and the number and magnitude of the banks which depend on
the Bank of England, are undeniable. There are very many more persons under
great liabilities than there are, or ever were, anywhere else. At the
commencement of every panic, all persons under such liabilities try to supply
themselves with the means of meeting those liabilities while they can. This
causes a great demand for new loans. And so far from being able to meet it, the
bankers who do not keep an extra reserve at that time borrow largely, or do not
renew large loans—very likely do both.

London bankers, other than the Bank of England, effect this in several ways.
First, they have probably discounted bills to a large amount for the bill brokers,
and if these bills are paid, they decline discounting any others to replace them.
The directors of the London and Westminster Bank had, in the panic of 1857,
discounted millions of such bills, and they justly said that if those bills were
paid they would have an amount of cash far more than sufficient for any
demand. But how were those bills to be paid? Some one else must lend the
money to pay them. The mercantile community could not on a sudden bear to
lose so large a sum of borrowed money; they have been used to rely on it, and
they could not carry on their business without it. Least of all could they bear it
at the beginning of a panic, when everybody wants more money than usual.
Speaking broadly, those bills can only be paid by the discount of other bills.
When the bills (suppose) of a Manchester warehouseman which he gave to the
manufacturer become due, he cannot, as a rule, pay for them at once in cash;
he has bought on credit, and he has sold on credit. He is but a middleman. To
pay his own bill to
the maker of the goods, he must discount the bills he has received from the
shopkeepers to whom he has sold the goods; but if there is a sudden cessation
in the means of discount, he will not be able to discount them. All our
mercantile community must obtain new loans to pay old debts. If some one
else did not pour into the market the money which the banks like the London
and Westminster Bank take out of it, the bills held by the London and
Westminster Bank could not be paid.

Who then is to pour in the new money? Certainly not the bill brokers. They
have been used to re-discount with such banks as the London and Westminster
millions of bills, and if they see that they are not likely to be able to re-discount
those bills, they instantly protect themselves and do not discount them. Their
business does not allow them to keep much cash unemployed. They give
interest for all the money deposited with them—an interest often nearly
approaching the interest they can charge; as they can only keep a small reserve a
panic tells on them more quickly than on anyone else. They stop their discounts,
or much diminish their discounts, immediately. There is no new money to be
had from them, and the only place at which they can have it is the Bank of
England.
There is even a simpler case: the banker who is uncertain of his credit, and
wants to increase his cash, may have money on deposit at the bill brokers. If he
wants to replenish his reserve, he may ask for it, suppose, just when the alarm
is beginning. But if a great number of persons do this very suddenly, the bill
brokers will not at once be able to pay without borrowing. They have excellent
bills in their case, but these will not be due for some days; and the demand
from the more or less alarmed bankers is for payment at once and to-day.
Accordingly the bill broker takes refuge at the Bank of England the only place
where at such a moment new money is to be had.

The case is just the same if the banker wants to sell Consols, or to call in money
lent on Consols. These he reckons as part of his reserve. And in ordinary times
nothing can be better. According to the saying, you 'can sell Consols on a
Sunday.' In a time of no alarm, or in any alarm affecting that particular banker
only, he can rely on such reserve without misgiving. But not so in a general
panic. Then, if he wants to sell 500,000 L. worth of Consols, he will not find
500,000 L. of fresh money ready to come into the market. All ordinary bankers
are wanting to sell, or thinking they may have to sell. The only resource is the
Bank of England. In a great panic, Consols cannot be sold unless the Bank of
England will advance to the buyer, and no buyer can obtain advances on
Consols at such a time unless the Bank of England will lend to him.

The case is worse if the alarm is not confined to the great towns, but is diffused
through the country. As a rule, country bankers only keep so much barren cash
as is necessary for their common business. All the rest they leave at the bill
brokers, or at the interest-giving banks, or invest in Consols and such securities.
But in a panic they come to London and want this money. And it is only from
the Bank of England that they can get it, for all the rest of London want their
money for themselves.

If we remember that the liabilities of Lombard Street payable on demand are far
larger than those of any like market, and that the liabilities of the country are
greater still, we can conceive the magnitude of the pressure on the Bank of
England when both Lombard Street and the country suddenly and at once come
upon it for aid. No other bank was ever exposed to a demand so formidable, for
none ever before kept the banking reserve for such a nation as the English. The
mode in which the Bank of England meets this great responsibility is very
curious. It unquestionably does make enormous advances in every panic
 In 1847 the loans on 'private securities'
increased from 18,963,000 L to 20,409,000 L
1857 ditto ditto 20,404,000 L to 31,350,000 L
1866 ditto ditto 18,507,000 L to 33,447,000 L

But, on the other hand, as we have seen, though the Bank, more or less, does
its duty, it does not distinctly acknowledge that it is its duty. We are apt to be
solemnly told that the Banking Department of the Bank of England is only a
bank like other banks—that it has no peculiar duty in times of panic—that it
then is to look to itself alone, as other banks look. And there is this excuse for
the Bank. Hitherto questions of banking have been so little discussed in
comparison with questions of currency, that the duty of the Bank in time of
panic has been put on a wrong ground.

It is imagined that because bank notes are a legal tender, the Bank has some
peculiar duty to help other people. But bank notes are only a legal tender at the
Issue Department, not at the Banking Department, and the accidental
combination of the two departments in the same building gives the Banking
Department no aid in meeting a panic. If the Issue Department were at
Somerset House, and if it issued Government notes there, the position of the
Banking Department under the present law would be exactly what it is now.
No doubt, formerly the Bank of England could issue what it pleased, but that
historical reminiscence makes it no stronger now that it can no longer so issue.
We must deal with what is, not with what was.

And a still worse argument is also used. It is said that because the Bank of
England keeps the 'State account' and is the Government banker, it is a sort of
'public institution' and ought to help everybody. But the custody of the taxes
which have been collected and which wait to be expended is a duty quite apart
from panics. The Government money may chance to be much or little when
the panic comes. There is no relation or connection between the two. And the
State, in getting the Bank to keep what money it may chance to have, or in
borrowing of it what money it may chance to want, does not hire it to stop a
panic or much help it if it tries.

The real reason has not been distinctly seen. As has been already said—but on
account of its importance and perhaps its novelty it is worth saying again—
whatever bank or banks keep the ultimate banking reserve of the country must
lend that reserve most freely in time of apprehension, for that is one of the
characteristic uses of the bank reserve, and the mode in which it attains one of
the main ends for which it is kept. Whether rightly or wrongly, at present and
in fact the Bank of England keeps our ultimate bank reserve, and therefore it
must use it in this manner.

And though the Bank of England certainly do make great advances in time of
panic, yet as they do not do so on any distinct principle, they naturally do it
hesitatingly, reluctantly, and with misgiving. In 1847, even in 1866—the latest
panic, and the one in which on the whole the Bank acted the best—there was
nevertheless an instant when it was believed the Bank would not advance on
Consols, or at least hesitated to advance on them. The moment this was
reported in the City and telegraphed to the country, it made the panic
indefinitely worse. In fact, to make large advances in this faltering way is to
incur the evil of making them without obtaining the advantage. What is wanted
and what is necessary to stop a panic is to diffuse the impression, that though
money may be dear, still money is to be had. If people could be really
convinced that they could have money if they wait a day or two, and that utter
ruin is not coming, most likely they would cease to run in such a mad way for
money. Either shut the Bank at once, and say it will not lend more than it
commonly lends, or lend freely, boldly, and so that the public may feel you
mean to go on lending. To lend a great deal, and yet not give the public
confidence that you will lend sufficiently and effectually, is the worst of all
policies; but it is the policy now pursued.

In truth, the Bank do not lend from the motives which should make a bank
lend. The holders of the Bank reserve ought to lend at once and most freely in
an incipient panic, because they fear destruction in the panic. They ought not
to do it to serve others; they ought to do it to serve themselves. They ought to
know that this bold policy is the only safe one, and for that reason they ought
to choose it. But the Bank directors are not afraid. Even at the last moment
they say that 'whatever happens to the community, they can preserve
themselves.' Both in 1847 and 1857 (I believe also in 1866, though there is no
printed evidence of it) the Bank directors contended that the Banking
Department was quite safe though its reserve was nearly all gone, and that it
could strengthen itself by selling securities and by refusing to discount. But
this is a complete dream. The Bank of England could not sell 'securities,' for in
an extreme panic there is no one else to buy securities. The Bank cannot stay
still and wait till its bills are paid, and so fill its coffers, for unless it discounts
equivalent bills, the bills which it has already discounted will not be paid.
'When the reserve in the ultimate bank or banks—those keeping the reserve—
runs low, it cannot be augmented by the
same means that other and dependent banks commonly adopt to maintain
their reserve, for the dependent banks trust that at such moments the
ultimate banks will be discounting more than usual and lending more than
usual. But ultimate banks have no similar rear-guard to rely upon.

I shall have failed in my purpose if I have not proved that the system of
entrusting all our reserve to a single board, like that of the Bank directors, is
very anomalous; that it is very dangerous; that its bad consequences, though
much felt, have not been fully seen; that they have been obscured by traditional
arguments and hidden in the dust of ancient controversies.

But it will be said—What would be better? What other system could there be?
We are so accustomed to a system of banking, dependent for its cardinal function
on a single bank, that we can hardly conceive of any other. But the natural
system—that which would have sprung up if Government had let banking alone
—is that of many banks of equal or not altogether unequal size. In all other
trades competition brings the traders to a rough approximate equality. In cotton
spinning, no single firm far and permanently outstrips the others. There is no
tendency to a monarchy in the cotton world; nor, where banking has been left
free, is there any tendency to a monarchy in banking either. In Manchester, in
Liverpool, and all through England, we have a great number of banks, each
with a business more or less good, but we have no single bank with any sort of
predominance; nor is there any such bank in Scotland. In the new world of
Joint Stock Banks outside the Bank of England, we see much the same
phenomenon. One or more get for a time a better business than the others, but
no single bank permanently obtains an unquestioned predominance. None of
them gets so much before the others that the others voluntarily place their
reserves in its keeping. A republic with many competitors of a size or sizes
suitable to the business, is the constitution of every trade if left to itself, and of
banking as much as any other. A monarchy in any trade is a sign of some
anomalous advantage, and of some intervention from without.

I shall be at once asked—Do you propose a revolution? Do you propose to

abandon the one-reserve system, and create anew a many-reserve system? My
plain answer is that I do not propose it. I know it would be childish. Credit in
business is like loyalty in Government. You must take what you can find of it,
and work with it if possible. A theorist may easily map out a scheme of
Government in which Queen Victoria could be dispensed with. He may make
a theory that, since we admit and we know that the House of Commons is the
real
sovereign, any other sovereign is superfluous; but for practical purposes, it is
not even worth while to examine these arguments. Queen Victoria is loyally
obeyed
—without doubt, and without reasoning—by millions of human beings. If those
millions began to argue, it would not be easy to persuade them to obey Queen
Victoria, or anything else. Effectual arguments to convince the people who
need convincing are wanting. Just so, an immense system of credit, founded on
the Bank of England as its pivot and its basis, now exists. The English people,
and foreigners too, trust it implicitly. Every banker knows that if he has to
prove that he is worthy of credit, however good may be his arguments, in fact
his credit is gone: but what we have requires no proof. The whole rests on an
instinctive confidence generated by use and years. Nothing would persuade the
English people to abolish the Bank of England; and if some calamity swept it
away, generations must elapse before at all the same trust would be placed in
any other equivalent. A many-reserve system, if some miracle should put it
down in Lombard Street, would seem monstrous there. Nobody would
understand it, or confide in it. Credit is a power which may grow, but cannot be
constructed.
Those who live under a great and firm system of credit must consider that if
they break up that one they will never see another, for it will take years upon
years to make a successor to it.

On this account, I do not suggest that we should return to a natural or many-

reserve system of banking. I should only incur useless ridicule if I did suggest
it. Nor can I propose that we should adopt the simple and straightforward
expedient by which the French have extricated themselves from the same
difficulty. In France all banking rests on the Bank of France, even more than in
England all rests on the Bank of England. The Bank of France keeps the final
banking reserve, and it keeps the currency reserve too. But the State does not
trust such a function to a board of merchants, named by shareholders. The
nation itself—the Executive Government—names the governor and deputy-
governor of the Bank of France. These officers have, indeed, beside them a
council of 'regents,' or directors, named by the shareholders. But they need not
attend to that council unless they think fit; they are appointed to watch over the
national interest, and, in so doing, they may disregard the murmurs of the
'regents' if they like. And in theory, there is much to be said for this plan. The
keeping the single banking reserve being a national function, it is at least
plausible to argue that Government should choose the functionaries. No doubt
such a political intervention is contrary to the sound economical doctrine that
'banking is a trade, and only a trade.' But Government forgot that doctrine
when, by privileges and monopolies, it made a single bank predominant over
all others, and established the one-
reserve system. As that system exists, a logical Frenchman consistently enough
argues that the State should watch and manage it. But no such plan would
answer in England. We have not been trained to care for logical sequence in our
institutions, or rather we have been trained not to care for it. And the practical
result for which we do care would in this case be bad. The governor of the
Bank would be a high Parliamentary official, perhaps in the Cabinet, and
would change as chance majorities and the strength of parties decide. A trade
peculiarly requiring consistency and special attainment would be managed by a
shifting and untrained ruler. In fact, the whole plan would seem to an
Englishman of business palpably absurd; he would not consider it, he would
not think it worth considering. That it works fairly well in France, and that
there are specious arguments of theory for it, would not be sufficient to his
mind.

All such changes being out of the question, I can propose only three remedies.

First. There should be a clear understanding between the Bank and the public
that, since the Bank hold out ultimate banking reserve, they will recognise
and act on the obligations which this implies; that they will replenish it in
times of foreign demand as fully, and Lend it in times of internal panic as
freely and readily, as plain principles of banking require.

This looks very different from the French plan, but it is not so different in
reality. In England we can often effect, by the indirect compulsion of opinion,
what other countries must effect by the direct compulsion of Government. We
can do so in this case. The Bank directors now fear public opinion exceedingly;
probably no kind of persons are so sensitive to newspaper criticism. And this is
very natural. Our statesmen, it is true, are much more blamed, but they have
generally served a long apprenticeship to sharp criticism. If they still care for it
(and some do after years of experience much more than the world thinks), they
care less for it than at first, and have come to regard it as an unavoidable and
incessant irritant, of which they shall never be rid. But a bank director
undergoes no similar training and hardening. His functions at the Bank fill a
very small part of his time; all the rest of his life (unless he be in Parliament) is
spent in retired and mercantile industry. He is not subjected to keen and public
criticism, and is not taught to bear it. Especially when once in his life he
becomes, by rotation, governor, he is most anxious that the two years of office
shall 'go off well.' He is apt to be irritated even by objections to principles on
which he acts, and cannot bear with equanimity censure which is pointed and
personal. At present I am not sure if this sensitiveness is beneficial. As the
exact position of the Bank of
England in the Money Market is indistinctly seen, there is no standard to which
a Bank governor can appeal. He is always in fear that 'something may be said;'
but not quite knowing on what side that 'something' may be, his fear is but an
indifferent guide to him. But if the cardinal doctrine were accepted, if it were
acknowledged that the Bank is charged with the custody of our sole banking
reserve, and is bound to deal with it according to admitted principles, then a
governor of the Bank could look to those principles. He would know which way
criticism was coming. If he was guided by the code, he would have a plain
defence. And then we may be sure that old men of business would not deviate
from the code. At present the Board of Directors are a sort of semi-trustees for
the nation. I would have them real trustees, and with a good trust deed.

Secondly. The government of the Bank should be improved in a manner to be

explained. We should diminish the 'amateur' element; we should augment the
trained banking element; and we should ensure more constancy in the
administration.

Thirdly. As these two suggestions are designed to make the Bank as strong as
possible, we should look at the rest of our banking system, and try to reduce
the demands on the Bank as much as we can. The central machinery being
inevitably frail, we should carefully and as much as possible diminish the
strain upon it.

But to explain these proposals, and to gain a full understanding of many

arguments that have been used, we must look more in detail at the component
parts of Lombard street, and at the curious set of causes which have made it
assume its present singular structure.
CHAPTER III.
How Lombard Street Came to Exist, and Why It Assumed Its Present
Form.

In the last century, a favourite subject of literary ingenuity was 'conjectural

history,' as it was then called. Upon grounds of probability a fictitious sketch
was made of the possible origin of things existing. If this kind of speculation
were now applied to banking, the natural and first idea would be that large
systems of deposit banking grew up in the early world, just as they grow up
now in any large English colony. As soon as any such community becomes
rich enough to have much money, and compact enough to be able to lodge its
money in single banks, it at once begins so to do. English colonists do not like
the risk of keeping their money, and they wish to make an interest on it. They
carry from home the idea and the habit of banking, and they take to it as soon
as they can in their new world. Conjectural history would be inclined to say
that all banking began thus: but such history is rarely of any value. The basis of
it is false. It assumes that what works most easily when established is that
which it would be the most easy to establish, and that what seems simplest
when familiar would be most easily appreciated by the mind though
unfamiliar. But exactly the contrary is true.
Many things which seem simple and which work well when firmly
established, are very hard to establish among new people, and not very easy
to explain to them. Deposit banking is of this sort. Its essence is that a very
large number of persons agree to trust a very few persons, or some one
person. Banking would not be a profitable trade if bankers were not a small
number, and depositors in comparison an immense number. But to get a great
number of persons to do exactly the same thing is always very difficult, and
nothing but a very palpable necessity will make them on a sudden begin to do
it. And there is no such palpable necessity in banking. If you take a country
town in France, even now, you will not find any such system of banking as
ours. Cheque-books are unknown, and money kept on running account by
bankers is rare. People store
their money in a caisse at their houses. Steady savings, which are waiting for
investment, and which are sure not to be soon wanted, may be lodged with
bankers; but the common floating cash of the community is kept by the
community themselves at home. They prefer to keep it so, and it would not
answer a banker's purpose to make expensive arrangements for keeping it
otherwise. If a 'branch,' such as the National Provincial Bank opens in an
English country town, were opened in a corresponding French one, it would
not pay its expenses. You could not get any sufficient number of Frenchmen to
agree to put their money there. And so it is in all countries not of British
descent, though in various degrees. Deposit banking is a very difficult thing to
begin, because people do not like to let their money out of their sight,
especially do not like to let it out of sight without security—still more, cannot
all at once agree on any single person to whom they are content to trust it
unseen and unsecured.
Hypothetical history, which explains the past by what is simplest and
commonest in the present, is in banking, as in most things, quite untrue.

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.'

Again, a most important function of early banks is one which the present
banks retain, though it is subsidiary to their main use; viz. the function of
remitting money. A man brings money to the bank to meet a payment which he
desires to make at a great distance, and the bank, having a connection with
other banks, sends it where it is wanted. As soon as bills of exchange are given
upon a large scale, this remittance is a very pressing requirement. Such bills
must be made payable at a place convenient to the seller of the goods in
payment of which they are given, perhaps at the great town where his
warehouse is. But this may be very far from the retail shop of the buyer who
bought those goods to sell them again in the country. For these, and a
multitude of purposes, the instant and regular remittance of money is an early
necessity of growing trade; and that remittance it was a first object of early
banks to accomplish.

These are all uses other than those of deposit banking which banks supplied that
afterwards became in our English sense deposit banks. By supplying these uses,
they gained the credit that afterwards enabled them to gain a living as deposit
banks. Being trusted for one purpose, they came to be trusted for a purpose
quite different, ultimately far more important, though at first less keenly
pressing. But these wants only affect a few persons, and therefore bring the
bank under the notice of a few only. The real introductory function which
deposit banks at first
perform is much more popular, and it is only when they can perform this more
popular kind of business that deposit banking ever spreads quickly and
extensively. This function is the supply of the paper circulation to the country,
and it will be observed that I am not about to overstep my limits and discuss
this as a question of currency. In what form the best paper currency can be
supplied to a country is a question of economical theory with which I do not
meddle here. I am only narrating unquestionable history, not dealing with an
argument where every step is disputed. And part of this certain history is that
the best way to diffuse banking in a community is to allow the banker to issue
bank-notes of small amount that can supersede the metal currency. This
amounts to a subsidy to each banker to enable him to keep open a bank till
depositors choose to come to it. The country where deposit banking is most
diffused is Scotland, and there the original profits were entirely derived from
the circulation. The note issue is now a most trifling part of the liabilities of the
Scotch banks, but it was once their mainstay and source of profit. A curious
book, lately published, has enabled us to follow the course of this in detail. The
Bank of Dundee, now amalgamated with the Royal Bank of Scotland, was
founded in 1763, and had become before its amalgamation, eight or nine years
since, a bank of considerable deposits. But for twenty-five years from its
foundation it had no deposits at all. It subsisted mostly on its note issue, and a
little on its remittance business. Only in 1792, after nearly thirty years, it began
to gain deposits, but from that time they augmented very rapidly. The banking
history of England has been the same, though we have no country bank
accounts in detail which go back so far. But probably up to 1830 in England, or
thereabouts, the main profit of banks was derived from the circulation, and for
many years after that the deposits were treated as very minor matters, and the
whole of so-called banking discussion turned on questions of circulation. We are
still living in the debris of that controversy, for, as I have so often said, people
can hardly think of the structure of Lombard Street, except with reference to
the paper currency and to the Act of 1844, which regulates it now. The French
are still in the same epoch of the subject. The great enquete of 1865 is almost
wholly taken up with currency matters, and mere banking is treated as
subordinate. And the accounts of the Bank of France show why. The last
weekly statement before the German war showed that the circulation of the
Bank of France was as much as 59,244,000 L., and that the private deposits
were only 17,127,000 L. Now the private deposits are about the same, and the
circulation is 112,000,000 L. So difficult is it in even a great country like
France for the deposit system of banking to take root, and establish itself with
the strength and vigour that it has in England.
The experience of Germany is the same. The accounts preceding the war in
North Germany showed the circulation of the issuing banks to be 39,875,000
L., and the deposits to be 6,472,000 L. while the corresponding figures at the
present moment are—circulation, 60,000,000 L. and deposits 8,000,000 L. It
would be idle to multiply Instances.

The reason why the use of bank paper commonly precedes the habit of making
deposits in banks is very plain. It is a far easier habit to establish. In the issue
of notes the banker, the person to be most benefited, can do something. He can
pay away his own 'promises' in loans, in wages, or in payment of debts. But in
the getting of deposits he is passive. His issues depend on himself; his deposits
on the favour of others. And to the public the change is far easier too. To collect
a great mass of deposits with the same banker, a great number of persons must
agree to do something. But to establish a note circulation, a large number of
persons need only do nothing. They receive the banker's notes in the common
course of their business, and they have only not to take those notes to the
banker for payment. If the public refrain from taking trouble, a paper
circulation is immediately in existence. A paper circulation is begun by the
banker, and requires no effort on the part of the public; on the contrary, it needs
an effort of the public to be rid of notes once issued; but deposit banking
cannot be begun by the banker, and requires a spontaneous and consistent
effort in the community.
And therefore paper issue is the natural prelude to deposit banking.

The way in which the issue of notes by a banker prepares the way for the
deposit of money with him is very plain. When a private person begins to
possess a great heap of bank-notes, it will soon strike him that he is trusting the
banker very much, and that in re turn he is getting nothing. He runs the risk of
loss and robbery just as if he were hoarding coin. He would run no more risk
by the failure of the bank if he made a deposit there, and he would be free from
the risk of keeping the cash. No doubt it takes time before even this simple
reasoning is understood by uneducated minds. So strong is the wish of most
people to see their money that they for some time continue to hoard bank-
notes: for a long period a few do so. But in the end common sense conquers.
The circulation of bank-notes decreases, and the deposit of money with the
banker increases. The credit of the banker having been efficiently advertised
by the note, and accepted by the public, he lives on the credit so gained years
after the note issue itself has ceased to be very important to him.

The efficiency of this introduction is proportional to the diffusion of the right of

note issue. A single monopolist issuer, like the Bank of France, works its way
with difficulty through a country, and advertises banking very slowly. Even
now the Bank of France, which, I believe, by law ought to have a branch in
each Department, has only branches in sixty out of eighty-six. On the other
hand, the Swiss banks, where there is always one or more to every Canton,
diffuse banking rapidly. We have seen that the liabilities of the Bank of France
stand thus:

Notes L 112,000,000
Deposits L 15,000,000

But the aggregate Swiss banks, on the contrary, stand:

Notes L 761,000
Deposits L 4,709,000

The reason is that a central bank which is governed in the capital and descends
on a country district, has much fewer modes of lending money safely than a
bank of which the partners belong to that district, and know the men and things
in it. A note issue is mainly begun by loans; there are then no deposits to be paid.
But the mass of loans in a rural district are of small amount; the bills to be
discounted are trifling; the persons borrowing are of small means and only
local repute; the value of any property they wish to pledge depends on local
changes and local circumstances. A banker who lives in the district, who has
always lived there, whose whole mind is a history of the district and its
changes, is easily able to lend money safely there. But a manager deputed by a
single central establishment does so with difficulty. The worst people will
come to him and ask for loans. His ignorance is a mark for all the shrewd and
crafty people thereabouts. He will have endless difficulties in establishing the
circulation of the distant bank, because he has not the local knowledge which
alone can teach him how to issue that circulation with safety.

A system of note issues is therefore the best introduction to a large system of

deposit banking. As yet, historically, it is the only introduction: no nation as
yet has arrived at a great system of deposit banking without going first
through the preliminary stage of note issue, and of such note issues the
quickest and most efficient in this way is one made by individuals resident in
the district, and conversant with it.

And this explains why deposit banking is so rare. Such a note issue as has been
described is possible only in a country exempt from invasion, and free from
revolution. During an invasion note-issuing banks must stop payment; a run is
nearly inevitable at such a time, and in a revolution too. In such great and
close civil dangers a nation is always demoralised; everyone looks to himself,
and everyone likes to possess himself of the precious metals. These are sure
to be valuable, invasion or no invasion, revolution or no revolution. But the
goodness of bank-notes depends on the solvency of the banker, and that
solvency may be impaired if the invasion is not repelled or the revolution
resisted.

Hardly any continental country has been till now exempt for long periods
both from invasion and revolution. In Holland and Germany—two countries
where note issue and deposit banking would seem as natural as in England
and Scotland—there was never any security from foreign war. A profound
apprehension of external invasion penetrated their whole habits, and men of
business would have thought it insane not to contemplate a contingency so
frequent in their history, and perhaps witnessed by themselves.

France indeed, before 1789, was an exception. For many years under the old
regime she was exempt from serious invasion or attempted revolution. Her
Government was fixed, as was then thought, and powerful; it could resist any
external enemy, and the prestige on which it rested seemed too firm to fear any
enemy from within. But then it was not an honest Government, and it had
shown its dishonesty in this particular matter of note issue. The regent in Law's
time had given a monopoly of note issue to a bad bank, and had paid off the
debts of the nation in worthless paper. The Government had created a
machinery of ruin, and had thriven on it. Among so apprehensive a race as the
French the result was fatal. For many years no attempt at note issue or deposit
banking was possible in France. So late as the foundation of the Caisse
d'Escompte, in Turgot's time, the remembrance of Law's failure was distinctly
felt, and impeded the commencement of better attempts.

This therefore is the reason why Lombard Street exists; that is, why England is
a very great Money Market, and other European countries but small ones in
comparison. In England and Scotland a diffused system of note issues started
banks all over the country; in these banks the savings of the country have been
lodged, and by these they have been sent to London. No similar system arose
elsewhere, and in consequence London is full of money, and all continental
cities are empty as compared with it.
II.

The monarchical form of Lombard Street is due also to the note issue. The
origin of the Bank of England has been told by Macaulay, and it is never wise
for an ordinary writer to tell again what he has told so much better. Nor is it
necessary, for his writings are in everyone's hands. Still I must remind my
readers of the curious story.

Of all institutions in the world the Bank of England is now probably the most
remote from party politics and from 'financing.' But in its origin it was not only
a finance company, but a Whig finance company. It was founded by a Whig
Government because it was in desperate want of money, and supported by the
'City' because the 'City' was Whig. Very briefly, the story was this. The
Government of Charles II. (under the Cabal Ministry) had brought the credit of
the English State to the lowest possible point. It had perpetrated one of those
monstrous frauds, which are likewise gross blunders. The goldsmiths, who then
carried on upon a trifling scale what we should now call banking, used to
deposit their reserve of treasure in the 'Exchequer,' with the sanction and under
the care of the Government. In many European countries the credit of the State
had been so much better than any other credit, that it had been used to
strengthen the beginnings of banking. The credit of the state had been so used
in England: though there had lately been a civil war and several revolutions,
the honesty of the English Government was trusted implicitly. But Charles II.
showed that it was trusted undeservedly. He shut up the 'Exchequer,' would
pay no one, and so the 'goldsmiths' were ruined.

The credit of the Stuart Government never recovered from this monstrous
robbery, and the Government created by the Revolution of 1688 could hardly
expect to be more trusted with money than its predecessor. A Government
created by a revolution hardly ever is. There is a taint of violence which
capitalists dread instinctively, and there is always a rational apprehension that
the Government which one revolution thought fit to set up another revolution
may think fit to pull down. In 1694, the credit of William III.'s Government
was so low in London that it was impossible for it to borrow any large sum;
and the evil was the greater, because in consequence of the French war the
financial straits of the Government were extreme. At last a scheme was hit
upon which would relieve their necessities. 'The plan,' says Macaulay, 'was
that twelve hundred thousand pounds should be raised at what was then
considered as the
moderate rate of 8 per cent.' In order to induce the subscribers to advance the
money promptly on terms so unfavourable to the public, the subscribers were
to be incorporated by the name of the Governor and Company of the Bank of
England. They were so incorporated, and the 1,200,000 L. was obtained.

On many succeeding occasions, their credit was of essential use to the

Government. Without their aid, our National Debt could not have been
borrowed; and if we had not been able to raise that money we should have
been conquered by France and compelled to take back James II. And for many
years afterwards the existence of that debt was a main reason why the
industrial classes never would think of recalling the Pretender, or of upsetting
the revolution settlement. The 'fund-holder' is always considered in the books
of that time as opposed to his 'legitimate' sovereign, because it was to be
feared that this sovereign would repudiate the debt which was raised by those
who dethroned him, and which was spent in resisting him and his allies. For a
long time the Bank of England was the focus of London Liberalism, and in
that capacity rendered to the State inestimable services. In return for these
substantial benefits the Bank of England received from the Government, either
at first or afterwards, three most important privileges.

First. The Bank of England had the exclusive possession of the Government
balances. In its first period, as I have shown, the Bank gave credit to the
Government, but afterwards it derived credit from the Government. There is a
natural tendency in men to follow the example of the Government under which
they live. The Government is the largest, most important, and most
conspicuous entity with which the mass of any people are acquainted; its range
of knowledge must always be infinitely greater than the average of their
knowledge, and therefore, unless there is a conspicuous warning to the
contrary, most men are inclined to think their Government right, and, when
they can, to do what it does. Especially in money matters a man might fairly
reason—'If the Government is right in trusting the Bank of England with the
great balance of the nation, I cannot be wrong in trusting it with my little
balance.'

Second. The Bank of England had, till lately, the monopoly of limited liability
in England. The common law of England knows nothing of any such principle.
It is only possible by Royal Charter or Statute Law. And by neither of these
was any real bank (I do not count absurd schemes such as Chamberlayne's
Land Bank) permitted with limited liability in England till within these few
years. Indeed, a good many people thought it was right for the Bank of
England, but not right for
any other bank. I remember hearing the conversation of a distinguished
merchant in the City of London, who well represented the ideas then most
current. He was declaiming against banks of limited liability, and some one
asked—'Why, what do you say, then, to the Bank of England, where you keep
your own account?' 'Oh!' he replied, 'that is an exceptional case.' And no doubt
it was an exception of the greatest value to the Bank of England, because it
induced many quiet and careful merchants to be directors of the Bank, who
certainly would not have joined any bank where all their fortunes were liable,
and where the liability was not limited.

Thirdly. The Bank of England had the privilege of being the sole joint stock
company permitted to issue bank notes in England. Private London bankers did
indeed issue notes down to the middle of the last century, but no joint stock
company could do so. The explanatory clause of the Act of 1742 sounds most
curiously to our modern ears. 'And to prevent any doubt that may arise
concerning the privilege or power given to the said governor and company' that
is, the Bank of England' OF EXCLUSIVE BANKING; and also in regard to
creating any other bank or banks by Parliament, or restraining other persons
from banking during the continuance of the said privilege granted to the
governor and company of the Bank of England, as before recited; it is hereby
further enacted and declared by the authority aforesaid, that it is the true intent
and meaning of the said Act that no other bank shall be created, established, or
allowed by Parliament, and that it shall not be lawful for any body politic or
corporate whatsoever created or to be created, or for any other persons
whatsoever united or to be united in covenants or partnership exceeding the
number of six persons in that part of Great Britain called England, to borrow,
owe, or take up any sum or sums of money on their bills or notes payable on
demand or at any less time than six months from the borrowing thereof during
the continuance of such said privilege to the said governor and company, who
are hereby declared to be and remain a corporation with the privilege of
exclusive banking, as before recited.' To our modern ears these words seem to
mean more than they did. The term banking was then applied only to the issue
of notes and the taking up of money on bills on demand. Our present system of
deposit banking, in which no bills or promissory notes are issued, was not then
known on a great scale, and was not called banking. But its effect was very
important. It in time gave the Bank of England the monopoly of the note issue
of the Metropolis. It had at that time no branches, and so it did not compete for
the country circulation. But in the Metropolis, where it did compete, it was
completely victorious. No company but the Bank of England could issue notes,
and unincorporated individuals gradually gave way, and ceased to do so. Up to
1844 London private bankers might have issued notes if they pleased, but
almost a hundred years ago they were forced out of the field. The Bank of
England has so long had a practical monopoly of the circulation, that it is
commonly believed always to have had a legal monopoly.

And the practical effect of the clause went further: it was believed to make the
Bank of England the only joint stock company that could receive deposits, as
well as the only company that could issue notes. The gift of 'exclusive banking'
to the Bank of England was read in its most natural modern sense: it was
thought to prohibit any other banking company from carrying on our present
system of banking. After joint stock banking was permitted in the country,
people began to inquire why it should not exist in the Metropolis too? And
then it was seen that the words I have quoted only forbid the issue of
negotiable instruments, and not the receiving of money when no such
instrument is given. Upon this construction, the London and Westminster Bank
and all our older joint stock banks were founded. But till they began, the Bank
of England had among companies not only the exclusive privilege of note
issue, but that of deposit banking too. It was in every sense the only banking
company in London.

With so many advantages over all competitors, it is quite natural that the Bank
of England should have far outstripped them all. Inevitably it became the bank
in London; all the other bankers grouped themselves round it, and lodged their
reserve with it. Thus our one reserve system of banking was not deliberately
founded upon definite reasons; it was the gradual consequence of many singular
events, and of an accumulation of legal privileges on a single bank which has
now been altered, and which no one would now defend.
CHAPTER IV.
The Position of the Chancellor of the Exchequer in the Money Market.

Nothing can be truer in theory than the economical principle that banking is a
trade and only a trade, and nothing can be more surely established by a larger
experience than that a Government which interferes with any trade injures
that trade. The best thing undeniably that a Government can do with the
Money Market is to let it take care of itself.

But a Government can only carry out this principle universally if it observe one
condition: it must keep its own money. The Government is necessarily at times
possessed of large sums in cash. It is by far the richest corporation in the
country; its annual revenue payable in money far surpasses that of any other
body or person. And if it begins to deposit this immense income as it accrues at
any bank, at once it becomes interested in the welfare of that bank. It cannot pay
the interest on its debt if that bank cannot produce the public deposits when that
interest becomes due; it cannot pay its salaries, and defray its miscellaneous
expenses, if that bank fail at any time. A modern Government is like a very rich
man with very great debts which he cannot well pay; its credit is necessary to its
prosperity, almost to its existence, and if its banker fail when one of its debts
becomes due its difficulty is intense.

Another banker, it will be said, may take up the Government account. He may
advance, as is so often done in other bank failures, what the Government needs
for the moment in order to secure the Government account in future. But the
imperfection of this remedy is that it fails in the very worst case. In a panic,
and at a general collapse of credit, no such banker will probably be found. The
old banker who possesses the Government deposit cannot repay it, and no
banker not having that deposit will, at a bad crisis, be able to find the
5,000,000 L. or 6,000,000 L. which the quarter day of a Government such as
ours requires. If a finance Minister, having entrusted his money to a bank,
begins to act strictly, and
say he will in all cases let the Money Market take care of itself, the reply is that
in one case the Money Market will take care of him too, and he will be
insolvent.

In the infancy of Banking it is probably much better that a Government should

as a rule keep its own money. If there are not Banks in which it can place
secure reliance, it should not seem to rely upon them. Still less should it give
peculiar favour to any one, and by entrusting it with the Government account
secure to it a mischievous supremacy above all other banks. The skill of a
financier in such an age is to equalise the receipt of taxation, and the outgoing
of expenditure; it should be a principal care with him to make sure that more
should not be locked up at a particular moment in the Government coffers than
is usually locked up there. If the amount of dead capital so buried in the
Treasury does not at any time much exceed the common average, the evil so
caused is inconsiderable: it is only the loss of interest on a certain sum of
money, which would not be much of a burden on the whole nation; the
additional taxation it would cause would be inconsiderable. Such an evil is
nothing in comparison with that of losing the money necessary for inevitable
expence by entrusting it to a bad Bank, or that of recovering this money by
identifying the national credit with the bad Bank and so propping it up and
perpetuating it. So long as the security of the Money Market is not entirely to
be relied on, the Government of a country had much better leave it to itself and
keep its own money. If the banks are bad, they will certainly continue bad and
will probably become worse if the Government sustains and encourages them.
The cardinal maxim is, that any aid to a present bad Bank is the surest mode of
preventing the establishment of a future good Bank.

When the trade of Banking began to be better understood, when the Banking
system was thoroughly secure, the Government might begin to lend gradually;
especially to lend the unusually large sums which even under the most
equable system of finance will at times accumulate in the public exchequer.

Under a natural system of banking it would have every facility. Where there
were many banks keeping their own reserve, and each most anxious to keep a
sufficient reserve, because its own life and credit depended on it, the risk of the
Government in keeping a banker would be reduced to a minimum. It would
have the choice of many bankers, and would not be restricted to any one.

Its course would be very simple, and be analogous to that of other public
bodies in the country. The Metropolitan Board of Works, which collects a great
revenue
in London, has an account at the London and Westminster Bank, for which that
bank makes a deposit of Consols as a security. The Chancellor of the Exchequer
would have no difficulty in getting such security either. If, as is likely, his
account would be thought to be larger than any single bank ought to be
entrusted with, the public deposits might be divided between several. Each
would give security, and the whole public money would be safe. If at any time
the floating money in the hands of Government were exceptionally large, he
might require augmented security to be lodged, and he might obtain an interest.
He would be a lender of such magnitude and so much influence, that he might
command his own terms. He might get his account kept safe if anyone could.

If, on the other hand, the Chancellor of the Exchequer were a borrower, as at
times he is, he would have every facility in obtaining what he wanted. The
credit of the English Government is so good that he could borrow better than
anyone else in the world. He would have greater facility, indeed, than now,
for, except with the leave of Parliament, the Chancellor of the Exchequer
cannot borrow by our present laws in the open market. He can only borrow
from the Bank of England on what are called 'deficiency bills.' In a natural
system, he would borrow of any one out of many competing banks, selecting
the one that would lend cheapest; but under our present artificial system, he is
confined to a single bank, which can fix its own charge.

If contrary to expectation a collapse occurred, the Government might withdraw,

as the American Government actually has withdrawn, its balance from the
bankers. It might give its aid, lend Exchequer bills, or otherwise pledge its
credit for the moment, but when the exigency was passed it might let the
offending banks suffer. There would be a penalty for their misconduct. New
and better banks, who might take warning from that misconduct, would arise.
As in all natural trades, what is old and, rotten would perish, what is new and
good would replace it. And till the new banks had proved, by good conduct,
their fitness for State confidence, the State need not give it. The Government
could use its favour as a bounty on prudence, and the withdrawal of that favour
as a punishment for culpable folly.

Under a good system of banking, a great collapse, except from rebellion or

invasion, would probably not happen. A large number of banks, each feeling that
their credit was at stake in keeping a good reserve, probably would keep one; if
any one did not, it would be criticised constantly, and would soon lose its
standing, and in the end disappear. And such banks would meet an incipient
panic freely, and generously; they would advance out of their reserve boldly
and largely, for each individual bank would fear suspicion, and know that at
such periods it must 'show strength,' if at such times it wishes to be thought to
have strength. Such a system reduces to a minimum the risk that is caused by
the deposit. If the national money can safely be deposited in banks in any way,
this is the way to make it safe.

But this system is nearly the opposite to that which the law and circumstances
have created for us in England. The English Government, far from keeping
cash from the money market till the position of that market was reasonably
secure, at a very early moment, and while credit of all kinds was most
insecure, for its own interests entered into the Money Market. In order to effect
loans better, it gave the custody and profit of its own money (along with other
privileges) to a single bank, and therefore practically and in fact it is identified
with the Bank of this hour. It cannot let the money market take care of itself
because it has deposited much money in that market, and it cannot pay its way
if it loses that money.

Nor would any English statesman propose to 'wind up' the Bank of England. A
theorist might put such a suggestion on paper, but no responsible government
would think of it. At the worst crisis and in the worst misconduct of the Bank,
no such plea has been thought of: in 1825 when its till was empty, in 1837 when
it had to ask aid from the Bank of France, no such idea was suggested. By
irresistible tradition the English Government was obliged to deposit its money in
the money market and to deposit with this particular Bank.

And this system has plain and grave evils.

1st. Because being created by state aid, it is more likely than a natural system to
require state help.

2ndly. Because, being a one-reserve system, it reduces the spare cash of the
Money Market to a smaller amount than any other system, and so makes that
market more delicate. There being a less hoard to meet liabilities, any error in
the management of that reserve has a proportionately greater effect.

3rdly. Because, our one reserve is, by the necessity of its nature, given over to
one board of directors, and we are therefore dependent on the wisdom of that
one only, and cannot, as in most trades, strike an average of the wisdom and
the folly, the discretion and the indiscretion, of many competitors.
Lastly. Because that board of directors is, like every other board, pressed on by
its shareholders to make a high dividend, and therefore to keep a small reserve,
whereas the public interest imperatively requires that they shall keep a large
one.

These four evils were inseparable from the system, but there is besides an
additional and accidental evil. The English Government not only created this
singular system, but it proceeded to impair it, and demoralise all the public
opinion respecting it. For more than a century after its creation
(notwithstanding occasional errors) the Bank of England, in the main, acted
with judgment and with caution. Its business was but small as we should now
reckon, but for the most part it conducted that business with prudence and
discretion. In 1696, it had been involved in the most serious difficulties, and
had been obliged to refuse to pay some of its notes. For a long period it was in
wholesome dread of public opinion, and the necessity of retaining public
confidence made it cautious. But the English Government removed that
necessity. In 1797, Mr. Pitt feared that he might not be able to obtain sufficient
species for foreign payments, in consequence of the low state of the Bank
reserve, and he therefore required the Bank not to pay in cash. He removed the
preservative apprehension which is the best security of all Banks.

For this reason the period under which the Bank of England did not pay gold for
its notes—the period from 1797 to 1819—is always called the period of the
Bank restriction. As the Bank during that period did not perform, and was not
compelled by law to perform, its contract of paying its notes in cash, it might
apparently have been well called the period of Bank license. But the word
'restriction' was quite right, and was the only proper word as a description of,
the policy of 1797. Mr. Pitt did not say that the Bank of England need not pay
its notes in specie; he 'restricted' them from doing so; he said that they must not.

In consequence, from 1797 to 1844 (when a new era begins), there never was a
proper caution on the part of the Bank directors. At heart they considered that
the Bank of England had a kind of charmed life, and that it was above the
ordinary banking anxiety to pay its way. And this feeling was very natural. A
bank of issue, which need not pay its notes in cash, has a charmed life; it can
lend what it wishes, and issue what it likes, with no fear of harm to itself, and
with no substantial check but its own inclination. For nearly a quarter of a
century, the Bank of England was such a bank, for all that time it could not be
in any danger. And naturally the public mind was demoralised also. Since
1797, the public have always expected the Government to help the Bank if
necessary. I
cannot fully discuss the suspensions of the Act of 1844 in 1847, 1857, and
1866; but indisputably one of their effects is to make people think that
Government will always help the Bank if the Bank is in extremity. And this is
the sort of anticipation which tends to justify itself, and to cause what it
expects.

On the whole, therefore, the position of the Chancellor of the Exchequer in

our Money Market is that of one who deposits largely in it, who created it,
and who demoralised it. He cannot, therefore, banish it from his thoughts, or
decline responsibility for it. He must arrange his finances so as not to
intensify panics, but to mitigate them. He must aid the Bank of England in the
discharge of its duties; he must not impede or prevent it.

His aid may be most efficient. He is, on finance, the natural exponent of the
public opinion of England. And it is by that opinion that we wish the Bank of
England to be guided. Under a natural system of banking we should have
relied on self-interest, but the State prevented that; we now rely on opinion
instead; the public approval is a reward, its disapproval a severe penalty, on the
Bank directors; and of these it is most important that the finance minister
should be a sound and felicitous exponent.
CHAPTER V.
The Mode in Which the Value of Money is Settled in Lombard Street.

Many persons believe that the Bank of England has some peculiar power of
fixing the value of money. They see that the Bank of England varies its
minimum rate of discount from time to time, and that, more or less, all other
banks follow its lead, and charge much as it charges; and they are puzzled
why this should be. 'Money,' as economists teach, 'is a commodity, and only a
commodity;' why then, it is asked, is its value fixed in so odd a way, and not
the way in which the value of all other commodities is fixed?

There is at bottom, however, no difficulty in the matter. The value of money is

settled, like that of all other commodities, by supply and demand, and only the
form is essentially different. In other commodities all the large dealers fix their
own price; they try to underbid one another, and that keeps down the price; they
try to get as much as they can out of the buyer, and that keeps up the price.
Between the two what Adam Smith calls the higgling of the market settles it.
And this is the most simple and natural mode of doing business, but it is not
the only mode. If circumstances make it convenient another may be adopted.
A single large holder—especially if he be by far the greatest holder—may fix
his price, and other dealers may say whether or not they will undersell him, or
whether or not they will ask more than he does. A very considerable holder of an
article may, for a time, vitally affect its value if he lay down the minimum
price which he will take, and obstinately adhere to it. This is the way in which
the value of money in Lombard Street is settled. The Bank of England used to
be a predominant, and is still a most important, dealer in money. It lays down
the least price at which alone it will dispose of its stock, and this, for the most
part, enables other dealers to obtain that price, or something near it.

The reason is obvious. At all ordinary moments there is not money enough in
Lombard Street to discount all the bills in Lombard Street without taking
some
money from the Bank of England. As soon as the Bank rate is fixed, a great
many persons who have bills to discount try how much cheaper than the Bank
they can get these bills discounted. But they seldom can get them discounted
very much cheaper, for if they did everyone would leave the Bank, and the outer
market would have more bills than it could bear.

In practice, when the Bank finds this process beginning, and sees that its
business is much diminishing, it lowers the rate, so as to secure a reasonable
portion of the business to itself, and to keep a fair part of its deposits
employed. At Dutch auctions an upset or maximum price used to be fixed by
the seller, and he came down in his bidding till he found a buyer. The value of
money is fixed in Lombard Street in much the same way, only that the upset
price is not that of all sellers, but that of one very important seller, some part
of whose supply is essential.

The notion that the Bank of England has a control over the Money Market,
and can fix the rate of discount as it likes, has survived from the old days
before 1844, when the Bank could issue as many notes as it liked. But even
then the notion was a mistake. A bank with a monopoly of note issue has great
sudden power in the Money Market, but no permanent power: it can affect the
rate of discount at any particular moment, but it cannot affect the average
rate. And the reason is, that any momentary fall in money, caused by the
caprice of such a bank, of itself tends to create an immediate and equal rise,
so that upon an average the value is not altered.

What happens is this. If a bank with a monopoly of note issue suddenly lends
(suppose) 2,000,000 L. more than usual, it causes a proportionate increase of
trade and increase of prices. The persons to whom that 2,000,000 L. was lent,
did not borrow it to lock it up; they borrow it, in the language of the market,
to 'operate with' that is, they try to buy with it; and that new attempt to buy—
that new demand raises prices. And this rise of prices has three consequences.
First. It makes everybody else want to borrow money. Money is not so
efficient in buying as it was, and therefore operators require more money for
the same dealings. If railway stock is 10 per cent dearer this year than last, a
speculator who borrows money to enable him to deal must borrow 10 per
cent more this year than last, and in consequence there is an augmented
demand for loans.
Secondly. This is an effectual demand, for the increased price of railway stock
enables those who wish it to borrow more upon it. The common practice is to
lend a certain portion of the market value of such securities, and if that value
increases, the amount of the usual loan to be obtained on them increases too. In
this way, therefore, any artificial reduction in the value of money causes a new
augmentation of the demand for money, and thus restores that value to its
natural level. In all business this is well known by experience: a stimulated
market soon becomes a tight market, for so sanguine are enterprising men, that
as soon as they get any unusual ease they always fancy that the relaxation is
greater than it is, and speculate till they want more than they can obtain.

In these two ways sudden loans by an issuer of notes, though they may
temporarily lower the value of money, do not lower it permanently, because they
generate their own counteraction. And this they do whether the notes issued are
convertible into coin or not. During the period of Bank restriction, from 1797 to
1819, the Bank of England could not absolutely control the Money Market, any
more than it could after 1819, when it was compelled to pay its notes in coin.
But in the case of convertible notes there is a third effect, which works in the
same direction, and works more quickly. A rise of prices, confined to one
country, tends to increase imports, because other countries can obtain more for
their goods if they send them there, and it discourages exports, because a
merchant who would have gained a profit before the rise by buying here to sell
again will not gain so much, if any, profit after that rise. By this augmentation
of imports the indebtedness of this country is augmented, and by this
diminution of exports the proportion of that indebtedness which is paid in the
usual way is decreased also. In consequence, there is a larger balance to be
paid in bullion; the store in the bank or banks keeping the reserve is
diminished, and the rate of interest must be raised by them to stay the efflux.
And the tightness so produced is often greater than, and always equal to, the
preceding unnatural laxity.

There is, therefore, no ground for believing, as is so common, that the value of
money is settled by different causes than those which affect the value of other
commodities, or that the Bank of England has any despotism in that matter. It
has the power of a large holder of money, and no more. Even formerly, when
its monetary powers were greater and its rivals weaker, it had no absolute
control. It was simply a large corporate dealer, making bids and much
influencing—though in no sense compelling—other dealers thereby.

But though the value of money is not settled in an exceptional way, there is
nevertheless a peculiarity about it, as there is about many articles. It is a
commodity subject to great fluctuations of value, and those fluctuations are
easily produced by a slight excess or a slight deficiency of quantity. Up to a
certain point money is a necessity. If a merchant has acceptances to meet to-
morrow, money he must and will find to-day at some price or other. And it is
this urgent need of the whole body of merchants which runs up the value of
money so wildly and to such a height in a great panic. On the other hand,
money easily becomes a 'drug,' as the phrase is, and there is soon too much of
it. The number of accepted securities is limited, and cannot be rapidly
increased; if the amount of money seeking these accepted securities is more
than can be lent on them the value of money soon goes down. You may often
hear in the market that bills are not to be had, meaning good bills of course, and
when you hear this you may be sure that the value of money is very low.

If money were all held by the owners of it, or by banks which did not pay an
interest for it, the value of money might not fall so fast. Money would, in the
market phrase, be 'well held.' The possessors would be under no necessity to
employ it all; they might employ part at a high rate rather than all at a low rate.
But in Lombard Street money is very largely held by those who do pay an
interest for it, and such persons must employ it all, or almost all, for they have
much to pay out with one hand, and unless they receive much with the other
they will be ruined. Such persons do not so much care what is the rate of
interest at which they employ their money: they can reduce the interest they
pay in proportion to that which they can make. The vital points to them is to
employ it at some rate. If you hold (as in Lombard Street some persons do)
millions of other people's money at interest, arithmetic teaches that you will
soon be ruined if you make nothing of it even if the interest you pay is not
high.

The fluctuations in the value of money are therefore greater than those on the
value of most other commodities. At times there is an excessive pressure to
borrow it, and at times an excessive pressure to lend it, and so the price is forced
up and down.

These considerations enable us to estimate the responsibility which is thrown on

the Bank of England by our system, and by every system on the bank or banks
who by it keep the reserve of bullion or of legal tender exchangeable for
bullion. These banks can in no degree control the permanent value of money,
but they can completely control its momentary value. They cannot change the
average value, but they can determine the deviations from the average. If the
dominant banks manage ill, the rate of interest will at one time be excessively
high, and at another time excessively low: there will be first a pernicious
excitement, and next a fatal collapse. But if they manage well, the rate of
interest will not deviate
so much from the average rate; it will neither ascend so high nor descend so
low. As far as anything can be steady the value of money will then be steady,
and probably in consequence trade will be steady too—at least a principal
cause of periodical disturbance will have been withdrawn from it.
CHAPTER VI.
Why Lombard Street is Often Very Dull, and Sometimes Extremely
Excited.

Any sudden event which creates a great demand for actual cash may cause, and
will tend to cause, a panic in a country where cash is much economised, and
where debts payable on demand are large. In such a country an immense credit
rests on a small cash reserve, and an unexpected and large diminution of that
reserve may easily break up and shatter very much, if not the whole, of that
credit. Such accidental events are of the most various nature: a bad harvest, an
apprehension of foreign invasion, the sudden failure of a great firm which
everybody trusted, and many other similar events, have all caused a sudden
demand for cash. And some writers have endeavoured to classify panics
according to the nature of the particular accidents producing them. But little,
however, is, I believe, to be gained by such classifications. There is little
difference in the effect of one accident and another upon our credit system. We
must be prepared for all of them, and we must prepare for all of them in the
same way—by keeping a large cash reserve.

But it is of great importance to point out that our industrial organisation is liable
not only to irregular external accidents, but likewise to regular internal changes;
that these changes make our credit system much more delicate at some times
than at others; and that it is the recurrence of these periodical seasons of
delicacy which has given rise to the notion that panics come according to a
fixed rule, that every ten years or so we must have one of them.

Most persons who begin to think of the subject are puzzled on the threshold.
They hear much of 'good times' and 'bad times,' meaning by 'good' times in
which nearly everyone is very well off, and by 'bad' times in which nearly
everyone is comparatively ill off. And at first it is natural to ask why should
everybody, or almost everybody, be well off together? Why should there be any
great tides of industry, with large diffused profit by way of flow, and large
diffused want of profit, or loss, by way of ebb? The main answer is hardly
given distinctly in our common books of political economy. These books do
not tell you what is the fund out of which large general profits are paid in
good times, nor do they ex plain why that fund is not available for the same
purpose in bad times. Our current political economy does not sufficiently take
account of time as an element in trade operations; but as soon as the division
of labour has once established itself in a community, two principles at once
begin to be important, of which time is the very essence. These are:

First. That as goods are produced to be exchanged, it is good that they should be
exchanged as quickly as possible.

Secondly. That as every producer is mainly occupied in producing what others

want, and not what he wants himself, it is desirable that he should always be
able to find, without effort, without delay, and without uncertainty, others who
want what he can produce.

In themselves these principles are self-evident. Everyone will admit it to be

expedient that all goods wanting to be sold should be sold as soon as they are
ready; that every man who wants to work should find employment as soon as
he is ready for it. Obviously also, as soon as the 'division of labour' is really
established, there is a difficulty about both of these principles. A produces what
he thinks B wants, but it may be a mistake, and B may not want it. A may be
able and willing to produce what B wants, but he may not be able to find B—
he may not know of his existence.

The general truth of these principles is obvious, but what is not obvious is the
extreme greatness of their effects. Taken together, they make the whole
difference between times of brisk trade and great prosperity, and times of
stagnant trade and great adversity, so far as that prosperity and that adversity are
real and not illusory. If they are satisfied, everyone knows whom to work for,
and what to make, and he can get immediately in exchange what he wants
himself. There is no idle labour and no sluggish capital in the whole community,
and, in consequence, all which can be produced is produced, the effectiveness of
human industry is augmented, and both kinds of producers—both capitalists and
labourers—are much richer than usual, because the amount to be divided
between them is also much greater than usual.
And there is a partnership in industries. No single large industry can be
depressed without injury to other industries; still less can any great group of
industries. Each industry when prosperous buys and consumes the produce
probably of most (certainly of very many) other industries, and if industry A fail
and is in difficulty, industries B, and C, and D, which used to sell to it, will not
be able to sell that which they had produced in reliance on A's demand, and in
future they will stand idle till industry A recovers, because in default of A there
will be no one to buy the commodities which they create. Then as industry B
buys of C, D, &c., the adversity of B tells on C, D, &c., and as these buy of E,
F, &c., the effect is propagated through the whole alphabet. And in a certain
sense it rebounds. Z feels the want caused by the diminished custom of A, B, &
C, and so it does not earn so much; in consequence, it cannot lay out as much
on the produce of A, B, & C, and so these do not earn as much either. In all
this money is but an instrument. The same thing would happen equally well in
a trade of barter, if a state of barter on a very large scale were not practically
impossible, on account of the time and trouble which it would necessarily
require. As has been explained, the fundamental cause is that under a system in
which everyone is dependent on the labour of everyone else, the loss of one
spreads and multiplies through all, and spreads and multiplies the faster the
higher the previous perfection of the system of divided labour, and the more
nice and effectual the mode of interchange. And the entire effect of a
depression in any single large trade requires a considerable time before it can
be produced. It has to be propagated, and to be returned through a variety of
industries, before it is complete. Short depressions, in consequence, have
scarcely any discernible consequences; they are over before we think of their
effects. It is only in the case of continuous and considerable depressions that
the cause is in action long enough to produce discernible effects.

The most common, and by far the most important, case where the depression
in one trade causes depression in all others, is that of depressed agriculture.
When the agriculture of the world is ill off, food is dear. And as the amount of
absolute necessaries which a people consumes cannot be much diminished, the
additional amount which has to be spent on them is so much subtracted from
what used to be spent on other things. All the industries, A, B, C, D, up to Z,
are somewhat affected by an augmentation in the price of corn, and the most
affected are the large ones, which produce the objects in ordinary times most
consumed by the working classes. The clothing trades feel the difference at
once, and in this country the liquor trade (a great source of English revenue)
feels it almost equally soon. Especially when for two or three years harvests
have been bad, and
corn has long been dear, every industry is impoverished, and almost every
one, by becoming poorer, makes every other poorer too. All trades are slack
from diminished custom, and the consequence is a vast stagnant capital, much
idle labour, and a greatly retarded production.

It takes two or three years to produce this full calamity, and the recovery from it
takes two or three years also. If corn should long be cheap, the labouring classes
have much to spend on what they like besides. The producers of those things
become prosperous, and have a greater purchasing power. They exercise it, and
that creates in the class they deal with another purchasing power, and so all
through society. The whole machine of industry is stimulated to its maximum of
energy, just as before much of it was slackened almost to its minimum.

A great calamity to any great industry will tend to produce the same effect, but
the fortunes of the industries on which the wages of labour are expended are
much more important than those of all others, because they act much more
quickly upon a larger mass of purchasers. On principle, if there was a perfect
division of labour, every industry would have to be perfectly prosperous in
order that any one might be so. So far, therefore, from its being at all natural
that trade should develop constantly, steadily, and equably, it is plain, without
going farther, from theory as well as from experience, that there are inevitably
periods of rapid dilatation, and as inevitably periods of contraction and of
stagnation.

Nor is this the only changeable element in modern industrial societies. Credit
— the disposition of one man to trust another—is singularly varying. In
England, after a great calamity, everybody is suspicious of everybody; as soon
as that calamity is forgotten, everybody again confides in everybody. On the
Continent there has been a stiff controversy as to whether credit should or
should not be called capital:' in England, even the little attention once paid to
abstract economics is now diverted, and no one cares in the least for refined
questions of this kind: the material practical point is that, in M. Chevalier's
language, credit is 'additive,' or additional—that is, in times when credit is
good productive power is more efficient, and in times when credit is bad
productive power is less efficient. And the state of credit is thus influential,
because of the two principles which have just been explained. In a good state
of credit, goods lie on hand a much less time than when credit is bad; sales are
quicker; intermediate dealers borrow easily to augment their trade, and so
more and more goods are more quickly and more easily transmitted from the
producer to the consumer.
These two variable causes are causes of real prosperity. They augment trade
and production, and so are plainly beneficial, except where by mistake the
wrong things are produced, or where also by mistake misplaced credit is
given, and a man who cannot produce anything which is wanted gets the
produce of other people's labour upon a false idea that he will produce it. But
there is another variable cause which produces far more of apparent than of
real prosperity and of which the effect is in actual life mostly confused with
those of the others.

In our common speculations we do not enough remember that interest on

money is a refined idea, and not a universal one. So far indeed is it from being
universal, that the majority of saving persons in most countries would reject it.
Most savings in most countries are held in hoarded specie. In Asia, in Africa, in
South America, largely even in Europe, they are thus held, and it would frighten
most of the owners to let them out of their keeping. An Englishman—a modern
Englishman at least—assumes as a first principle that he ought to be able to 'put
his money into something safe that will yield 5 per cent;' but most saving
persons in most countries are afraid to 'put their money' into anything. Nothing
is safe to their minds; indeed, in most countries, owing to a bad Government
and a backward industry, no investment, or hardly any, really is safe. In most
countries most men are content to forego interest; but in more advanced
countries, at some times there are more savings seeking investment than there
are known investments for; at other times there is no such superabundance.
Lord Macaulay has graphically described one of the periods of excess. He says
—'During the interval between the Restoration and the Revolution the riches of
the nation had been rapidly increasing. Thousands of busy men found every
Christmas that, after the expenses of the year's housekeeping had been defrayed
out of the year's income, a surplus remained; and how that surplus was to be
employed was a question of some difficulty. In our time, to invest such a
surplus, at something more than three per cent, on the best security that has ever
been known in the world, is the work of a few minutes. But in the seventeenth
century, a lawyer, a physician, a retired merchant, who had saved some
thousands, and who wished to place them safely and profitably, was often
greatly embarrassed. Three generations earlier, a man who had accumulated
wealth in a profession generally purchased real property, or lent his savings on
mortgage. But the number of acres in the kingdom had remained the same; and
the value of those acres, though it had greatly increased, had by no means
increased so fast as the quantity of capital which was seeking for employment.
Many too wished to put their money where they could find it at an hour's notice,
and looked about for some species of property which could be more readily
transferred than a house or a field. A
capitalist might lend on bottomry or on personal security; but, if he did so, he
ran a great risk of losing interest and principal. There were a few joint stock
companies, among which the East India Company held the foremost place; but
the demand for the stock of such companies was far greater than the supply.
Indeed the cry for a new East India Company was chiefly raised by persons
who had found difficulty in placing their savings at interest on good security.
So great was that difficulty that the practice of hoarding was common. We are
told that the father of Pope, the poet, who retired from business in the City
about the time of the Revolution, carried to a retreat in the country a strong
box containing near twenty thousand pounds, and took out from time to time
what was required for household expenses; and it is highly probable that this
was not a solitary case. At present the quantity of coin which is hoarded by
private persons is so small, that it would, if brought forth, make no perceptible
addition to the circulation. But, in the earlier part of the reign of William the
Third, all the greatest writers on currency were of opinion that a very
considerable mass of gold and silver was hidden in secret drawers and behind
wainscots.

'The natural effect of this state of things was that a crowd of projectors,
ingenious and absurd, honest and knavish, employed themselves in devising
new schemes for the employment of redundant capital. It was about the year
1688 that the word stockjobber was first heard in London. In the short space of
four years a crowd of companies, every one of which confidently held out to
subscribers the hope of immense gains, sprang into existence—the Insurance
Company, the Paper Company, the Lutestring Company, the Pearl Fishery
Company, the Glass Bottle Company, the Alum Company, the Blythe Coal
Company, the Swordblade Company. There was a Tapestry Company, which
would soon furnish pretty hangings for all the parlours of the middle class, and
for all the bed-chambers of the higher. There was a Copper Company, which
proposed to explore the mines of England, and held out a hope that they would
prove not less valuable than those of Potosi. There was a Diving Company,
which undertook to bring up precious effects from shipwrecked vessels, and
which announced that it had laid in a stock of wonderful machines resembling
complete suits of armour. In front of the helmet was a huge glass eye like that
of a Cyclops; and out of the crest went a pipe through which the air was to be
admitted. The whole process was exhibited on the Thames. Fine gentlemen
and fine ladies were invited to the show, were hospitably regaled, and were
delighted by seeing the divers in their panoply descend into the river and return
laden with old iron and ship's tackle. There was a Greenland Fishing Company,
which could not fail to drive the Dutch whalers and herring busses out of the
Northern Ocean.
There was a Tanning Company, which promised to furnish leather superior to
the best that was brought from Turkey or Russia. There was a society which
undertook the office of giving gentlemen a liberal education on low terms, and
which assumed the sounding name of the Royal Academies Company. In a
pompous advertisement it was announced that the directors of the Royal
Academies Company had engaged the best masters in every branch of
knowledge, and were about to issue twenty thousand tickets at twenty shillings
each. There was to be a lottery—two thousand prizes were to be drawn; and
the fortunate holders of the prizes were to be taught, at the charge of the
Company, Latin, Greek, Hebrew, French, Spanish, conic sections,
trigonometry, heraldry, japaning, fortification, bookkeeping, and the art of
playing the theorbo.'

The panic was forgotten till Lord Macaulay revived the memory of it. But, in
fact, in the South Sea Bubble, which has always been remembered, the form
was the same, only a little more extravagant; the companies in that mania were
for objects such as these:—' "Wrecks to be fished for on the Irish Coast—
Insurance of Horses and other Cattle (two millions)—Insurance of Losses by
Servants—To make Salt Water Fresh—For building of Hospitals for Bastard
Children—For building of Ships against Pirates—For making of Oil from Sun-
flower Seeds— For improving of Malt Liquors—For recovery of Seamen's
Wages—For extracting of Silver from Lead—For the transmuting of
Quicksilver into a malleable and fine Metal—For making of Iron with Pit-coal
—For importing a Number of large Jack Asses from Spain—For trading in
Human Hair—For fatting of Hogs—For a Wheel of Perpetual Motion." But the
most strange of all, perhaps, was "For an Undertaking which shall in due time
be revealed." Each subscriber was to pay down two guineas, and hereafter to
receive a share of one hundred, with a disclosure of the object; and so tempting
was the offer, that 1,000 of these subscriptions were paid the same morning,
with which the projector went off in the afternoon.' In 1825 there were
speculations in companies nearly as wild, and just before 1866 there were
some of a like nature, though not equally extravagant. The fact is, that the
owners of savings not finding, in adequate quantities, their usual kind of
investments, rush into anything that promises speciously, and when they find
that these specious investments can be disposed of at a high profit, they rush
into them more and more. The first taste is for high interest, but that taste soon
becomes secondary.
There is a second appetite for large gains to be made by selling the
principal which is to yield the interest. So long as such sales can be
effected the mania continues; when it ceases to be possible to effect them,
ruin begins.
So long as the savings remain in possession of their owners, these hazardous
gamblings in speculative undertakings are almost the whole effect of an excess
of accumulation over tested investment. Little effect is produced on the general
trade of the country. The owners of the savings are too scattered and far from
the market to change the majority of mercantile transactions. But when these
savings come to be lodged in the hands of bankers, a much wider result is
produced.
Bankers are close to mercantile life; they are always ready to lend on good
mercantile securities; they wish to lend on such securities a large part of the
money entrusted to them. When, therefore, the money so entrusted is
unusually large, and when it long continues so, the general trade of the
country is, in the course of time, changed. Bankers are daily more and more
ready to lend money to mercantile men; more is lent to such men; more
bargains are made in consequence; commodities are more sought after; and,
in consequence, prices rise more and more.

The rise of prices is quickest in an improving state of credit. Prices in general

are mostly determined by wholesale transactions. The retail dealer adds a
percentage to the wholesale prices, not, of course, always the same percentage,
but still mostly the same. Given the wholesale price of most articles, you can
commonly tell their retail price. Now wholesale transactions are commonly not
cash transactions, but bill transactions. The duration of the bill varies with the
custom of the trade; it may be two, three months, or six weeks, but there is
always a bill. Times of credit mean times in which the bills of many people are
taken readily; times of bad credit, times when the bills of much fewer people
are taken, and even of those suspiciously. In times of good credit there are a
great number of strong purchasers, and in times of bad credit only a smaller
number of weak ones; and, therefore, years of improving credit, if there be no
disturbing cause, are years of rising price, and years of decaying credit, years
of falling price.

This is the meaning of the saying 'John Bull can stand many things, but he
cannot stand two per cent:' it means that the greatest effect of the three great
causes is nearly peculiar to England; here, and here almost alone, the excess of
savings over investments is deposited in banks; here, and here only, is it made
use of so as to affect trade at large; here, and here only, are prices gravely
affected. In these circumstances, a low rate of interest, long protracted, is
equivalent to a total depreciation of the precious metals. In his book on the
effect of the great gold discoveries, Professor Jevons showed, and so far as I
know, was the first to show, the necessity of eliminating these temporary
changes of value in gold before you could judge properly of the permanent
depreciation. He
proved, that in the years preceding both 1847 and 1857 there was a general
rise of prices; and in the years succeeding these years, a great fall. The same
might be shown of the years before and after 1866, mutatis mutandis.

And at the present moment we have a still more remarkable example, which
was thus analysed in the Economist of the 30th December, 1871, in an article
which I venture to quote as a whole:

'THE GREAT RISE IN THE PRICE OF COMMODITIES.

'Most persons are aware that the trade of the country is in a state of great
activity. All the usual tests indicate that—the state of the Revenue, the Bankers'
Clearing- house figures, the returns of exports and imports are all plain, and all
speak the same language. But few have, we think, considered one most
remarkable feature of the present time, or have sufficiently examined its
consequences. That feature is the great rise in the price of most of the leading
articles of trade during the past year. We give at the foot of this paper a list of
articles, comprising most
first-rate articles of commerce, and it will be seen that the rise of price,
though not universal and not uniform, is nevertheless very striking and very
general. The most remarkable cases are—

January December
L, s. d. L, s. d.
Wool—South Down hogs per pack 13 0 0 21 15 0
Cotton—Upland ordinary per lb. 0 0 7-1/4 0 0 8-3/8
No. 40 mule yarn, &c. per lb. 0 1 1-1/2 0 1 2-1/2
Iron—Bars, British per ton 7 2 6 8 17 6
Pig, No. 1 Clyde per ton 2 13 3 3 16 0
Lead per ton 18 7 6 8 17 6
Tin per ton 137 0 0 157 0 0
Copper—Sheeting per ton 75 10 0 95 0 0
Wheat (GAZETTE average) per qr. 2 12 0 2 15 8

—and in other cases there is a tendency upwards in price much more often
than there is a tendency downwards.

'This general rise of price must be due either to a diminution in the supply of the
quoted articles, or to an increased demand for them. In some cases there has no
doubt been a short supply. Thus in wool, the diminution in the home breed of
sheep has had a great effect on the price—

In 1869 the home stock of sheep was

29,538,000 In 1871 27,133,000
—————
Diminution 2,405,000
Equal to 8.1 per
cent

and in the case of some other articles there may be a similar cause operating.
But taking the whole mass of the supply of commodities in this country, as
shown by the plain test of the quantities imported, it has not diminished, but
augmented.
The returns of the Board of Trade prove this in the most striking manner, and
we give below a table of some of the important articles. The rise in prices must,
therefore, be due to an increased demand, and the first question is, to what is
that demand due?

'We believe it to be due to the combined operation of three causes cheap money,
cheap corn, and improved credit. As to the first indeed, it might be said at first
sight that so general an increase must be due to a depreciation of the precious
metals. Certainly in many controversies facts far less striking have been
alleged as proving it. And indeed there plainly is a diminution in the
purchasing power of money, though that diminution is not general and
permanent, but local and temporary. The peculiarity of the precious metals is
that their value depends for unusually long periods on the quantity of them
which is in the market. In the long run, their value, like that of all others, is
determined by the cost at which they can be brought to market. But for all
temporary purposes, it is the supply in the market which governs the price, and
that supply in this country is exceedingly variable. After a commercial crisis,
1866 for example, two things happen: first, we call in the debts which are
owing to us in foreign countries; and we require these debts to be paid to us,
not in commodities, but in money. From this cause principally, and omitting
minor causes, the bullion in the Bank of England, which was 13,156,000 L. in
May 1866, rose to 19,413,000 L. in January 1867, being an increase of over
6,000,000 L. And then there comes also a second cause, tending in the same
direction. During a depressed period the savings of the country increase
considerably faster than the outlet for them. A person who has made savings
does not know what to do with them. And this new unemployed saving means
additional money. Till a saving is invested or employed it exists only in the
form of money: a farmer who has sold his wheat and has 100 L. 'to the good,'
holds that 100 L. in money, or some equivalent for
money, till he sees some advantageous use to be made of it. Probably he places
it in a bank, and this enables it to do more work. If 3,000,000 L. of coin be
deposited in a bank, and it need only keep 1,000,000 L. as a reserve, that sets
2,000,000 L. free, and is for the time equivalent to an increase of so much coin.
As a principle it may be laid down that all new unemployed savings require
either an increased stock of the precious metals, or an increase in the
efficiency of the banking expedients by which these metals are economised. In
other words, in a saving and uninvesting period of the national industry, we
accumulate gold, and augment the efficiency of our gold. If therefore such a
saving period follows close upon an occasion when foreign credits have been
diminished and foreign debts called in, the augmentation in the effective
quantity of gold in the country is extremely great. The old money called in
from abroad and the new money representing the new saving co-operate with
one another. And their natural tendency is to cause a general rise in price, and
what is the same thing, a diffused diminution in the purchasing power of
money.

'Up to this point there is nothing special in the recent history of the money
market. Similar events happened both after the panic of 1847, and after that of
1857. But there is another cause of the same kind, and acting in the same
direction, which is peculiar to the present time; this cause is the amount of the
foreign money, and especially of the money of foreign Governments, now in
London. No Government probably ever had nearly as much at its command as
the German Government now has. Speaking broadly, two things happened:
during the war England was the best place of shelter for foreign money, and
this made money more cheap here than it would otherwise have been; after
the war England became the most convenient paying place, and the most
convenient resting place for money, and this again has made money cheaper.
The commercial causes, for which there are many precedents, have been
aided by a political cause for the efficacy of which there is no precedent.

'But though plentiful money is necessary to high prices, and though it has a
natural tendency to produce these prices, yet it is not of itself sufficient to
produce them. In the cases we are dealing with, in order to lower prices there
must not only be additional money, but a satisfactory mode of employing that
additional money. This is obvious if we remember whence that augmented
money is derived. It is derived from the savings of the people, and will only be
invested in the manner which the holders for the time being consider suitable
to such savings. It will not be used in mere expenditure; it would be contrary
to the very nature of it so to use it. A new channel of demand is required to take
off the
new money, or that new money will not raise prices. It will lie idle in the
banks, as we have often seen it. We should still see the frequent, the common
phenomenon of dull trade and cheap money existing side by side.

'The demand in this case arose in the most effective of all ways. In 1867 and the
first half of 1868 corn was dear, as the following figures show:

GAZETTE AVERAGE PRICE OF WHEAT.

s. d.
December, 1866 60
3 January, 1867 61 4
February 60 10
March 59 9
April 61 6
May 64 8
June 65 8
July 65 0
August 67 8
September 62 8
October 1867 66 6
November 69 5
December 67 4
January, 1868 70 3
February 73 0
March 73 0
April 73 3
May 73 9
June 67 11
July 65 5

From that time it fell, and it was very cheap during the whole of 1869 and 1870.
The effect of this cheapness is great in every department of industry. The
working classes, having cheaper food, need to spend so much less on that food,
and have more to spend on other things. In consequence, there is a gentle
augmentation of demand through almost all departments of trade. And this
almost always causes a great augmentation in what may be called the
instrumental trades—that is, in the trades which deal in machines and
instruments used in many branches of commerce, and in the materials for such.
Take, for instance, the iron trade—
 In the year 1869 we exported 2,568,000
tons " 1870 " 2,716,000 tons
——————— 5,284,000 tons
" 1867 " 1,881,000 tons
" 1868 " 1,944,000 tons
——————— 3,826,000 tons
———————
Increase 1,458,000 tons

that is to say, cheap corn operating throughout the world, created a new demand
for many kinds of articles; the production of a large number of such articles
being aided by iron in some one of its many forms, iron to that extent was
exported. And the effect is cumulative. The manufacture of iron being
stimulated, all persons concerned in that great manufacture are well off, have
more to spend, and by spending it encourage other branches of manufacture,
which again propagate the demand; they receive and so encourage industries in
a third degree dependent and removed.

'It is quite true that corn has not been quite so cheap during the present year.
But even if it had been dearer than it is, it would not all at once arrest the great
trade which former cheapness had created. The "ball," if we may so say, "was
set rolling" in 1869 and 1870, and a great increase of demand was then created
in certain trades and propagated through all trades. A continuance of very high
prices would produce the reverse effect; it would slacken demand in certain
trades, and the effect would be gradually diffused through all trades. But a
slight rise such as that of this year has no perceptible effect.

'When the stimulus of cheap corn is added to that of cheap money, the full
conditions of a great and diffused rise of prices are satisfied. This new
employment supplies a mode in which money can be invested. Bills are drawn
of greater number and greater magnitude, and through the agencies of banks
and discount houses, the savings of the country are invested in such bills.
There is thus a new want and a new purchase-money to supply that want, and
the consequence is the diffused and remarkable rise of price which the figures
show to have occurred.

'The rise has also been aided by the revival of credit. This, as need not be at
length explained, is a great aid to buying, and consequently a great aid to a
rise of price. Since 1866, credit has been gradually, though very slowly,
recovering,
and it is probably as good as it is reasonable or proper that it should be. We are
now trusting as many people as we ought to trust, and as yet there is no wild
excess of misplaced confidence which would make us trust those whom we
ought not to trust.'

The process thus explained is the common process. The surplus of loanable
capital which lies in the hands of bankers is not employed by them in any
original way; it is almost always lent to a trade already growing and already
improving. The use of it develops that trade yet farther, and this again
augments and stimulates other trades. Capital may long lie idle in a stagnant
condition of industry; the mercantile securities which experienced bankers
know to be good do not augment, and they will not invent other securities, or
take bad ones.

In most great periods of expanding industry, the three great causes—much

loanable capital, good credit, and the increased profits derived from better-
used labour and better-used capital—have acted simultaneously; and though
either may act by itself, there is a permanent reason why mostly they will act
together. They both tend to grow together, if you begin from a period of
depression. In such periods credit is bad, and industry unemployed; very
generally provisions are high in price, and their dearness was one of the
causes which made the times bad. Whether there was or was not too much
loanable capital when that period begins, there soon comes to be too much.
Quiet people continue to save part of their incomes in bad times as well as in
good; indeed, of the two, people of slightly-varying and fixed incomes have
better means of saving in bad times because prices are lower. Quiescent trade
affords no new securities in which the new saving can be invested, and
therefore there comes soon to be an excess of loanable capital. In a year or
two after a crisis credit usually improves, as the remembrance of the disasters
which at the crisis impaired credit is becoming fainter and fainter. Provisions
get back to their usual price, or some great industry makes, from some
temporary cause, a quick step forward. At these moments, therefore, the three
agencies which, as has been explained, greatly develope trade, combine to
develope it simultaneously.

The certain result is a bound of national prosperity; the country leaps forward
as if by magic. But only part of that prosperity has a solid reason. As far as
prosperity is based on a greater quantity of production, and that of the right
articles—as far as it is based on the increased rapidity with which commodities
of every kind reach those who want them—its basis is good. Human industry
is more efficient, and therefore there is more to be divided among mankind.
But in
so far as that prosperity is based on a general rise of prices, it is only
imaginary. A general rise of prices is a rise only in name; whatever anyone gains
on the article which he has to sell he loses on the articles which he has to buy,
and so he is just where he was. The only real effects of a general rise of prices
are these: first, it straitens people of fixed incomes, who suffer as purchasers,
but who have no gain to correspond; and secondly, it gives an extra profit to
fixed capital created before the rise happened. Here the sellers gain, but
without any equivalent loss as buyers. Thirdly, this gain on fixed capital is
greatest in what may be called the industrial 'implements,' such as coal and
iron. These are wanted in all industries, and in any general increase of prices,
they are sure to rise much more than other things. Everybody wants them; the
supply of them cannot be rapidly augmented, and therefore their price rises
very quickly. But to the country as a whole, the general rise of prices is no
benefit at all; it is simply a change of nomenclature for an identical relative
value in the same commodities. Nevertheless, most people are happier for it;
they think they are getting richer, though they are not. And as the rise does not
happen on all articles at the same moment, but is propagated gradually through
society, those to whom it first comes gain really; and as at first every one
believes that he will gain when his own article is rising, a buoyant cheerfulness
overflows the mercantile world.

This prosperity is precarious as far as it is real, and transitory in so far as it is

fictitious. The augmented production, which is the reason of the real
prosperity, depends on the full working of the whole industrial organisation—
of all capitalists and labourers; that prosperity was caused by that full
working, and will cease with it. But that full working is liable to be destroyed
by the occurrence of any great misfortune to any considerable industry. This
would cause misfortune to the industries dependent on that one, and, as has
been explained, all through society and back again. But every such industry is
liable to grave fluctuations, and the most important—the provision industries
—to the gravest and the suddenest. They are dependent on the casualties of
the seasons. A single bad harvest diffused over the world, a succession of two or
three bad harvests, even in England only, will raise the price of corn
exceedingly, and will keep it high. And a great and protracted rise in the price
of corn will at once destroy all the real part of the unusual prosperity of
previous good times. It will change the full working of the industrial machine
into an imperfect working; it will make the produce of that machine less than
usual instead of more than usual; instead of there being more than the average
of general dividend to be distributed between the producers, there will
immediately be less than the average.
And in so far as the apparent prosperity is caused by an unusual plentifulness
of loanable capital and a consequent rise in prices, that prosperity is not only
liable to reaction, but certain to be exposed to reaction. The same causes which
generate this prosperity will, after they have been acting a little longer,
generate an equivalent adversity. The process is this: the plentifulness of
loanable capital causes a rise of prices; that rise of prices makes it necessary to
have more loanable capital to carry on the same trade. 100,000 L. will not buy
as much when prices are high as it will when prices are low, it will not be so
effectual for carrying on business; more money is necessary in dear times than
in cheap times to produce the same changes in the same commodities. Even
supposing trade to have remained stationary, a greater capital would be
required to carry it on after such a rise of prices as has been described than was
necessary before that rise.
But in this case the trade will not have remained stationary; it will have
increased—certainly to some extent, probably to a great extent. The 'loanable
capital,' the lending of which caused the rise of prices, was lent to enable it—
to augment. The loanable capital lay idle in the banks till some trade started
into prosperity, and then was lent in order to develope that trade; that trade
caused other secondary developments; those secondary developments
enabled more loanable capital to be lent; and that lending caused a tertiary
development of trade; and so on through society.

In consequence, a long-continued low rate of interest is almost always

followed by a rapid rise in that rate. Till the available trade is found it lies idle,
and can scarcely be lent at all; some of it is not lent. But the moment the
available trade is discovered—the moment that prices have risen—the demand
for loanable capital becomes keen. For the most part, men of business must
carry on their regular trade; if it cannot be carried on without borrowing 10 per
cent more capital, 10 per cent more capital they must borrow. Very often they
have incurred obligations which must be met; and if that is so the rate of
interest which they pay is comparatively indifferent. What is necessary to meet
their acceptances they will borrow, pay for it what they may; they had better
pay any price than permit those acceptances to be dishonoured. And in less
extreme eases men of business have a fixed capital, which cannot lie idle
except at a great loss; a set of labourers which must be, if possible, kept
together; a steady connection of customers, which they would very unwillingly
lose. To keep all these, they borrow; and in a period of high prices many
merchants are peculiarly anxious to borrow, because the augmentation of the
price of the article in which they deal makes them really see, or imagine that
they see, peculiar opportunities of profit. An immense new borrowing soon
follows upon the new and great trade, and the
rate of interest rises at once, and generally rises rapidly.

This is the surer to happen that Lombard Street is, as has been shown before, a
very delicate market. A large amount of money is held there by bankers and by
bill-brokers at interest: this they must employ, or they will be ruined. It is
better for them to reduce the rate they charge, and compensate themselves by
reducing the rate they pay, rather than to keep up the rate of charge, if by so
doing they cannot employ all their money. It is vital to them to employ all the
money on which they pay interest. A little excess therefore forces down the rate
of interest very much. But if that low rate of interest should cause, or should
aid in causing, a great growth of trade, the rise is sure to be quick, and is apt to
be violent. The figures of trade are reckoned by hundreds of millions, where
those of loanable capital count only by millions. A great increase in the
borrowing demands of English commerce almost always changes an excess of
loanable capital above the demand to a greater deficiency below the demand.
That deficiency causes adversity, or apparent adversity, in trade, just as, and in
the same manner, that the previous excess caused prosperity, or apparent
prosperity. It causes a fall of price that runs through society; that fall causes a
decline of activity and a diminution of profits—a painful contraction instead of
the previous pleasant expansion.

The change is generally quicker because some check to credit happens at an

early stage of it. The mercantile community will have been unusually fortunate
if during the period of rising prices it has not made great mistakes. Such a
period naturally excites the sanguine and the ardent; they fancy that the
prosperity they see will last always, that it is only the beginning of a greater
prosperity. They altogether over-estimate the demand for the article they deal
in, or the work they do. They all in their degree—and the ablest and the
cleverest the most—work much more than they should, and trade far above their
means. Every great crisis reveals the excessive speculations of many houses
which no one before suspected, and which commonly indeed had not begun or
had not carried very far those speculations, till they were tempted by the daily
rise of price and the surrounding fever.

The case is worse, because at most periods of great commercial excitement

there is some mixture of the older and simpler kind of investing mania. Though
the money of saving persons is in the hands of banks, and though, by offering
interest, banks retain the command of much of it, yet they do not retain the
command of the whole, or anything near the whole; all of it can be used, and
much of it is used, by its owners. They speculate with it in bubble companies
and in worthless shares, just as they did in the time of the South Sea mania,
when there were no banks, and as they would again in England supposing that
banks ceased to exist. The mania of 1825 and the mania of 1866 were striking
examples of this; in their case to a great extent, as in most similar modern
periods to a less extent, the delirium of ancient gambling co-operated with the
milder madness of modern overtrading. At the very beginning of adversity, the
counters in the gambling mama, the shares in the companies created to feed the
mania, are discovered to be worthless; down they all go, and with them much
of credit.

The good times too of high price almost always engender much fraud. All
people are most credulous when they are most happy; and when much money
has just been made, when some people are really making it, when most people
think they are making it, there is a happy opportunity for ingenious mendacity.
Almost everything will be believed for a little while, and long before discovery
the worst and most adroit deceivers are geographically or legally beyond the
reach of punishment. But the harm they have done diffuses harm, for it weakens
credit still farther.

When we understand that Lombard Street is subject to severe alternations of

opposite causes, we should cease to be surprised at its seeming cycles. We
should cease too to be surprised at the sudden panics. During the period of
reaction and adversity, just even at the last instant of prosperity, the whole
structure is delicate. The peculiar essence of our banking system is an
unprecedented trust between man and man: and when that trust is much
weakened by hidden causes, a small accident may greatly hurt it, and a great
accident for a moment may almost destroy it.

Now too that we comprehend the inevitable vicissitudes of Lombard Street, we

can also thoroughly comprehend the cardinal importance of always retaining a
great banking reserve. Whether the times of adversity are well met or ill met
depends far more on this than on any other single circumstance. If the reserve
be large, its magnitude sustains credit; and if it be small, its diminution
stimulates the gravest apprehensions. And the better we comprehend the
importance of the banking reserve, the higher we shall estimate the
responsibility of those who keep it.
CHAPTER VII.
A More Exact Account of the Mode in Which the Bank of England Has
Discharged Its Duty of Retaining a Good Bank Reserve, and of Administering
It Effectually.

The preceding chapters have in some degree enabled us to appreciate the

importance of the duties which the Bank of England is bound to discharge as
to its banking reserve.

If we ask how the Bank of England has discharged this great responsibility, we
shall be struck by three things: first, as has been said before, the Bank has
never by any corporate act or authorised utterance acknowledged the duty, and
some of its directors deny it; second (what is even more remarkable), no
resolution of Parliament, no report of any Committee of Parliament (as far as I
know), no remembered speech of a responsible statesman, has assigned or
enforced that duty on the Bank; third (what is more remarkable still), the
distinct teaching of our highest authorities has often been that no public duty of
any kind is imposed on the Banking Department of the Bank; that, for banking
purposes, it is only a joint stock bank like any other bank; that its managers
should look only to the interest of the proprietors and their dividend; that they
are to manage as the London and Westminster Bank or the Union Bank
manages.

At first, it seems exceedingly strange that so important a responsibility should

be unimposed, unacknowledged, and denied; but the explanation is this. We are
living amid the vestiges of old controversies, and we speak their language,
though we are dealing with different thoughts and different facts. For more
than fifty years—from 1793 down to 1844—there was a keen controversy as to
the public duties of the Bank. It was said to be the 'manager' of the paper
currency, and on that account many expected much good from it; others said it
did great harm; others again that it could do neither good nor harm. But for the
whole period there was an incessant and fierce discussion. That discussion was
terminated by the Act of 1844. By that Act the currency manages itself; the
entire working is automatic. The Bank of England plainly does not manage—
cannot even be said to manage—the currency any more. And naturally, but
rashly, the only reason upon which a public responsibility used to be assigned to
the Bank having now clearly come to an end, it was inferred by many that the
Bank had no responsibility. The complete uncertainty as to the degree of
responsibility acknowledged by the Bank of England is best illustrated by what
has been said by the Bank directors themselves as to the panic of 1866. The
panic of that year, it will be remembered, happened, contrary to precedent, in
the spring, and at the next meeting of the Court of Bank proprietors—the
September meeting—there was a very remarkable discussion, which I give at
length below, and of which all that is most material was thus described in the
'Economist':

'THE GREAT IMPORTANCE OF THE LATE MEETING OF THE PROPRIETORS OF THE

BANK OF ENGLAND.

'The late meeting of the proprietors of the Bank of England has a very unusual
importance. There can be no effectual inquiry now into the history of the late
crisis. A Parliamentary committee next year would, unless something strange
occur in the interval, be a great waste of time. Men of business have keen
sensations but short memories, and they will care no more next February for
the events of last May than they now care for the events of October 1864. A pro
forma inquiry, on which no real mind is spent, and which everyone knows will
lead to nothing, is far worse than no inquiry at all. Under these circumstances
the official statements of the Governor of the Bank are the only authentic
expositions we shall have of the policy of the Bank Directors, whether as
respects the past or the future. And when we examine the proceedings with
care, we shall find that they contain matter of the gravest import.

'This meeting may be considered to admit and recognise the fact that the Bank
of England keeps the sole banking reserve of the country. We do not now mix up
this matter with the country circulation, or the question whether there should
be many issuers of notes or only one. We speak not of the currency reserve, but
of the banking reserve—the reserve held against deposits, and not the reserve
held against notes. We have often insisted in these columns that the Bank of
England does keep the sole real reserve—the sole considerable unoccupied
mass of cash in the country; but there has been no universal agreement about
it. Great authorities have been unwilling to admit it. They have not, indeed,
formally and explicitly contended against it. If they had, they must have
pointed out some
other great store of unused cash besides that at the Bank, and they could not find
such store. But they have attempted distinctions; have said that the doctrine that
the Bank of England keeps the sole banking reserve of the country was "not a
good way of putting it," was exaggerated, and was calculated to mislead.

'But the late meeting is a complete admission that such is the

fact. The Governor of the Bank said:

"'A great strain has within the last few months been put upon the resources of
this house, and of the whole banking community of London; and I think I am
entitled to say that not only this house, but the entire banking body, acquitted
themselves most honourably and creditably throughout that very trying period.
Banking is a very peculiar business, and it depends so much upon credit that
the least blast of suspicion is sufficient to sweep away, as it were, the harvest
of a whole year. But the manner in which the banking establishments generally
in London met the demands made upon them during the greater portion of the
past half-year affords a most satisfactory proof of the soundness of the
principles on which their business is conducted. This house exerted itself to the
utmost—and exerted itself most successfully—to meet the crisis. We did not
flinch from our post. When the storm came upon us, on the morning on which
it became known that the house of Overend and Co. had failed, we were in as
sound and healthy a position as any banking establishment could hold, and on
that day and throughout the succeeding week we made advances which would
hardly be credited. I do not believe that anyone would have thought of
predicting, even at the shortest period beforehand, the greatness of those
advances. It was not unnatural that in this state of things a certain degree of
alarm should have taken possession of the public mind, and that those who
required accommodation from the Bank should have gone to the Chancellor of
the Exchequer and requested the Government to empower us to issue notes
beyond the statutory amount, if we should think that such a measure was
desirable. But we had to act before we could receive any such power, and
before the Chancellor of the Exchequer was perhaps out of his bed we had
advanced one-half of our reserves, which were certainly thus reduced to an
amount which we could not witness without regret. But we would not flinch
from the duty which we conceived was imposed upon us of supporting the
banking community, and I am not aware that any legitimate application made
for assistance to this house was refused. Every gentleman who came here with
adequate security was liberally dealt with, and if accommodation could not be
afforded to the full extent which was demanded, no one who offered proper
security failed to obtain relief from this house."
'Now this is distinctly saying that the other banks of the country need not keep
any such banking reserve—any such sum of actual cash—of real sovereigns
and bank notes, as will help them through a sudden panic. It acknowledges a
"duty" on the part of the Bank of England to "support the banking
community," to make the reserve of the Bank of England do for them as well
as for itself.

'In our judgment this language is most just, and the Governor of the Bank could
scarcely have done a greater public service than by using language so business-
like and so distinct. Let us know precisely who is to keep the banking reserve. If
the joint stock banks and the private banks and the country banks are to keep
their share, let us determine on that; Mr. Gladstone appeared not long since to
say in Parliament that it ought to be so. But at any rate there should be no doubt
whose duty it is. Upon grounds which we have often stated, we believe that the
anomaly of one bank keeping the sole banking reserve is so fixed in our system
that we cannot change it if we would. The great evil to be feared was an
indistinct conception of the fact, and that is now avoided.

'The importance of these declarations by the Bank is greater, because after the
panic of 1857 the bank did not hold exactly the same language. A person who
loves concise expressions said lately "that Overends broke the Bank in 1866
because it went, and in 1857 because it was not let go." We need not too
precisely examine such language; the element of truth in it is very plain—the
great advances made to Overends were a principal event in the panic of 1857;
the bill-brokers were then very much what the bankers were lately they were
the borrowers who wanted sudden and incalculable advances. But the bill-
brokers were told not to expect the like again. But Alderman Salomons, on the
part of the London bankers, said, "he wished to take that opportunity of stating
that he believed nothing could be more satisfactory to the managers and
shareholders of joint stock banks than the testimony which the Governor of the
Bank of England had that day borne to the sound and honourable manner in
which their business was conducted. It was manifestly desirable that the joint
stock banks and the banking interest generally should work in harmony with
the Bank of England; and he sincerely thanked the Governor of the Bank for
the kindly manner in which he had alluded to the mode in which the joint
stock banks had met the late monetary crisis." The Bank of England agrees to
give other banks the requisite assistance in case of need, and the other banks
agree to ask for it.

'Secondly. The Bank agrees, in fact, if not in name, to make limited advances on
proper security to anyone who applies for it. On the present occasion
45,000,000
L. was so advanced in three months. And the Bank do not say to the
mercantile community, or to the bankers, "Do not come to us again. We helped
you once. But do not look upon it as a precedent. We will not help you again."
On the contrary, the evident and intended implication is that under like
circumstances the Bank would act again as it has now acted.'

This article was much disliked by many of the Bank directors, and especially by
some whose opinion is of great authority. They thought that the 'Economist'
drew 'rash deductions' from a speech which was in itself 'open to some
objection
—'which was, like all such speeches, defective in theoretical precision, and
which was at best only the expression of an opinion by the Governor of that
day, which had not been authorised by the Court of Directors, which could not
bind the Bank. However the article had at least this use, that it brought out the
facts. All the directors would have felt a difficulty in commenting upon, or
limiting, or in differing from, a speech of a Governor from the chair. But there
was no difficulty or delicacy in attacking the 'Economist.' Accordingly Mr.
Hankey, one of the most experienced bank directors, not long after, took
occasion to observe: 'The "Economist" newspaper has put forth what in my
opinion is the most mischievous doctrine ever broached in the monetary or
banking world in this country; viz, that it is the proper function of the Bank of
England to keep money available at all times to supply the demands of bankers
who have rendered their own assets unavailable. Until such a doctrine is
repudiated by the banking interest, the difficulty of pursuing any sound
principle of banking in London will be always very great. But I do not believe
that such a doctrine as that bankers are justified in relying on the Bank of
England to assist them in time of need is generally held by the bankers in
London.

'I consider it to be the undoubted duty of the Bank of England to hold its
banking deposits (reserving generally about one-third in cash) in the most
available securities; and in the event of a sudden pressure in the money market,
by whatever circumstance it may be caused, to bear its full share of a drain on
its resources. I am ready to admit, however, that a general opinion has long
prevailed that the Bank of England ought to be prepared to do much more than
this, though I confess my surprise at finding an advocate for such an opinion in
the "Economist." If it were practicable for the Bank to retain money
unemployed to meet such an emergency, it would be a very unwise thing to do
so. But I contend that it is quite impracticable, and if it were possible, it would
be most inexpedient; and I can only express my regret that the Bank, from a
desire to do everything in its power to afford general assistance in times of
banking or
commercial distress, should ever have acted in a way to encourage such an
opinion. The more the conduct of the affairs of the Bank is made to assimilate
to the conduct of every other well-managed bank in the United Kingdom, the
better for the Bank, and the better for the community at large.'

I am scarcely a judge, but I do not think Mr. Hankey replies to

the 'Economist' very conclusively.

First. He should have observed that the question is not as to what 'ought to
be,' but as to what is. The 'Economist' did not say that the system of a single
bank reserve was a good system, but that it was the system which existed, and
which must be worked, as you could not change it.

Secondly. Mr. Hankey should have shown 'some other store of unused cash'
except the reserve in the Banking Department of the Bank of England out of
which advances in time of panic could be made. These advances are necessary,
and must be made by someone. The 'reserves' of London bankers are not such
store; they are used cash, not unused; they are part of the Bank deposits, and
lent as such.

Thirdly. Mr. Hankey should have observed that we know by the published
figures that the joint stock banks of London do not keep one-third, or anything
like one-third, of their liabilities in 'cash' even meaning by 'cash' a deposit at
the Bank of England. One-third of the deposits in joint stock banks, not to
speak of the private banks, would be 30,000,000 L.; and the private deposits of
the Bank of England are 18,000,000 L. According to his own statement, there
is a conspicuous contrast. The joint stock banks, and the private banks, no
doubt, too, keep one sort of reserve, and the Bank of England a different kind
of reserve altogether. Mr. Hankey says that the two ought to be managed on
the same principle; but if so, he should have said whether he would assimilate
the practice of the Bank of England to that of the other banks, or that of the
other banks to the practice of the Bank of England.

Fourthly. Mr. Hankey should have observed that, as has been explained, in most
panics, the principal use of a 'banking reserve' is not to advance to bankers; the
largest amount is almost always advanced to the mercantile public and to bill-
brokers. But the point is, that by our system all extra pressure is thrown upon
the Bank of England. In the worst part of the crisis of 1866, 50,000 L. 'fresh
money' could not be borrowed, even on the best security—even on Consols
except at the
Bank of England. There was no other lender to new borrowers.

But my object now is not to revive a past controversy, but to show in what an
unsatisfactory and uncertain condition that controversy has left a most
important subject. Mr. Hankey's is the last explanation we have had of the
policy of the Bank. He is a very experienced and attentive director, and I think
expresses, more or less, the opinions of other directors. And what do we find?
Setting aside and saying nothing about the remarkable speech of the Governor
in 1866, which at least (according to the interpretation of the 'Economist') was
clear and excellent, Mr. Hankey leaves us in doubt altogether as to what will
be the policy of the Bank of England in the next panic, and as to what amount
of aid the public may then expect from it. His words are too vague. No one can
tell what a 'fair share' means; still less can we tell what other people at some
future time will say it means. Theory suggests, and experience proves, that in a
panic the holders of the ultimate Bank reserve (whether one bank or many)
should lend to all that bring good securities quickly, freely, and readily. By that
policy they allay a panic; by every other policy they intensify it. The public
have a right to know whether the Bank of England—the holders of our ultimate
bank reserve— acknowledge this duty, and are ready to perform it. But this is
now very uncertain.

If we refer to history, and examine what in fact has been the conduct of the
Bank directors, we find that they have acted exactly as persons of their type,
character, and position might have been expected to act. They are a board of
plain, sensible, prosperous English merchants; and they have both done and
left undone what such a board might have been expected to do and not to do.
Nobody could expect great attainments in economical science from such a
board; laborious study is for the most part foreign to the habits of English
merchants. Nor could we expect original views on banking, for banking is a
special trade, and English merchants, as a body, have had no experience in it.
A 'board' can scarcely ever make improvements, for the policy of a board is
determined by the opinions of the most numerous class of its members—its
average members—and these are never prepared for sudden improvements. A
board of upright and sensible merchants will always act according to what it
considers 'safe' principles—that is, according to the received maxims of the
mercantile world then and there—and in this manner the directors of the Bank
of England have acted nearly uniformly. Their strength and their weakness
were curiously exemplified at the time when they had the most power. After
the suspension of cash payments in 1797, the directors of the Bank of England
could
issue what notes they liked. There was no check; these notes could not come
back upon the Bank for payment; there was a great temptation to extravagant
issue, and no present penalty upon it. But the directors of the Bank withstood
the temptation; they did not issue their inconvertible notes extravagantly. And
the proof is, that for more than ten years after the suspension of cash payments
the Bank paper was undepreciated, and circulated at no discount in comparison
with gold. Though the Bank directors of that day at last fell into errors, yet on
the whole they acted with singular judgment and moderation. But when, in
1810, they came to be examined as to their reasons, they gave answers that
have become almost classical by their nonsense. Mr. Pearse, the Governor of
the Bank, said: 'In considering this subject, with reference to the manner in
which bank-notes are issued, resulting from the applications made for
discounts to supply the necessary want of bank-notes, by which their issue in
amount is so controlled that it can never amount to an excess, I cannot see how
the amount of bank-notes issued can operate upon the price of bullion, or the
state of the exchanges; and therefore I am individually of opinion that the price
of bullion, or the state of the exchanges, can never be a reason for lessening the
amount of bank-notes to be issued, always understanding the control which I
have already described.

'Is the Governor of the Bank of the same opinion which has now been expressed
by the Deputy-Governor?

'Mr. Whitmore, I am so much of the same opinion, that I never think it

necessary to advert to the price of gold, or the state of the exchange, on the
days on which we make our advances.

'Do you advert to these two circumstances with a view to regulate the general
amount of your advances?—I do not advert to it with a view to our general
advances, conceiving it not to bear upon the question.

And Mr. Harman, another Bank director, expressed his opinion in these terms: 'I
must very materially alter my opinions before I can suppose that the exchanges
will be influenced by any modifications of our paper currency.'

Very few persons perhaps could have managed to commit so many blunders in
so few words.

But it is no disgrace at all to the Bank directors of that day to have committed
these blunders. They spoke according to the best mercantile opinion of
England. The City of London and the House of Commons both approved of
what they said; those who dissented were said to be abstract thinkers and
unpractical men. The Bank directors adopted the ordinary opinions, and
pursued the usual practice of their time. It was this 'routine' that caused their
moderation. They believed that so long as they issued 'notes' only at 5 per cent,
and only on the discount of good bills, those notes could not be depreciated.
And as the number of 'good' bills—bills which sound merchants know to be
good—does not rapidly increase, and as the market rate of interest was often
less than 5 per cent, these checks on over-issue were very effective. They
failed in time, and the theory upon which they were defended was nonsense;
but for a time their operation was powerful and excellent.

Unluckily, in the management of the matter before us—the management of the

Bank reserve—the directors of the Bank of England were neither acquainted
with right principles, nor were they protected by a judicious routine. They
could not be expected themselves to discover such principles. The abstract
thinking of the world is never to be expected from persons in high places; the
administration of first-rate current transactions is a most engrossing business,
and those charged with them are usually but little inclined to think on points of
theory, even when such thinking most nearly concerns those transactions. No
doubt when men's own fortunes are at stake, the instinct of the trader does
somehow anticipate the conclusions of the closet. But a board has no instincts
when it is not getting an income for its members, and when it is only
discharging a duty of office. During the suspension of cash payments—a
suspension which lasted twenty-two years
—all traditions as to a cash reserve had died away. After 1819 the Bank
directors had to discharge the duty of keeping a banking reserve, and (as the law
then stood) a currency reserve also, without the guidance either of keen
interests, or good principles, or wise traditions.

Under such circumstances, the Bank directors inevitably made mistakes of the
gravest magnitude. The first time of trial came in 1825. In that year the Bank
directors allowed their stock of bullion to fall in the most alarming manner:

On Dec. 24, 1824, the coin and bullion in the Bank was L 10,721,000
On Dec. 25, 1825, it was reduced to L 1,260,000

and the consequence was a panic so tremendous that its results are well
remembered after nearly fifty years. In the next period of extreme trial—in
1837-9—the Bank was compelled to draw for 2,000,000 L. on the Bank of
France; and even after that aid the directors permitted their bullion, which
was still the currency reserve as well as the banking reserve, to be reduced
to 2,404,000 L.: a great alarm pervaded society, and generated an eager
controversy, out of which ultimately emerged the Act of 1844. The next trial
came in 1847, and then the Bank permitted its banking reserve (which the
law had now distinctly separated) to fall to 1,176,000 L.; and so intense was
the alarm, that the executive Government issued a letter of licence,
permitting the Bank, if necessary, to break the new law, and, if necessary, to
borrow from the currency reserve, which was full, in aid of the banking
reserve, which was empty. Till 1857 there was an unusual calm in the
money market, but in the autumn of that year the Bank directors let the
banking reserve, which even in October was far too small, fall thus:

Oct. 10 4,024,000 L
" 17 3,217,000 L
" 24 3,485,000 L
" 31 2,258,000 L
Nov. 6 2,155,000 L
" 13 957,000 L

And then a letter of licence like that of 1847 was not only issued, but used.
The Ministry of the day authorised the Bank to borrow from the currency
reserve in aid of the banking reserve, and the Bank of England did so borrow
several hundred pounds till the end of the month of November. A more
miserable catalogue than that of the failures of the Bank of England to keep a
good banking reserve in all the seasons of trouble between 1825 and 1857 is
scarcely to be found in history.

But since 1857 there has been a great improvement. By painful events and
incessant discussions, men of business have now been trained to see that a
large banking reserve is necessary, and to understand that, in the curious
constitution of the English banking world, the Bank of England is the only
body which could effectually keep it. They have never acknowledged the duty;
some of them, as we have seen, deny the duty; still they have to a considerable
extent begun to perform the duty. The Bank directors, being experienced and
able men of business, comprehended this like other men of business. Since
1857 they have always kept, I do not say a sufficient banking reserve, but a
fair and creditable banking reserve, and one altogether different from any
which they kept before.
At one period the Bank directors even went farther: they made a distinct step in
advance of the public intelligence; they adopted a particular mode of raising
the rate of interest, which is far more efficient than any other mode. Mr.
Goschen observes, in his book on the Exchanges: 'Between the rates in London
and Paris, the expense of sending gold to and fro having been reduced to a
minimum between the two cities, the difference can never be very great; but it
must not be forgotten that, the interest being taken at a percentage calculated
per annum, and the probable profit having, when an operation in three-month
bills is contemplated, to be divided by four, whereas the percentage of expense
has to be wholly borne by the one transaction, a very slight expense becomes a
great impediment. If the cost is only 1/2 per cent, there must be a profit of 2
per cent in the rate of interest, or 1/2 per cent on three months, before any
advantage commences; and thus, supposing that Paris capitalists calculate that
they may send their gold over to England for 1/2 per cent expense, and chance
their being so favoured by the Exchanges as to be able to draw it back without
any cost at all, there must nevertheless be an excess of more than 2 per cent in
the London rate of interest over that in Paris, before the operation of sending
gold over from France, merely for the sake of the higher interest, will pay.'
Accordingly, Mr. Goschen recommended that the Bank of England should, as a
rule, raise their rate by steps of 1 per cent at a time when the object of the rise
was to affect the 'foreign Exchanges.' And the Bank of England, from 1860
onward, have acted upon that principle. Before that time they used to raise
their rate almost always by steps of 1/2 per cent, and there was nothing in the
general state of mercantile opinion to compel them to change their policy. The
change was, on the contrary, most unpopular. On this occasion, and, as far as I
know, on this occasion alone, the Bank of England made an excellent alteration
of their policy, which was not exacted by contemporary opinion, and which
was in advance of it. The beneficial results of the improved policy of the Bank
were palpable and speedy. We were enabled by it to sustain the great drain of
silver from Europe to India to pay for Indian cotton in the years between
18621865. In the autumn of 1864 there was especial danger; but, by a rapid
and able use of their new policy, the Bank of England maintained an adequate
reserve, and preserved the country from calamities which, if we had looked
only to precedent, would have seemed inevitable. All the causes which
produced the panic of 1857 were in action in 1864—the drain of silver in 1864
and the preceding year was beyond comparison greater than in 1857 and the
years before it—and yet in 1864 there was no panic. The Bank of England was
almost immediately rewarded for its adoption of right principles by finding that
those principles, at a severe crisis, preserved public credit.

In 1866 undoubtedly a panic occurred, but I do not think that the Bank of
England can be blamed for it. They had in their till an exceedingly good
reserve according to the estimate of that time—a sufficient reserve, in all
probability, to have coped with the crises of 1847 and 1857. The suspension of
Overend and Gurney—the most trusted private firm in England caused an
alarm, in suddenness and magnitude, without example. What was the effect of
the Act of 1844 on the panic of 1866 is a question on which opinion will be
long divided; but I think it will be generally agreed that, acting under the
provisions of that law, the directors of the Bank of England had in their
banking department in that year a fairly large reserve quite as large a reserve
as anyone expected them to keep—to meet unexpected and painful
contingencies.

From 1866 to 1870 there was almost an unbroken calm on the money market.
The Bank of England had no difficulties to cope with; there was no
opportunity for much discretion. The money market took care of itself. But in
1870 the Bank of France suspended specie payments, and from that time a new
era begins. The
demands on this market for bullion have been greater, and have been more
incessant, than they ever were before, for this is now the only bullion market.
This has made it necessary for the Bank of England to hold a much larger
banking reserve than was ever before required, and to be much more watchful
than in former times lest that banking reserve should on a sudden be
dangerously diminished. The forces are greater and quicker than they used to
be, and a firmer protection and a surer solicitude are necessary. But I do not
think the Bank of England is sufficiently aware of this. All the governing body
of the Bank certainly are not aware of it. The same eminent director to whom I
have before referred, Mr. Hankey, published in the 'Times' an elaborate letter,
saying again that one-third of the liabilities were, even in these altered times, a
sufficient reserve for the Banking Department of the Bank of England, and that
it was no part of the business of the Bank to keep a supply of 'bullion for
exportation,' which was exactly the most mischievous doctrine that could be
maintained when the Banking Department of the Bank of England had become
the only great repository in Europe where gold could at once be obtained, and
when, therefore, a far greater store of bullion ought to be kept than at any
former period.

And besides this defect of the present time, there are some chronic faults in the
policy of the Bank of England, which arise, as will be presently explained, from
grave defects in its form of government.

There is almost always some hesitation when a Governor begins to reign. He is

the Prime Minister of the Bank Cabinet; and when so important a functionary
changes, naturally much else changes too. If the Governor be weak, this kind
of vacillation and hesitation continues throughout his term of office. The usual
defect then is, that the Bank of England does not raise the rate of interest
sufficiently quickly. It does raise it; in the end it takes the alarm, but it does not
take the alarm sufficiently soon. A cautious man, in a new office, does not like
strong measures. Bank Governors are generally cautious men; they are taken
from a most cautious class; in consequence they are very apt to temporise and
delay. But almost always the delay in creating a stringency only makes a
greater stringency inevitable. The effect of a timid policy has been to let the
gold out of the Bank, and that gold must be recovered. It would really have
been far easier to have maintained the reserve by timely measures than to have
replenished it by delayed measures; but new Governors rarely see this.

Secondly. Those defects are apt, in part, or as a whole, to be continued

throughout the reign of a weak Governor. The objection to a decided policy, and
the indisposition to a timely action, which are excusable in one whose
influence is beginning, and whose reign is new, is continued through the
whole reign of one to whom those defects are natural, and who exhibits those
defects in all his affairs.

Thirdly. This defect is enhanced, because, as has so often been said, there is
now no adequate rule recognised in the management of the banking reserve. Mr.
Weguelin, the last Bank Governor who has been examined, said that it was
sufficient for the Bank to keep from one-fourth to one-third of its banking
liabilities as a reserve. But no one now would ever be content if the banking
reserve were near to one-fourth of its liabilities. Mr. Hankey, as I have shown,
considers 'about a third' as the proportion of reserve to liability at which the
Bank should aim; but he does not say whether he regards a third as the
minimum below which the reserve in the Banking Department should never be,
or as a fair average, about which the reserve may fluctuate, sometimes being
greater, or at others less.

In a future chapter I shall endeavour to show that one-third of its banking

liabilities is at present by no means an adequate reserve for the Banking
Department—that it is not even a proper minimum, far less a fair average; and I
shall allege what seem to me good reasons for thinking that, unless the Bank
aim by a different method at a higher standard, its own position may hereafter
be perilous, and the public may be exposed to disaster.

II.

But, as has been explained, the Bank of England is bound, according to our
system, not only to keep a good reserve against a time of panic, but to use
that reserve effectually when that time of panic comes. The keepers of the
Banking reserve, whether one or many, are obliged then to use that reserve
for their own safety. If they permit all other forms of credit to perish, their
own will perish immediately, and in consequence.

As to the Bank of England, however, this is denied. It is alleged that the Bank of
England can keep aloof in a panic; that it can, if it will, let other banks and
trades fail; that if it chooses, it can stand alone, and survive intact while all else
perishes around it. On various occasions, most influential persons, both in the
government of the Bank and out of it, have said that such was their opinion.
And we must at once see whether this opinion is true or false, for it is absurd to
attempt to estimate the conduct of the Bank of England during panics before we
know what the precise position of the Bank in a panic really is.

The holders of this opinion in its most extreme form say, that in a panic the
Bank of England can stay its hand at any time; that, though it has advanced
much, it may refuse to advance more; that though the reserve may have been
reduced by such advances, it may refuse to lessen it still further; that it can
refuse to make any further dis counts; that the bills which it has discounted will
become due; that it can refill its reserve by the payment of those bills; that it
can sell stock or other securities, and so replenish its reserve still further. But in
this form the notion scarcely merits serious refutation. If the Bank reserve has
once become low, there are, in a panic, no means of raising it again. Money
parted with at such a time is very hard to get back; those who have taken it will
not let it go— not, at least, unless they are sure of getting other money in its
place. And at such instant the recovery of money is as hard for the Bank of
England as for any one else, probably even harder. The difficulty is this: if the
Bank decline to discount, the holders of the bills previously discounted cannot
pay. As has been shown, trade in England is largely carried on with borrowed
money. If you propose greatly to reduce that amount, you will cause many
failures unless you can pour in from elsewhere some equivalent amount of new
money. But in a panic there is no new money to be had; everybody who has it
clings to it, and will not part with it. Especially what has been advanced to
merchants cannot easily be recovered; they are under immense liabilities, and
they will not give back a penny which they imagine that even possibly they
may need to discharge those liabilities. And bankers are in even greater terror.
In a panic they will not discount a host of new bills; they are engrossed with
their own liabilities and those of their own customers, and do not care for those
of others. The notion that the Bank of England can stop discounting in a panic,
and so obtain fresh money, is a delusion. It can stop discounting, of course, at
pleasure. But if it does, it will get in no new money; its bill case will daily be
more and more packed with bills 'returned unpaid.'

The sale of stock, too, by the Bank of England in the middle of a panic is
impossible. The bank at such a time is the only lender on stock, and it is only by
loans from a bank that large purchases, at such a moment, can be made. Unless
the Bank of England lend, no stock will be bought. There is not in the country
any large sum of unused ready money ready to buy it. The only unused sum is
the reserve in the Banking Department of the Bank of England: if, therefore, in
a panic that Department itself attempt to sell stock, the failure would be
ridiculous.
It would hardly be able to sell any at all. Probably it would not sell fifty
pounds' worth. The idea that the Bank can, during a panic, replenish its
reserve in this or in any other manner when that reserve has once been
allowed to become empty, or nearly empty, is too absurd to be steadily
maintained, though I fear that it is not yet wholly abandoned.

The second and more reasonable conception of the independence of the Bank
of England is, however, this: It may be said, and it is said, that if the Bank of
England stop at the beginning of a panic, if it refuse to advance a shilling more
than usual, if it begin the battle with a good banking reserve, and do not
diminish it by extra loans, the Bank of England is sure to be safe. But this form
of the opinion, though more reasonable and moderate, is not, therefore, more
true. The panic of 1866 is the best instance to test it. As everyone knows, that
panic began quite suddenly, on the fall of 'Overends.' Just before, the Bank had
5,812,000 L. in its reserve; in fact, it advanced 13,000,000 L. of new money in
the next few days, and its reserve went down to nothing, and the Government
had to help. But if the Bank had not made these advances, could it have kept its
reserve?

Certainly it could not. It could not have retained its own deposits. A large part of
these are the deposits of bankers, and they would not consent to help the Bank
of England in a policy of isolation. They would not agree to suspend payments
themselves, and permit the Bank of England to survive, and get all their
business. They would withdraw their deposits from the Bank; they would not
assist it to stand erect amid their ruin. But even if this were not so, even if the
banks were willing to keep their deposits at the Bank while it was not lending,
they would soon find that they could not do it. They are only able to keep those
deposits at the Bank by the aid of the Clearing-house system, and if a panic
were to pass a certain height, that system, which rests on confidence, would be
destroyed by terror.

The common course of business is this. A B having to receive 50,000 l. from C

D takes C D's cheque on a banker crossed, as it is called, and, therefore, only
payable to another banker. He pays that cheque to his own credit with his own
banker, who presents it to the banker on whom it is drawn, and if good it is an
item between them in the general clearing or settlement of the afternoon. But
this is evidently a very refined machinery, which a panic will be apt to destroy.
At the first stage A B may say to his debtor C D, 'I cannot take your cheque, I
must have bank-notes.' If it is a debt on securities, he will be very apt to say
this. The usual practice—credit being good—is for the creditor to take the
debtor's
cheque, and to give up the securities. But if the 'securities' really secure him in a
time of difficulty, he will not like to give them up, and take a bit of paper—a
mere cheque, which may be paid or not paid. He will say to his debtor, 'I can
only give you your securities if you will give me bank-notes.' And if he does
say so, the debtor must go to his bank, and draw out the 50,000 L. if he has it.
But if this were done on a large scale, the bank's 'cash in house' would soon be
gone; as the Clearing-house was gradually superseded it would have to trench
on its deposit at the Bank of England; and then the bankers would have to pay
so much over the counter that they would be unable to keep much money at the
Bank, even if they wished. They would soon be obliged to draw out every
shilling.

The diminished use of the Clearing-house, in consequence of the panic, would

intensify that panic. By far the greater part of the bargains of the country in
moneyed securities is settled on the Stock Exchange twice a month, and the
number of securities then given up for mere cheques, and the number of
cheques then passing at the Clearing-house are enormous. If that system
collapse, the number of failures would be incalculable, and each failure would
add to the discredit that caused the collapse.

The non-banking customers of the Bank of England would be discredited as

well as other people; their cheques would not be taken any more than those of
others; they would have to draw out bank-notes, and the Bank reserve would not
be enough for a tithe of such payments.

The matter would come shortly to this: a great number of brokers and dealers
are under obligations to pay immense sums, and in common times they obtain
these sums by the transfer of certain securities. If, as we said just now, No. 1
has borrowed 50,000 L. of No. 2 on Exchequer bills, he, for the most part,
cannot pay No. 2 till he has sold or pledged those bills to some one else. But
till he has the bills he cannot pledge or sell them; and if No. 2 will not give
them up till he gets his money, No. 1 will be ruined, because he cannot pay it.
And if No. 2 has No. 3 to pay, as is very likely, he may be ruined because of
No. 1's default, and No. 4 only on account of No. 3's default; and so on without
end. On settling day, without the Clearing-house, there would be a mass of
failures, and a bundle of securities. The effect of these failures would be a
general run on all bankers, and on the Bank of England particularly.

It may indeed be said that the money thus taken from the Banking Department
of the Bank of England would return there immediately; that the public who
borrowed it would not know where else to deposit it; that it would be taken out
in the morning, and put back in the evening. But, in the first place, this
argument assumes that the Banking Department would have enough money to
pay the demands on it; and this is a mistake: the Banking Department would not
have a hundredth part of the necessary funds. And in the second, a great panic
which deranged the Clearing-house would soon be diffused all through the
country. The money therefore taken from the Bank of England could not be
soon returned to the Bank; it would not come back on the evening of the day on
which it was taken out, or for many days; it would be distributed through the
length and breadth of the country, wherever there were bankers, wherever there
was trade, wherever there were liabilities, wherever there was terror.

And even in London, so immense a panic would soon impair the credit of the
Banking Department of the Bank of England. That department has no great
prestige. It was only created in 1844, and it has failed three times since. The
world would imagine that what has happened before will happen again; and
when they have got money, they will not deposit it at an establishment which
may not be able to repay it. This did not happen in former panics, because the
case we are considering never arose. The Bank was helping the public, and,
more or less confidently, it was believed that the Government would help the
Bank. But if the policy be relinquished which formerly assuaged alarm, that
alarm will be protracted and enhanced, till it touch the Banking Department
of the Bank itself.

I do not imagine that it would touch the Issue Department. I think that the public
would be quite satisfied if they obtained bank-notes. Generally nothing is gained
by holding the notes of a bank instead of depositing them at a bank. But in the
Bank of England there is a great difference: their notes are legal tender.
Whoever holds them can always pay his debts, and, except for foreign
payments, he could want no more. The rush would be for bank-notes; those that
could be obtained would be carried north, south, east, and west, and, as there
would not be enough for all the country, the Banking Department would soon
pay away all it had.

Nothing, therefore, can be more certain than that the Bank of England has in
this respect no peculiar privilege; that it is simply in the position of a Bank
keeping the Banking reserve of the country; that it must in time of panic do
what all other similar banks must do; that in time of panic it must advance
freely and vigorously to the public out of the reserve.
And with the Bank of England, as with other Banks in the same case, these
advances, if they are to be made at all, should be made so as if possible to
obtain the object for which they are made. The end is to stay the panic; and the
advances should, if possible, stay the panic. And for this purpose there are two
rules: First. That these loans should only be made at a very high rate of interest.
This will operate as a heavy fine on unreasonable timidity, and will prevent the
greatest number of applications by persons who do not require it. The rate
should be raised early in the panic, so that the fine may be paid early; that no
one may borrow out of idle precaution without paying well for it; that the
Banking reserve may be protected as far as possible.

Secondly. That at this rate these advances should be made on all good banking
securities, and as largely as the public ask for them. The reason is plain. The
object is to stay alarm, and nothing therefore should be done to cause alarm.
But the way to cause alarm is to refuse some one who has good security to
offer. The news of this will spread in an instant through all the money market
at a moment of terror; no one can say exactly who carries it, but in half an hour
it will be carried on all sides, and will intensify the terror everywhere. No
advances indeed need be made by which the Bank will ultimately lose. The
amount of bad business in commercial countries is an infinitesimally small
fraction of the whole business. That in a panic the bank, or banks, holding the
ultimate reserve should refuse bad bills or bad securities will not make the
panic really worse; the 'unsound' people are a feeble minority, and they are
afraid even to look frightened for fear their unsoundness may be detected. The
great majority, the majority to be protected, are the 'sound' people, the people
who have good security to offer. If it is known that the Bank of England is
freely advancing on what in ordinary times is reckoned a good security—on
what is then commonly pledged and easily convertible—the alarm of the
solvent merchants and bankers will be stayed. But if securities, really good and
usually convertible, are refused by the Bank, the alarm will not abate, the other
loans made will fail in obtaining their end, and the panic will become worse
and worse.

It may be said that the reserve in the Banking Department will not be enough
for all such loans. If that be so, the Banking Department must fail. But lending
is, nevertheless, its best expedient. This is the method of making its money go
the farthest, and of enabling it to get through the panic if anything will so
enable it. Making no loans as we have seen will ruin it; making large loans
and stopping, as we have also seen, will ruin it. The only safe plan for the
Bank is the brave plan, to lend in a panic on every kind of current security, or
every sort on which
money is ordinarily and usually lent. This policy may not save the Bank; but if
it do not, nothing will save it.

If we examine the manner in which the Bank of England has fulfilled these
duties, we shall find, as we found before, that the true principle has never been
grasped; that the policy has been inconsistent; that, though the policy has much
improved, there still remain important particulars in which it might be better
than it is. The first panic of which it is necessary here to speak, is that of 1825:
I hardly think we should derive much instruction from those of 1793 and 1797;
the world has changed too much since; and during the long period of
inconvertible currency from 1797 to 1819, the problems to be solved were
altogether different from our present ones. In the panic of 1825, the Bank of
England at first acted as unwisely as it was possible to act. By every means it
tried to restrict its advances. The reserve being very small, it endeavoured to
protect that reserve by lending as little as possible. The result was a period of
frantic and almost inconceivable violence; scarcely any one knew whom to
trust; credit was almost suspended; the country was, as Mr. Huskisson
expressed it, within twenty-four hours of a state of barter. Applications for
assistance were made to the Government, but though it was well known that
the Government refused to act, there was not, as far as I know, until lately any
authentic narrative of the real facts. In the 'Correspondence' of the Duke of
Wellington, of all places in the world, there is a full account of them. The Duke
was then on a mission at St. Petersburg, and Sir R. Peel wrote to him a letter of
which the following is a part: 'We have been placed in a very unpleasant
predicament on the other question—the issue of Exchequer Bills by
Government. The feeling of the City, of many of our friends, of some of the
Opposition, was decidedly in favour of the issue of Exchequer Bills to relieve
the merchants and manufacturers.

'It was said in favour of the issue, that the same measure had been tried and
succeeded in 1793 and 1811. Our friends whispered about that we were acting
quite in a different manner from that in which Mr. Pitt did act, and would
have acted had he been alive.

'We felt satisfied that, however plausible were the reasons urged in favour of the
issue of Exchequer Bills, yet that the measure was a dangerous one, and ought
to be resisted by the Government.

'There are thirty millions of Exchequer Bills outstanding. The purchases lately
made by the Bank can hardly maintain them at par. If there were a new issue
to
such an amount as that contemplated—viz., five millions—there would be a
great danger that the whole mass of Exchequer Bills would be at a discount,
and would be paid into the revenue. If the new Exchequer Bills were to be
issued at a different rate of interest from the outstanding ones—say bearing an
interest of five per cent—the old ones would be immediately at a great
discount unless the interest were raised. If the interest were raised, the charge
on the revenue would be of course proportionate to the increase of rate of
interest. We found that the Bank had the power to lend money on deposit of
goods. As our issue of Exchequer Bills would have been useless unless the
Bank cashed them, as therefore the intervention of the Bank was in any event
absolutely necessary, and as its intervention would be chiefly useful by the
effect which it would have in increasing the circulating medium, we advised
the Bank to take the whole affair into their own hands at once, to issue their
notes on the security of goods, instead of issuing them on Exchequer Bills,
such bills being themselves issued on that security.

'They reluctantly consented, and rescued us from a very embarrassing

predicament.'

The success of the Bank of England on this occasion was owing to its complete
adoption of right principles. The Bank adopted these principles very late; but
when it adopted them it adopted them completely. According to the official
statement which I quoted before, 'we,' that is, the Bank directors, 'lent money
by every possible means, and in modes which we had never adopted before; we
took in stock on security, we purchased Exchequer Bills, we made advances on
Exchequer Bills, we not only discounted outright, but we made advances on
deposits of bills of Exchange to an immense amount—in short, by every
possible means consistent with the safety of the Bank.' And for the complete
and courageous adoption of this policy at the last moment the directors of the
Bank of England at that time deserve great praise, for the subject was then less
understood even than it is now; but the directors of the Bank deserve also
severe censure, for previously choosing a contrary policy; for being reluctant to
adopt the new one; and for at last adopting it only at the request of, and upon a
joint responsibility with, the Executive Government.

After 1825, there was not again a real panic in the money market till 1847.
Both of the crises of 1837 and 1839 were severe, but neither terminated in a
panic: both were arrested before the alarm reached its final intensity; in neither,
therefore, could the policy of the Bank at the last stage of fear be tested.
In the three panics since 1844—in 1847, 1857, and 1866—the policy of the
Bank has been more or less affected by the Act of 1844, and I cannot therefore
discuss it fully within the limits which I have pre scribed for myself. I can only
state two things: First, that the directors of the Bank above all things maintain,
that they have not been in the earlier stage of panic prevented by the Act of
1844 from making any advances which they would otherwise have then made.
Secondly, that in the last stage of panic, the Act of 1844 has been already
suspended, rightly or wrongly, on these occasions; that no similar occasion has
ever yet occurred in which it has not been suspended; and that, rightly or
wrongly, the world confidently expects and relies that in all similar cases it
will be suspended again. Whatever theory may prescribe, the logic of facts
seems peremptory so far. And these principles taken together amount to saying
that, by the doctrine of the directors, the Bank of England ought, as far as they
can, to manage a panic with the Act of 1844, pretty much as they would
manage one without it—in the early stage of the panic because then they are
not fettered, and in the latter because then the fetter has been removed.

We can therefore estimate the policy of the Bank of England in the three panics
which have happened since the Act of 1844, without inquiring into the effect
of the Act itself. It is certain that in all of these panics the Bank has made very
large advances indeed. It is certain, too, that in all of them the Bank has been
quicker than it was in 1825; that in all of them it has less hesitated to use its
banking reserve in making the advances which it is one principal object of
maintaining that reserve to make, and to make at once. But there is still a
considerable evil.
No one knows on what kind of securities the Bank of England will at such
periods make the advances which it is necessary to make.

As we have seen, principle requires that such advances, if made at all for the
purpose of curing panic, should be made in the manner most likely to cure
that panic. And for this purpose, they should be made on everything which in
common times is good 'banking security.' The evil is, that owing to terror,
what is commonly good security has ceased to be so; and the true policy is so
to use the Banking reserve, that if possible the temporary evil may be stayed,
and the common course of business be restored. And this can only be
effected by advancing on all good Banking securities.

Unfortunately, the Bank of England do not take this course. The Discount
office is open for the discount of good bills, and makes immense advances
accordingly. The Bank also advances on consols and India securities, though
there was, in the
crisis of 1866, believed to be for a moment a hesitation in so doing. But these
are only a small part of the securities on which money in ordinary times can be
readily obtained, and by which its repayment is fully secured. Railway
debenture stock is as good a security as a commercial bill, and many people, of
whom I own I am one, think it safer than India stock; on the whole, a great
railway is, we think, less liable to unforeseen accidents than the strange Empire
of India. But I doubt if the Bank of England in a panic would advance on
railway debenture stock, at any rate no one has any authorised reason for
saying that it would. And there are many other such securities.

The amount of the advance is the main consideration for the Bank of England,
and not the nature of the security on which the advance is made, always
assuming the security to be good. An idea prevails (as I believe) at the Bank of
England that they ought not to advance during a panic on any kind of security
on which they do not commonly advance. But if bankers for the most part do
advance on such security in common times, and if that security is indisputably
good, the ordinary practice of the Bank of England is immaterial. In ordinary
times the Bank is only one of many lenders, whereas in a panic it is the sole
lender, and we want, as far as we can, to bring back the unusual state of a time
of panic to the common state of ordinary times.

In common opinion there is always great uncertainty as to the conduct of the

Bank: the Bank has never laid down any clear and sound policy on the subject.
As we have seen, some of its directors (like Mr. Hankey) advocate an erroneous
policy. The public is never sure what policy will be adopted at the most
important moment: it is not sure what amount of advance will be made, or on
what security it will be made. The best palliative to a panic is a confidence in
the adequate amount of the Bank reserve, and in the efficient use of that reserve.
And until we have on this point a clear understanding with the Bank of
England, both our liability to crises and our terror at crises will always be
greater than they would otherwise be.
CHAPTER VIII.
The Government of the Bank of England.

The Bank of England is governed by a board of directors, a Governor, and a

Deputy-Governor; and the mode in which these are chosen, and the time for
which they hold office, affect the whole of its business. The board of directors
is in fact self-electing. In theory a certain portion go out annually, remain out
for a year, and are subject to re-election by the proprietors. But in fact they are
nearly always, and always if the other directors wish it, re-elected after a year.
Such has been the unbroken practice of many years, and it would be hardly
possible now to break it. When a vacancy occurs by death or resignation, the
whole board chooses the new member, and they do it, as I am told, with great
care. For a peculiar reason, it is important that the directors should be young
when they begin; and accordingly the board run over the names of the most
attentive and promising young men in the old-established firms of London, and
select the one who, they think, will be most suitable for a bank director. There
is a considerable ambition to fill the office. The status which is given by it,
both to the individual who fills it and to the firm of merchants to which he
belongs, is considerable.
There is surprisingly little favour shown in the selection; there is a great wish
on the part of the Bank directors for the time being to provide, to the best of
their ability, for the future good government of the Bank. Very few selections in
the world are made with nearly equal purity. There is a sincere desire to do the
best for the Bank, and to appoint a well-conducted young man who has begun
to attend to business, and who seems likely to be fairly sensible and fairly
efficient twenty years later.

The age is a primary matter. The offices of Governor and Deputy-Governor are
given in rotation. The Deputy-Governor always succeeds the Governor, and
usually the oldest director who has not been in office becomes Deputy-
Governor. Sometimes, from personal reasons, such as ill-health or special
temporary
occupation, the time at which a director becomes Deputy-Governor may be a
little deferred, and, in some few cases, merchants in the greatest business
have been permitted to decline entirely. But for all general purposes, the rule
may be taken as absolute. Save in rare cases, a director must serve his time as
Governor and Deputy-Governor nearly when his turn comes, and he will not
be asked to serve much before his turn. It is usually about twenty years from
the time of a man's first election that he arrives, as it is called, at the chair.
And as the offices of Governor and Deputy-Governor are very important, a
man who fills them should be still in the vigour of life. Accordingly, Bank
directors, when first chosen by the board, are always young men.

At first this has rather a singular effect; a stranger hardly knows what to make
of it. Many years since, I remember seeing a very fresh and nice-looking young
gentleman, and being struck with astonishment at being told that he was a
director of the Bank of England. I had always imagined such directors to be
men of tried sagacity and long experience, and I was amazed that a cheerful
young man should be one of them. I believe I thought it was a little dangerous.
I thought such young men could not manage the Bank well. I feared they had
the power to do mischief.

Further inquiry, however, soon convinced me that they had not the power.
Naturally, young men have not much influence at a board where there are
many older members. And in the Bank of England there is a special provision
for depriving them of it if they get it. Some of the directors, as I have said,
retire annually, but by courtesy it is always the young ones. Those who have
passed the chair—that is, who have served the office of Governor—always
remain. The young part of the board is the fluctuating part, and the old part is
the permanent part; and therefore it is not surprising that the young part has
little influence. The Bank directors may be blamed for many things, but they
cannot be blamed for the changeableness and excitability of a neocracy.

Indeed, still better to prevent it, the elder members of the board—that is, those
who have passed the chair—form a standing committee of indefinite powers,
which is called the Committee of Treasury. I say 'indefinite powers,' for I am
not aware that any precise description has ever been given of them, and I doubt
if they can be precisely described. They are sometimes said to exercise a
particular control over the relations and negotiations between the Bank and the
Government. But I confess that I believe that this varies very much with the
character of the Governor for the time being. A strong Governor does much
mainly upon his own responsibility, and a weak Governor does little. Still the
influence of the Committee of Treasury is always considerable, though not
always the same. They form a a cabinet of mature, declining, and old men,
just close to the executive; and for good or evil such a cabinet must have
much power.

By old usage, the directors of the Bank of England cannot be themselves by

trade bankers. This is a relic of old times. Every bank was supposed to be
necessarily, more or less, in opposition to every other bank—banks in the
same place to be especially in opposition. In consequence, in London, no
banker has a chance of being a Bank director, or would ever think of
attempting to be one. I am here speaking of bankers in the English sense, and
in the sense that would surprise a foreigner. One of the Rothschilds is on the
Bank direction, and a foreigner would be apt to think that they were bankers if
any one was. But this only illustrates the essential difference between our
English notions of banking and the continental. Ours have attained a much
fuller development than theirs.
Messrs. Rothschild are immense capitalists, having, doubtless, much borrowed
money in their hands. But they do not take 100 L. payable on demand, and pay
it back in cheques of 5 L. each, and that is our English banking. The borrowed
money which they have is in large sums, borrowed for terms more or less long.
English bankers deal with an aggregate of small sums, all of which are
repayable on short notice, or on demand. And the way the two employ their
money is different also. A foreigner thinks 'an Exchange business'—that is, the
buying and selling bills on foreign countries—a main part of banking. As I
have explained, remittance is one of the subsidiary conveniences which early
banks subserve before deposit banking begins. But the mass of English country
bankers only give bills on places in England or on London, and in London the
principal remittance business has escaped out of the hands of the bankers.
Most of them would not know how to carry through a great 'Exchange
operation,' or to 'bring home the returns.' They would as soon think of turning
silk merchants. The Exchange trade is carried on by a small and special body
of foreign bill-brokers, of whom Messrs. Rothschild are the greatest. One of
that firm may, therefore, well be on the Bank direction, notwithstanding the
rule forbidding bankers to be there, for he and his family are not English
bankers, either by the terms on which they borrow money, or the mode in
which they employ it. But as to bankers in the English sense of the word, the
rule is rigid and absolute. Not only no private banker is a director of the Bank
of England, but no director of any joint stock bank would be allowed to
become such. The two situations would be taken to be incompatible.
The mass of the Bank directors are merchants of experience, employing a
considerable capital in trades in which they have been brought up, and with
which they are well acquainted. Many of them have information as to the
present course of trade, and as to the character and wealth of merchants, which
is most valuable, or rather is all but invaluable, to the Bank. Many of them, too,
are quiet, serious men, who, by habit and nature, watch with some kind of care
every kind of business in which they are engaged, and give an anxious opinion
on it.
Most of them have a good deal of leisure, for the life of a man of business who
employs only his own capital, and employs it nearly always in the same way, is
by no means fully employed. Hardly any capital is enough to employ the
principal partner's time, and if such a man is very busy, it is a sign of
something wrong. Either he is working at detail, which subordinates would do
better, and which he had better leave alone, or he is engaged in too many
speculations, is incurring more liabilities than his capital will bear, and so may
be ruined. In consequence, every commercial city abounds in men who have
great business ability and experience, who are not fully occupied, who wish to
be occupied, and who are very glad to become directors of public companies in
order to be occupied. The direction of the Bank of England has, for many
generations, been composed of such men.

Such a government for a joint stock company is very good if its essential
nature be attended to, and very bad if that nature be not attended to. That
government is composed of men with a high average of general good sense,
with an excellent knowledge of business in general, but without any special
knowledge of the particular business in which they are engaged. Ordinarily, in
joint stock banks and companies this deficiency is cured by the selection of a
manager of the company, who has been specially trained to that particular
trade, and who engages to devote all his experience and all his ability to the
affairs of the company. The directors, and often a select committee of them
more especially, consult with the manager, and after hearing what he has to
say, decide on the affairs of the company. There is in all ordinary joint stock
companies a fixed executive specially skilled, and a somewhat varying council
not specially skilled. The fixed manager ensures continuity and experience in
the management, and a good board of directors ensures general wisdom.

But in the Bank of England there is no fixed executive. The Governor and
Deputy-Governor, who form that executive, change every two years. I
believe, indeed, that such was not the original intention of the founders. In
the old days of few and great privileged companies, the chairman, though
periodically
elected, was practically permanent so long as his policy was popular. He was
the head of the ministry, and ordinarily did not change unless the opposition
came in. But this idea has no present relation to the constitution of the Bank of
England. At present, the Governor and Deputy-Governor almost always change
at the end of two years; the case of any longer occupation of the chair is so
very rare, that it need not be taken account of. And the Governor and Deputy-
Governor of the Bank cannot well be shadows. They are expected to be
constantly present; to see all applicants for advances out of the ordinary
routine; to carry on the almost continuous correspondence between the Bank
and its largest customer—the Government; to bring all necessary matters
before the board of directors or the Committee of Treasury, in a word, to do
very much of what falls to the lot of the manager in most companies. Under
this shifting chief executive, there are indeed very valuable heads of
departments. The head of the Discount Department is especially required to be
a man of ability and experience. But these officers are essentially subordinate;
no one of them is like the general manager of an ordinary bank—the head of
all action. The perpetually present executive—the Governor and Deputy-
Governor—make it impossible that any subordinate should have that position. A
really able and active-minded Governor, being required to sit all day in the
bank, in fact does, and can hardly help doing, its principal business.

In theory, nothing can be worse than this government for a bank a shifting
executive; a board of directors chosen too young for it to be known whether
they are able; a committee of management, in which seniority is the necessary
qualification, and old age the common result; and no trained bankers anywhere.

Even if the Bank of England were an ordinary bank, such a constitution would
be insufficient; but its inadequacy is greater, and the consequences of that
inadequacy far worse, because of its greater functions. The Bank of England
has to keep the sole banking reserve of the country; has to keep it through all
changes of the money market, and all turns of the Exchanges; has to decide on
the instant in a panic what sort of advances should be made, to what amounts,
and for what dates; and yet it has a constitution plainly defective. So far the
government of the Bank of England being better than that of any other bank—
as it ought to be, considering that its functions are much harder and graver—
any one would be laughed at who proposed it as a model for the government of
a new bank; and that government, if it were so proposed, would on all hands be
called old-fashioned, and curious.
As was natural, the effects—good and evil—of its constitution are to be seen
in every part of the Bank's history. On one vital point the Bank's management
has been excellent. It has done perhaps less 'bad business,' certainly less very
bad business, than any bank of the same size and the same age. In all its
history I do not know that its name has ever been connected with a single large
and discreditable bad debt. There has never been a suspicion that it was
'worked' for the benefit of any one man, or any combination of men. The great
respectability of the directors, and the steady attention many of them have
always given the business of the Bank, have kept it entirely free from anything
dishonorable and discreditable. Steady merchants collected in council are an
admirable judge of bills and securities. They always know the questionable
standing of dangerous persons; they are quick to note the smallest signs of
corrupt transactions; and no sophistry will persuade the best of them out of their
good instincts. You could not have made the directors of the Bank of England
do the sort of business which 'Overends' at last did, except by a moral miracle
—except by changing their nature. And the fatal career of the Bank of the
United States would, under their management, have been equally impossible.
Of the ultimate solvency of the Bank of England, or of the eventual safety of
its vast capital, even at the worst periods of its history, there has not been the
least doubt.

But nevertheless, as we have seen, the policy of the Bank has frequently
been deplorable, and at such times the defects of its government have
aggravated if not caused its calamities.

In truth the executive of the Bank of England is now much such as the
executive of a public department of the Foreign Office or the Home Office
would be in which there was no responsible permanent head. In these
departments of Government, the actual chief changes nearly, though not quite,
as often as the Governor of the Bank of England. The Parliamentary Under-
Secretary—the Deputy-Governor, so to speak, of that office—changes nearly
as often. And if the administration solely, or in its details, depended on these
two, it would stop. New men could not carry it on with vigour and efficiency;
indeed they could not carry it on at all. But, in fact, they are assisted by a
permanent Under-Secretary, who manages all the routine business, who is the
depository of the secrets of the office, who embodies its traditions, who is the
hyphen between changing administrations. In consequence of this assistance,
the continuous business of the department is, for the most part, managed
sufficiently well, notwithstanding frequent changes in the heads of
administration. And it is only by such assistance that such business could be so
managed. The present administration of the Bank
is an attempt to manage a great, a growing, and a permanently continuous
business without an adequate permanent element, and a competent connecting
link.

In answer, it may be said that the duties which press on the Governor and
Deputy-Governor of the Bank are not so great or so urgent as those which
press upon the heads of official departments. And perhaps, in point of mere
labour, the Governor of the Bank has the advantage. Banking never ought to be
an exceedingly laborious trade. There must be a great want of system and a
great deficiency in skilled assistance if extreme labour is thrown upon the
chief. But in importance, the functions of the head of the Bank rank as high as
those of any department. The cash reserve of the country is as precious a
deposit as any set of men can have the care of. And the difficulty of dealing
with a panic (as the administration of the Bank is forced to deal with it) is
perhaps a more formidable instant difficulty than presses upon any single
minister. At any rate, it comes more suddenly, and must be dealt with more
immediately, than most comparable difficulties; and the judgment, the nerve,
and the vigour needful to deal with it are plainly rare and great.

The natural remedy would be to appoint a permanent Governor of the Bank.

Nor, as I have said, can there be much doubt that such was the intention of its
founders. All the old companies which have their beginning in the seventeenth
century had the same constitution, and those of them which have lingered
down to our time retain it. The Hudson's Bay Company, the South Sea
Company, the East India Company, were all founded with a sort of sovereign
executive, intended to be permanent, and intended to be efficient. This is,
indeed, the most natural mode of forming a company in the minds of those to
whom companies are new. Such persons will have always seen business
transacted a good deal despotically; they will have learnt the value of prompt
decision and of consistent policy; they will have often seen that business is best
managed when those who are conducting it could scarcely justify the course
they are pursuing by distinct argument which others could understand. All 'city'
people make their money by investments, for which there are often good
argumentative reasons; but they would hardly ever be able, if required before a
Parliamentary committee, to state those reasons. They have become used to act
on them without distinctly analysing them, and, in a monarchical way, with
continued success only as a test of their goodness. Naturally such persons,
when proceeding to form a company, make it upon the model of that which
they have been used to see successful.
They provide for the executive first and above all things. How much this was in
the minds of the founders of the Bank of England may be judged of by the name
which they gave it. Its corporate name is the 'Governor and Company of the
Bank of England.' So important did the founders think the executive that they
mentioned it distinctly, and mentioned it first.

And not only is this constitution of a company the most natural in the early
days when companies were new, it is also that which experience has shown to
be the most efficient now that companies have long been tried. Great railway
companies are managed upon no other. Scarcely any instance of great success
in a railway can be mentioned in which the chairman has not been an active
and judicious man of business, constantly attending to the affairs of the
company. A thousand instances of railway disaster can be easily found in
which the chairman was only a nominal head—a nobleman, or something of
that sort—chosen for show. 'Railway chairmanship' has become a profession,
so much is efficiency valued in it, and so indispensable has ability been found
to be. The plan of appointing a permanent 'chairman' at the Bank of England is
strongly supported by much modern experience.

Nevertheless, I hesitate as to its expediency; at any rate, there are other plans
which, for several reasons, should, I think, first be tried in preference.

First. This plan would be exceedingly unpopular. A permanent Governor of the

Bank of England would be one of the greatest men in England. He would be a
little 'monarch' in the City; he would be far greater than the 'Lord Mayor.' He
would be the personal embodiment of the Bank of England; he would be
constantly clothed with an almost indefinite prestige. Everybody in business
would bow down before him and try to stand well with him, for he might in a
panic be able to save almost anyone he liked, and to ruin almost anyone he
liked. A day might come when his favour might mean prosperity, and his distrust
might mean ruin. A position with so much real power and so much apparent
dignity would be intensely coveted. Practical men would be apt to say that it
was better than the Prime Ministership, for it would last much longer, and
would have a greater jurisdiction over that which practical men would most
value, over money. At all events, such a Governor, if he understood his
business, might make the fortunes of fifty men where the Prime Minister can
make that of one. Scarcely anything could be more unpopular in the City than
the appointment of a little king to reign over them.

Secondly. I do not believe that we should always get the best man for the post;
often I fear that we should not even get a tolerable man. There are many cases
in which the offer of too high a pay would prevent our obtaining the man we
wish for, and this is one of them. A very high pay of prestige is almost always
very dangerous. It causes the post to be desired by vain men, by lazy men, by
men of rank; and when that post is one of real and technical business, and
when, therefore, it requires much previous training, much continuous labour,
and much patient and quick judgment, all such men are dangerous. But they
are sure to covet all posts of splendid dignity, and can only be kept out of them
with the greatest difficulty. Probably, in every Cabinet there are still some
members (in the days of the old close boroughs there were many) whose posts
have come to them not from personal ability or inherent merit, but from their
rank, their wealth, or even their imposing exterior. The highest political offices
are, indeed, kept clear of such people, for in them serious and important duties
must constantly be performed in the face of the world. A Prime Minister, or a
Chancellor of the Exchequer, or a Secretary of State must explain his policy
and defend his actions in Parliament, and the discriminating tact of a critical
assembly—abounding in experience, and guided by tradition—will soon
discover what he is. But the Governor of the Bank would only perform quiet
functions, which look like routine, though they are not, in which there is no
immediate risk of success or failure; which years hence may indeed issue in a
crop of bad debts, but which any grave persons may make at the time to look
fair and plausible. A large Bank is exactly the place where a vain and shallow
person in authority, if he be a man of gravity and method, as such men often
are, may do infinite evil in no long time, and before he is detected. If he is
lucky enough to begin at a time of expansion in trade, he is nearly sure not to
be found out till the time of contraction has arrived, and then very large figures
will be required to reckon the evil he has done.

And thirdly, I fear that the possession of such patronage would ruin any set of
persons in whose gift it was. The election of the Chairman must be placed
either in the court of proprietors or that of the directors. If the proprietors
choose, there will be something like the evils of an American presidential
election. Bank stock will be bought in order to confer the qualification of
voting at the election of the 'chief of the City.' The Chairman, when elected,
may well find that his most active supporters are large borrowers of the Bank,
and he may well be puzzled to decide between his duty to the Bank and his
gratitude to those who chose him.
Probably, if he be a cautious man of average ability, he will combine both
evils; he will not lend so much money as he is asked for, and so will offend
his own supporters; but will lend some which will be lost, and so the profits
of the Bank
will be reduced. A large body of Bank proprietors would make but a bad elective
body for an office of great prestige; they would not commonly choose a good
person, and the person they did choose would be bound by promises that would
make him less good.

The court of directors would choose better; a small body of men of business
would not easily be persuaded to choose an extremely unfit man. But they
would not often choose an extremely good man. The really best man would
probably not be so rich as the majority of the directors, nor of so much standing,
and not unnaturally they would much dislike to elevate to the headship of the
City, one who was much less in the estimation of the City than themselves. And
they would be canvassed in every way and on every side to appoint a man of
mercantile dignity or mercantile influence. Many people of the greatest prestige
and rank in the City would covet so great a dignity; if not for themselves, at
least for some friend, or some relative, and so the directors would be set upon
from every side.

An election so liable to be disturbed by powerful vitiating causes would rarely

end in a good choice. The best candidate would almost never be chosen; often,
I fear, one would be chosen altogether unfit for a post so important. And the
excitement of so keen an election would altogether disturb the quiet of the
Bank. The good and efficient working of a board of Bank directors depends on
its internal harmony, and that harmony would be broken for ever by the
excitement, the sayings, and the acts of a great election. The board of directors
would almost certainly be demoralised by having to choose a sovereign, and
there is no certainty, nor any great likelihood, indeed, that they would choose a
good one. 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.

I think, however, that much of the advantage, with little of the risk, might be
secured by a humbler scheme. In English political offices, as was observed
before, the evil of a changing head is made possible by the permanence of a
dignified subordinate. Though the Parliamentary Secretary of State and the
Parliamentary Under-Secretary go in and out with each administration, another
Under-Secretary remains through all such changes, and is on that account
called 'permanent.' Now this system seems to me in its principle perfectly
applicable to the administration of the Bank of England. For the reasons
which have just been given, a permanent ruler of the Bank of England cannot
be appointed; for other reasons, which were just before given, some most
influential permanent functionary is essential in the proper conduct of the
business of the Bank; and, mutatis mutandis, these are the very difficulties,
and the very advantages which have led us to frame our principal offices of
state in the present fashion.

Such a Deputy-Governor would not be at all a 'king' in the City. There would
be no mischievous prestige about the office; there would be no attraction in it
for a vain man; and there would be nothing to make it an object of a violent
canvass or of unscrupulous electioneering. The office would be essentially
subordinate in its character, just like the permanent secretary in a political
office. The pay should be high, for good ability is wanted—but no pay would
attract the most dangerous class of people. The very influential, but not very
wise, City dignitary who would be so very dangerous is usually very opulent;
he would hardly have such influence he were not opulent: what he wants is not
money, but 'position.' A Governorship of the Bank of England he would take
almost without salary; perhaps he would even pay to get it: but a minor office
of essential subordination
would not attract him at all. We may augment the pay enough to get a good man,
without fearing that by such pay we may tempt—as by social privilege we
should tempt—exactly the sort of man we do not want.

Undoubtedly such a permanent official should be a trained banker. There is a

cardinal difference between banking and other kinds of commerce; you can
afford to run much less risk in banking than in commerce, and you must take
much greater precautions. In common business, the trader can add to the cost
price of the goods he sells a large mercantile profit, say 10 to 15 per cent; but
the banker has to be content with the interest of money, which in England is
not so much as per cent upon the average. The business of a banker therefore
cannot bear so many bad debts as that of a merchant, and he must be much
more cautious to whom he gives credit. Real money is a commodity much
more coveted than common goods: for one deceit which is attempted on a
manufacturer or a merchant, twenty or more are attempted on a banker. And
besides, a banker, dealing with the money of others, and money payable on
demand, must be always, as it were, looking behind him and seeing that he has
reserve enough in store if payment should be asked for, which a merchant
dealing mostly with his own capital need not think of. Adventure is the life of
commerce, but caution, I had almost said timidity, is the life of banking; and I
cannot imagine that the long series of great errors made by the Bank of
England in the management of its reserve till after 1857, would have been
possible if the merchants in the Bank court had not erroneously taken the same
view of the Bank's business that they must properly take of their own
mercantile business.
The Bank directors have almost always been too cheerful as to the Bank's
business, and too little disposed to take alarm. What we want to introduce
into the Bank court is a wise apprehensiveness, and this every trained banker
is taught by the habits of his trade, and the atmosphere of his life.

The permanent Governor ought to give his whole time to the business of the
Bank. He ought to be forbidden to engage in any other concern. All the present
directors, including the Governor and Deputy-Governor, are engaged in their
own business, and it is very possible, indeed it must perpetually have
happened, that their own business as merchants most occupied the minds of
most of them just when it was most important that the business of the Bank
should occupy them. It is at a panic and just before a panic that the business of
the Bank is most exacting and most engrossing. But just at that time the
business of most merchants must be unusually occupying and may be
exceedingly critical. By the present constitution of the Bank, the attention of
its sole rulers is most apt to be
diverted from the Bank's affairs just when those affairs require that attention the
most. And the only remedy is the appointment of a permanent and influential
man, who will have no business save that of the Bank, and who therefore
presumably will attend most to it at the critical instant when attention is most
required. His mind, at any rate, will in a panic be free from pecuniary anxiety,
whereas many, if not all, of the present directors must be incessantly thinking of
their own affairs and unable to banish them from their minds.

The permanent Deputy-Governor must be a director and a man of fair position.

He must not have to say 'Sir' to the Governor. There is no fair argument
between an inferior who has to exhibit respect and a superior who has to
receive respect. The superior can always, and does mostly, refute the bad
arguments of his inferior; but the inferior rarely ventures to try to refute the
bad arguments of his superior. And he still more rarely states his case
effectually; he pauses, hesitates, does not use the best word or the most apt
illustration, perhaps he uses a faulty illustration or a wrong word, and so fails
because the superior immediately exposes him. Important business can only be
sufficiently discussed by persons who can say very much what they like very
much as they like to one another.
The thought of the speaker should come out as it was in his mind, and not be
hidden in respectful expressions or enfeebled by affected doubt. What is
wanted at the Bank is not a new clerk to the directors—they have excellent
clerks of great experience now—but a permanent equal to the directors, who
shall be able to discuss on equal terms with them the business of the Bank, and
have this advantage over them in discussion, that he has no other business than
that of the Bank to think of.

The formal duties of such a permanent officer could only be defined by some
one conversant with the business of the Bank, and could scarcely be
intelligibly discussed before the public. Nor are the precise duties of the least
importance. Such an officer, if sound, able, and industrious, would soon rule
the affairs of the Bank. He would be acquainted better than anyone else, both
with the traditions of the past and with the facts of the present; he would have a
great experience; he would have seen many anxious times; he would always be
on the watch for their recurrence. And he would have a peculiar power of
guidance at such moments from the nature of the men with whom he has most
to deal. Most Governors of the Bank of England are cautious merchants, not
profoundly skilled in banking, but most anxious that their period of office
should be prosperous and that they should themselves escape censure. If a
'safe' course is pressed upon them they are likely to take that course. Now it
would almost
always be 'safe' to follow the advice of the great standing 'authority'; it would
always be most 'unsafe' not to follow it. If the changing Governor act on the
advice of the permanent Deputy-Governor, most of the blame in case of
mischance would fall on the latter; it would be said that a shifting officer like
the Governor might very likely not know what should be done, but that the
permanent official was put there to know it and paid to know it. But if, on the
other hand, the changing Governor should disregard the advice of his
permanent colleague, and the consequence should be bad, he would be blamed
exceedingly. It would be said that, 'being without experience, he had taken
upon him to overrule men who had much experience; that when the
constitution of the Bank had provided them with skilled counsel, he had taken
on himself to act of his own head, and to disregard that counsel;' and so on ad
infinitum. And there could be no sort of conversation more injurious to a man
in the City; the world there would say, rightly or wrongly, 'We must never be
too severe on errors of judgment; we are all making them every day; if
responsible persons do their best we can expect no more. But this case is
different: the Governor acted on a wrong system; he took upon himself an
unnecessary responsibility:' and so a Governor who incurred disaster by
disregarding his skilled counsellor would be thought a fool in the City for ever.
In consequence, the one skilled counsellor would in fact rule the Bank. I
believe that the appointment of the new permanent and skilled authority at the
Bank is the greatest reform which can be made there, and that which is most
wanted. I believe that such a person would give to the decision of the Bank that
foresight, that quickness, and that consistency in which those decisions are
undeniably now deficient. As far as I can judge, this change in the constitution
of the Bank is by far the most necessary, and is perhaps more important even
than all other changes. But, nevertheless, we should reform the other points
which we have seen to be defective.

First, the London bankers should not be altogether excluded from the court of
directors. The old idea, as I have explained, was that the London bankers were
the competitors of the Bank of England, and would hurt it if they could. But
now the London bankers have another relation to the Bank which did not then
exist, and was not then imagined. Among private people they are the principal
depositors in the Bank; they are therefore particularly interested in its stability;
they are especially interested in the maintenance of a good banking reserve, for
their own credit and the safety of their large deposits depend on it. And they
can bring to the court of directors an experience of banking itself, got outside
the Bank of England, which none of the present directors possess, for they
have learned all they know of banking at the Bank itself. There was also an old
notion
that the secrets of the Bank would be divulged if they were imparted to bankers.
But probably bankers are better trained to silence and secrecy than most people.
And there is only a thin partition now between the bankers and the secrets of the
Bank. Only lately a firm failed of which one partner was a director of the
London and Westminster Bank, and another a director of the Bank of England.
Who can define or class the confidential communications of such persons under
such circumstances?

As I observed before, the line drawn at present against bankers is very

technical and exclusively English. According to continental ideas, Messrs.
Rothschild are bankers, if any one is a banker. But the house of Rothschild is
represented on the Bank direction. And it is most desirable that it should be
represented, for members of that firm can give if they choose confidential
information of great value to the Bank. But, nevertheless, the objection which
is urged against English bankers is at least equally applicable to these foreign
bankers. They have, or may have, at certain periods an interest opposite to the
policy of the Bank. As the greatest Exchange dealers, they may wish to export
gold just when the Bank of England is raising its rate of interest to prevent
anyone from exporting gold. The vote of a great Exchange dealer might be
objected to for plausible reasons of contrary interest, if any such reasons were
worth regarding. But in fact the particular interest of single directors is not to
be regarded; almost all directors who bring special information labour under a
suspicion of interest; they can only have acquired that information in present
business, and such business may very possibly be affected for good or evil by
the policy of the Bank. But you must not on this account seal up the Bank
hermetically against living information; you must make a fair body of directors
upon the whole, and trust that the bias of some individual interests will
disappear and be lost in the whole. And if this is to be the guiding principle, it
is not consistent to exclude English bankers from the court.

Objection is often also taken to the constitution of the Committee of Treasury.

That body is composed of the Governor and Deputy-Governor and all the
directors who have held those offices; but as those offices in the main pass in
rotation, this mode of election very much comes to an election by seniority,
and there are obvious objections to giving, not only a preponderance to age,
but a monopoly to age. In some cases, indeed, this monopoly I believe has
already been infringed. When directors have on account of the magnitude of
their transactions, and the consequent engrossing nature of their business,
declined to fill the chair, in some cases they have been asked to be members
of the
Committee of Treasury notwithstanding. And it would certainly upon principle
seem wiser to choose a committee which for some purposes approximates to
a committee of management by competence rather than by seniority.

An objection is also taken to the large number of Bank directors. There are
twenty-four directors, a Governor and a Deputy-Governor, making a total court
of twenty-six persons, which is obviously too large for the real discussion of
any difficult business. And the case is worse because the court only meets
once a week, and only sits a very short time. 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.

There should be no delicacy as to altering the constitution of the Bank of

England. The existing constitution was framed in times that have passed away,
and was intended to be used for purposes very different from the present. The
founders may have considered that it would lend money to the Government,
that it would keep the money of the Government, that it would issue notes
payable to bearer, but that it would keep the 'Banking reserve' of a great nation
no one in the seventeenth century imagined. And when the use to which we are
putting an old thing is a new use, in common sense we should think whether
the old thing is quite fit for the use to which we are setting it. 'Putting new
wine into old bottles' is safe only when you watch the condition of the bottle,
and adapt its structure most carefully.
CHAPTER IX.
The Joint Stock Banks.

The Joint Stock Banks of this country are a most remarkable success.
Generally speaking the career of Joint Stock Companies in this country has
been chequered. Adam Smith, many years since, threw out many pregnant
hints on the difficulty of such undertakings—hints which even after so many
years will well repay perusal. But joint stock banking has been an exception
to this rule.
Four years ago I threw together the facts on the subject and the reasons for
them; and I venture to quote the article, because subsequent experience
suggests, I think, little to be added to it.

'The main classes of joint stock companies which have answered are three:—
1st. Those in which the capital is used not to work the business but to
guarantee the business. Thus a banker's business—his proper business—does
not begin while he is using his own money: it commences when he begins to
use the capital of others. An insurance office in the long run needs no capital;
the premiums which are received ought to exceed the claims which accrue. In
both cases, the capital is wanted to assure the public and to induce it to trust
the concern. 2ndly. Those companies have answered which have an exclusive
privilege which they have used with judgment, or which possibly was so very
profitable as to enable them to thrive with little judgment. 3rdly. Those which
have undertaken a business both large and simple—employing more money
than most individuals or private firms have at command, and yet such that, in
Adam Smith's words, "the operations are capable of being reduced to a routine
or such an uniformity of method as admits of no variation."

'As a rule, the most profitable of these companies are banks. Indeed, all the
favouring conditions just mentioned concur in many banks. An old-established
bank has a "prestige," which amounts to a "privileged opportunity"; though no
exclusive right is given to it by law, a peculiar power is given to it by opinion.
The business of banking ought to be simple; if it is hard it is wrong. The only
securities which a banker, using money that he may be asked at short notice to
repay, ought to touch, are those which are easily saleable and easily
intelligible. If there is a difficulty or a doubt, the security should be declined.
No business can of course be quite reduced to fixed rules. There must be
occasional cases which no pre-conceived theory can define. But banking
comes as near to fixed rules certainly as any existing business, perhaps as any
possible business. The business of an old-established bank has the full
advantage of being a simple business, and in part the advantage of being a
monopoly business. Competition with it is only open in the sense in which
competition with "the London Tavern" is open; anyone that has to do with
either will pay dear for it.

'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.
'The period to which these accounts refer was certainly not a particularly
profitable one—on the contrary, it has been specially unprofitable. The rate of
interest has been very low, and the amount of good security in the market small.
Many banks—to some extent most banks—probably had in their books painful
reminiscences of 1866. The fever of excitement which passed over the nation
was strongest in the classes to whom banks lent most, and consequently the
losses of even the most careful banks (save of those in rural and sheltered
situations) were probably greater than usual. But even tried by this very
unfavourable test banking is a trade profitable far beyond the average of trades.

'There is no attempt in these banks on the whole and as a rule to divide too
much
—on the contrary, they have accumulated about 13,000,000 L., or nearly 1/3 rd
of their capital, principally out of undivided profits. The directors of some of
them have been anxious to put away as much as possible and to divide as little
as possible.

'The reason is plain; out of the banks which pay more than 20 per cent, all but
one were old-established banks, and all those paying between 15 and 20 per
cent were old banks too. The "privileged opportunity" of which we spoke is
singularly conspicuous in such figures; it enables banks to pay much, which
without it would not have paid much. The amount of the profit is clearly
proportional to the value of the "privileged opportunity." All the banks which
pay above 20 per cent, save one, are banks more than 25 years old; all those
which pay between 15 and 20 are so too. A new bank could not make these
profits, or even by its competition much reduce these profits; in attempting to
do so, it would simply ruin itself. Not possessing the accumulated credit of
years, it would have to wind up before it attained that credit.

'The value of the opportunity too is proportioned to what has to be paid for it.
Some old banks have to pay interest for all their money; some have much for
which they pay nothing. Those who give much to their customers have of
course less left for their shareholders. Thus Scotland, where there is always a
daily interest, has no bank in the lists paying over 15 per cent. The profits of
Scotch banks run thus:

Capital Dividend
L
Bank of Scotland 1,500,000 12
British Linen Company 1,000,000 3
 Caledonian 125,000 10
Clydesdale 900,000 10
Commercial Bank of Scotland 1,000,000 13
National Bank of Scotland 1,000,000 112
North of Scotland 280,000 10
Union Bank of Scotland 1,000,000 10
City of Glasgow 870,000 8
Royal Bank 2,000,000 8
————-
9,675,000

Good profits enough, but not at all like the profits of the London and
Westminster, or the other most lucrative banks of the South.

'The Bank of England, it is true, does not seem to pay so much as other
English banks in this way of reckoning. It makes an immense profit, but then
its capital is immense too. In fact, the Bank of England suffers under two
difficulties.
Being much older than the other joint stock banks, it belongs to a less
profitable era. When it was founded, banks looked rather to the profit on their
own capital, and to the gains of note issue than to the use of deposits. The first
relations with the State were more like those of a finance company than of a
bank, as we now think of banking. If the Bank had not made loans to the
Government, which we should now think dubious, the Bank would not have
existed, for the Government would never have permitted it. Not only is the
capital of the Bank of England relatively greater, but the means of making
profit in the Bank of England are relatively less also. By custom and
understanding the Bank of England keep a much greater reserve in unprofitable
cash than other banks; if they do not keep it, either our whole system must be
changed or we should break up in utter bankruptcy. The earning faculty of the
Bank of England is in proportion less than that of other banks, and also the
sum on which it has to pay dividend is altogether greater than theirs.

'It is interesting to compare the facts of joint stock banking with the fears of it
which were felt. In 1832, Lord Overstone observed: "I think that joint stock
banks are deficient in everything requisite for the conduct of the banking
business except extended responsibility; the banking business requires peculiarly
persons attentive to all its details, constantly, daily, and hourly watchful of every
transaction, much more than mercantile or trading business. It also requires
immediate prompt decisions upon circumstances when they arise, in many cases
a decision that does not admit of delay for consultation; it also requires a
discretion to be exercised with reference to the special circumstances of each
case. Joint stock banks being of course obliged to act through agents and not
by a principal, and therefore under the restraint of general rules, cannot be
guided by so nice a reference to degrees of difference in the character of
responsibility of parties; nor can they undertake to regulate the assistance to
be granted to concerns under temporary embarrassment by so accurate a
reference to the circumstances, favourable or unfavourable, of each case."

'But in this very respect, joint stock banks have probably improved the
business of banking. The old private banks in former times used to lend much
to private individuals; the banker, as Lord Overstone on another occasion
explained, could have no security, but he formed his judgment of the
discretion, the sense, and the solvency of those to whom he lent. And when
London was by comparison a small city, and when by comparison everyone
stuck to his proper business, this practice might have been safe. But now that
London is enormous and that no one can watch anyone, such a trade would be
disastrous; at present, it would hardly be safe in a country town. The joint
stock banks were quite unfit for the business Lord Overstone meant, but then
that business is quite unfit for the present time.

This success of Joint Stock Banking is very contrary to the general expectation
at its origin. Not only private bankers, such as Lord Overstone then was, but a
great number of thinking persons feared that the joint stock banks would fast
ruin themselves, and then cause a collapse and panic in the country. The whole
of English commercial literature between 1830 and 1840 is filled with that
idea. Nor did it cease in 1840. So late as 1845, Sir R. Peel thought the
foundation of joint stock banks so dangerous that he subjected it to grave and
exceptional difficulty. Under the Act of 1845, which he proposed, no such
companies could be founded except with shares of 100 L. with 50 L.; paid up
on each; which effectually checked the progress of such banks, for few new
ones were established for many years, or till that act had been repealed. But in
this, as in many other cases, perhaps Sir R. Peel will be found to have been
clear-sighted rather than far-sighted. He was afraid of certain joint stock banks
which he saw rising around him; but the effect of his legislation was to give to
these very banks, if not a monopoly, at any rate an exemption from new rivals.
No one now founds or can found a new private bank, and Sir R. Peel by law
prevented new joint stock banks from being established. Though he was
exceedingly distrustful of the joint stock banks founded between 1826 and
1845, yet in fact he was their especial patron, and he more than any other man
encouraged and protected them.
But in this wonderful success there are two dubious points, two considerations
of different kinds, which forbid us to say that in other countries, even in
countries with the capacity of co-operation, joint stock banks would succeed as
well as we have seen that they succeed in England. 1st. These great Banks have
not had to keep so large a reserve against their liabilities as it was natural that
they should, being of first-rate magnitude, keep. They were at first, of course,
very small in comparison with what they are now. They found a number of
private bankers grouped round the Bank of England, and they added themselves
to the group.
Not only did they keep their reserve from the beginning at the Bank of
England, but they did not keep so much reserve as they would have kept if
there had been no Bank of England. For a long time this was hardly noticed.
For many years questions of the 'currency,' particularly questions as to the Act
of 1844, engrossed the attention of all who were occupied with these subjects.
Even those who were most anxious to speak evil of joint stock banks, did not
mention this particular evil. The first time, as far as I know, that it was
commented on in any important document, was in an official letter written in
1857 by Mr. Weguelin, who was then Governor of the Bank, to Sir George
Lewis, who was then Chancellor of the Exchequer. The Governor and the
Directors of the Bank of England had been asked by Sir George Lewis
severally to give their opinions on the Act of 1844, and all their replies were
published. In his, Mr. Weguelin says:

'If the amount of the reserve kept by the Bank of England be contrasted with
the reserve kept by the joint stock banks, a new and hitherto little considered
source of danger to the credit of the country will present itself. The joint stock
banks of London, judging by their published accounts, have deposits to the
amount of 30,000,000 L. Their capital is not more than 3,000,000 L., and they
have on an average 31,000,000 L., invested in one way or another, leaving
only 2,000,000
L. as a reserve against all this mass of liabilities.'

But these remarkable words were little observed in the discussions of that
time. The air was obscured by other matters. But in this work I have said so
much on the subject that I need say little now. The joint stock banks now keep
a main part of their reserve on deposit with the bill-brokers, or in good and
convertible interest-bearing securities. From these they obtain a large income,
and that income swells their profits. If they had to keep a much larger part than
now of that reserve in barren cash, their dividends would be reduced, and their
present success would become less conspicuous.

The second misgiving, which many calm observers more and more feel as to
our
largest joint stock banks, fastens itself on their government. Is that government
sufficient to lend well and keep safe so many millions? They are governed, as
every one knows, by a board of directors, assisted by a general manager, and
there are in London unrivalled materials for composing good boards of
directors. There are very many men of good means, of great sagacity and great
experience in business, who are obliged to be in the City every day, and to
remain there during the day, but who have very much time on their hands. A
merchant employing solely or principally his own capital has often a great deal
of leisure. He is obliged to be on the market, and to hear what is doing. Every
day he has some business to transact, but his transactions can be but few. His
capital can bear only a limited number of purchases; if he bought as much as
would fill his time from day to day he would soon be ruined, for he could not
pay for it.
Accordingly, many excellent men of business are quite ready to become
members of boards of directors, and to attend to the business of companies, a
good deal for the employment's sake. To have an interesting occupation which
brings dignity and power with it pleases them very much. As the aggregation
of commerce in great cities grows, the number of such men augments. A council
of grave, careful, and experienced men can, without difficulty, be collected for
a great bank in London, such as never could have been collected before, and
such as cannot now be collected elsewhere.

There are facilities, too, for engaging a good banker to be a manager such as
there never were before in the world. The number of such persons is much on
the increase. Any careful person who is experienced in figures, and has real
sound sense, may easily make himself a good banker. The modes in which
money can be safely lent by a banker are not many, and a clear-headed, quiet,
industrious person may soon learn all that is necessary about them. Our
intricate law of real property is an impediment in country banking, for it
requires some special study even to comprehend the elements of a law which is
full of technical words, and which can only be explained by narrating its
history. But the banking of great cities is little concerned with loans on landed
property. And all the rest of the knowledge requisite for a banker can easily be
obtained by anyone who has the sort of mind which takes to it. No doubt there
is a vast routine of work to be learned, and the manager of a large bank must
have a great facility in transacting business rapidly. But a great number of
persons are now bred from their earliest manhood in the very midst of that
routine; they learn it as they would learn a language, and come to be no more
able to unlearn it than they could unlearn a language. And the able ones among
them acquire an almost magical rapidity in effecting the business connected with
that routine. A very good manager and
very good board of directors can, without unreasonable difficulty, be provided
for a bank at present in London.

It will be asked, what more can be required? I reply, a great deal. All which
the best board of directors can really accomplish, is to form a good decision
on the points which the manager presents to them, and perhaps on a few others
which one or two zealous members of their body may select for discussion. A
meeting of fifteen or eighteen persons is wholly unequal to the transaction of
more business than this; it will be fortunate, and it must be well guided, if it
should be found to be equal to so much. The discussion even of simple
practical points by such a number of persons is a somewhat tedious affair.
Many of them will wish to speak on every decision of moment, and some of
them—some of the best of them perhaps—will only speak with difficulty and
slowly. Very generally, several points will be started at once, unless the
discussion is strictly watched by a rigid chairman; and even on a single point
the arguments will often raise grave questions which cannot be answered, and
suggest many more issues than can be advantageously decided by the meeting.
The time required by many persons for discussing many questions, would
alone prevent an assembly of many persons from overlooking a large and
complicated business.

Nor is this the only difficulty. Not only would a real supervision of a large
business by a board of directors require much more time than the board would
consent to occupy in meeting, it would also require much more time and much
more thought than the individual directors would consent to give. These
directors are only employing on the business of the Bank the vacant moments
of their time, and the spare energies of their minds. They cannot give the Bank
more; the rest is required for the safe conduct of their own affairs, and if they
diverted it from these affairs they would be ruined. A few of them may have
little other business, or they may have other partners in the business, on whose
industry they can rely, and whose judgment they can trust; one or two may
have retired from business. But for the most part, directors of a company
cannot attend principally and anxiously to the affairs of a company without so
far neglecting their own business as to run great risk of ruin; and if they are
ruined, their trustworthiness ceases, and they are no longer permitted by
custom to be directors.

Nor, even if it were possible really to supervise a business by the effectual

and constant inspection of fifteen or sixteen rich and capable persons, would
even the largest business easily bear the expense of such a supervision. I say
rich,
because the members of a board governing a large bank must be men of
standing and note besides, or they would discredit the bank; they need not be
rich in the sense of being worth millions, but they must be known to possess a
fair amount of capital and be seen to be transacting a fair quantity of business.
But the labour of such persons, I do not say their spare powers, but their
principal energies, fetches a high price. Business is really a profession often
requiring for its practice quite as much knowledge, and quite as much skill, as
law and medicine; and requiring also the possession of money. A thorough man
of business, employing a fair capital in a trade, which he thoroughly
comprehends, not only earns a profit on that capital, but really makes of his
professional skill a large income. He has a revenue from talent as well as from
money; and to induce sixteen or eighteen persons to abandon such a position
and such an income in order to devote their entire attention to the affairs of a
joint stock company, a salary must be given too large for the bank to pay or for
anyone to wish to propose.

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.

The remedy is this: a certain number of the directors, either those who have
more spare time than others, or those who are more ready to sell a large part of
their time to the bank, must be formed into a real working committee, which
must meet constantly, must investigate every large transaction, must be
acquainted with the means and standing of every large borrower, and must be
in such incessant communication with the manager that it will be impossible
for him to engage in hazardous enterprises of dangerous magnitude without
their knowing it and having an opportunity of forbidding it. In almost all cases
they would forbid it; all committees are cautious, and a committee of careful
men of business, picked from a large city, will usually err on the side of
caution if it err at all. The daily attention of a small but competent minor
council, to whom most of the powers of the directors are delegated, and who,
like a cabinet, guide the deliberations of the board at its meetings, is the only
adequate security of a large bank from the rash engagements of a despotic and
active general manager.
Fraud, in the face of such a committee, would probably never be attempted,
and even now it is a rare and minor evil.

Some such committees are vaguely known to exist in most, if not all, our large
joint stock banks. But their real constitution is not known. No customer and no
shareholder knows the names of the managing committee, perhaps, in any of
these large banks. And this is a grave error. A large depositor ought to be able to
ascertain who really are the persons that dispose of his money; and still more a
large shareholder ought not to rest till he knows who it is that makes
engagements on his behalf, and who it is that may ruin him if they choose. The
committee ought to be composed of quiet men of business, who can be
ascertained by inquiry to be of high character and well-judging mind. And if the
public and the shareholder knew that there was such a committee, they would
have sufficient reasons for the confidence which now is given without such
reasons.

A certain number of directors attending daily by rotation is, it should be said, no

substitute for a permanent committee. It has no sufficient responsibility. A
changing body cannot have any responsibility. The transactions which were
agreed to by one set of directors present on the Monday might be exactly those
which would be much disapproved by directors present on the Wednesday. It
is essential to the decisions of most business, and not least of the banking
business, that they should be made constantly by the same persons; the chain
of transactions must pass through the same minds. A large business may be
managed tolerably by a quiet group of second-rate men if those men be always
the same; but it cannot be managed at all by a fluctuating body, even of the
very
cleverest men. You might as well attempt to guide the affairs of the nation by
means of a cabinet similarly changing.

Our great joint stock bands are imprudent in so carefully concealing the details
of their government, and in secluding those details from the risk of discussion.
The answer, no doubt will be, 'Let well alone; as you have admitted, there
hardly ever before was so great a success as these banks of ours: what more do
you or can you want?' I can only say that I want further to confirm this great
success and to make it secure for the future. At present there is at least the
possibility of a great reaction. Supposing that, owing to defects in its
government, one even of the greater London joint stock banks failed, there
would be an instant suspicion of the whole system. One terra incognita being
seen to be faulty, every other terra incognita would be suspected. If the real
government of these banks had for years been known, and if the subsisting
banks had been known not to be ruled by the bad mode of government which
had ruined the bank that had fallen, then the ruin of that bank would not be
hurtful. The other banks would be seen to be exempt from the cause which had
destroyed it. But at present the ruin of one of these great banks would greatly
impair the credit of all. Scarcely any one knows the precise government of any
one; in no case has that government been described on authority; and the fall of
one by grave misgovernment would be taken to show that the others might as
easily be misgoverned also. And a tardy disclosure even of an admirable
constitution would not much help the surviving banks: as it was extracted by
necessity, it would be received with suspicion. A sceptical world would say 'of
course they say they are all perfect now; it would not do for them to say
anything else.'

And not only the depositors and the shareholders of these large banks have a
grave interest in their good government, but the public also. We have seen that
our banking reserve is, as compared with our liabilities, singularly small; we
have seen that the rise of these great banks has lessened the proportion of that
reserve to those liabilities; we have seen that the greatest strain on the banking
reserve is a 'panic.' Now, no cause is more capable of producing a panic,
perhaps none is so capable, as the failure of a first-rate joint stock bank in
London. Such an event would have something like the effect of the failure of
Overend, Gurney and Co.; scarcely any other event would have an equal
effect. And therefore, under the existing constitution of our banking system the
government of these great banks is of primary importance to us all.
CHAPTER X.
The Private Banks.

Perhaps some readers of the last part of the last chapter have been inclined to
say that I must be a latent enemy to Joint Stock Banking. At any rate, I have
pointed out what I think grave defects in it. But I fear that a reader of this
chapter may, on like grounds, suppose that I am an enemy to Private Banking.
And I can only hope that the two impressions may counteract one another, and
may show that I do not intend to be unfair.

I can imagine nothing better in theory or more successful in practice than

private banks as they were in the beginning. A man of known wealth, known
integrity, and known ability is largely entrusted with the money of his
neighbours. The confidence is strictly personal. His neighbours know him, and
trust him because they know him. They see daily his manner of life, and judge
from it that their confidence is deserved. In rural districts, and in former times,
it was difficult for a man to ruin himself except at the place in which he lived;
for the most part he spent his money there, and speculated there if he
speculated at all. Those who lived there also would soon see if he was acting
in a manner to shake their confidence. Even in large cities, as cities then were,
it was possible for most persons to ascertain with fair certainty the real
position of conspicuous persons, and to learn all which was material in fixing
their credit. Accordingly the bankers who for a long series of years passed
successfully this strict and continual investigation, became very wealthy and
very powerful.

The name 'London Banker' had especially a charmed value. He was supposed
to represent, and often did represent, a certain union of pecuniary sagacity and
educated refinement which was scarcely to be found in any other part of
society. In a time when the trading classes were much ruder than they now are,
many private bankers possessed variety of knowledge and a delicacy of
attainment which would even now be very rare. Such a position is indeed
singularly
favourable. The calling is hereditary; the credit of the bank descends from
father to son: this inherited wealth soon begins inherited refinement. Banking
is a watchful, but not a laborious trade. A banker, even in large business, can feel
pretty sure that all his transactions are sound, and yet have much spare mind. A
certain part of his time, and a considerable part of his thoughts, he can readily
devote to other pursuits. And a London banker can also have the most
intellectual society in the world if he chooses it. There has probably very rarely
ever been so happy a position as that of a London private banker; and never
perhaps a happier.

It is painful to have to doubt of the continuance of such a class, and yet, I fear,
we must doubt of it. The evidence of figures is against it. In 1810 there were
40 private banks in Lombard Street admitted to the clearing-house: there now
are only 3. Though the business of banking has increased so much since 1810,
this species of banks is fewer in number than it was then. Nor is this the worst.
The race is not renewed. There are not many recognised impossibilities in
business, but everybody admits 'that you cannot found a new private bank.' No
such has been founded in London, or, as far as I know, in the country, for
many years. The old ones merge or die, and so the number is lessened; but no
new ones begin so as to increase that number again.

The truth is that the circumstances which originally favoured the establishment
of private banks have now almost passed away. The world has become so large
and complicated that it is not easy to ascertain who is rich and who is poor. No
doubt there are some enormously wealthy men in England whose means
everybody has heard of, and has no doubt of. But these are not the men to incur
the vast liabilities of private banking. If they were bred in it they might stay in
it; but they would never begin it for themselves. And if they did, I expect
people would begin to doubt even of their wealth. It would be said, 'What does A
B go into banking for? he cannot be as rich as we thought.' A millionaire
commonly shrinks from liability, and the essence of great banking is great
liability. No doubt there are many 'second-rate' rich men, as we now count
riches, who would be quite ready to add to their income the profit of a private
bank if only they could manage it. But unluckily they cannot manage it. Their
wealth is not sufficiently familiar to the world; they cannot obtain the
necessary confidence.
No new private bank is founded in England because men of first-rate wealth
will not found one, and men not of absolutely first-rate wealth cannot.

In the present day, also, private banking is exposed to a competition against

which in its origin it had not to struggle. Owing to the changes of which I
have before spoken, joint stock banking has begun to compete with it. In old
times this was impossible; the Bank of England had a monopoly in banking
of the principle of association. But now large joint stock banks of deposit are
among the most conspicuous banks in Lombard Street. They have a large
paid-up capital and intelligible published accounts; they use these as an
incessant advertisement, in a manner in which no individual can use his own
wealth. By their increasing progress they effectually prevent the foundation
of any new private bank.

The amount of the present business of private banks is perfectly unknown.

Their balance sheets are effective secrets—rigidly guarded. But none of them,
except a few of the largest, are believed at all to gain business. The common
repute of Lombard Street might be wrong in a particular case, but upon the
general doctrine it is almost sure to be right. There are a few well-known
exceptions, but according to universal belief the deposits of most private
bankers in London tend rather to diminish than to increase.

As to the smaller banks, this naturally would be so. A large bank always tends to
become larger, and a small one tends to become smaller. People naturally
choose for their banker the banker who has most present credit, and the one
who has most money in hand is the one who possesses such credit. This is
what is meant by saying that a long established and rich bank has a 'privileged
opportunity'; it is in a better position to do its business than any one else is; it
has a great advantage over old competitors and an overwhelming superiority
over new comers. New people coming into Lombard Street judge by results;
they give to those who have: they take their money to the biggest bank
because it is the biggest. I confess I cannot, looking far forward into the future,
expect that the smaller private banks will maintain their ground. Their old
connections will not leave them; there will be no fatal ruin, no sudden
mortality. But the tide will gently ebb, and the course of business will be
carried elsewhere.

Sooner or later, appearances indicate, and principle suggests, that the business of
Lombard Street will be divided between the joint stock banks and a few large
private banks. And then we have to ask ourselves the question, can those large
private banks be permanent? I am sure I should be very sorry to say that they
certainly cannot, but at the same time I cannot be blind to the grave difficulties
which they must surmount.
In the first place, an hereditary business of great magnitude is dangerous. The
management of such a business needs more than common industry and more
than common ability. But there is no security at all that these will be regularly
continued in each generation. The case of Overend, Gurney and Co., the model
instance of all evil in business, is a most alarming example of this evil. No
cleverer men of business probably (cleverer I mean for the purposes of their
particular calling) could well be found than the founders and first managers of
that house. But in a very few years the rule in it passed to a generation whose
folly surpassed the usual limit of imaginable incapacity. In a short time they
substituted ruin for prosperity and changed opulence into insolvency. Such
great folly is happily rare; and the business of a bank is not nearly as difficult
as the business of a discount company. Still much folly is common, and the
business of a great bank requires a great deal of ability, and an even rarer
degree of trained and sober judgment. That which happened so marvelously in
the green tree may happen also in the dry. A great private bank might easily
become very rotten by a change from discretion to foolishness in those who
conduct it.

We have had as yet in London, happily, no example of this; indeed, we have

hardly as yet had the opportunity. Till now private banks have been small;
small as we now reckon banks. For their exigencies a moderate degree of
ability and an anxious caution will suffice. But if the size of the banks is
augmented and greater ability is required, the constant difficulty of an
hereditary government will begin to be felt. 'The father had great brains and
created the business: but the son had less brains and lost or lessened it.' This is
the history of all great monarchies, and it may be the history of great private
banks. The peculiarity in the case of Overend, Gurney and Co. at least, one
peculiarity is that the evil was soon discovered. The richest partners had least
concern in the management; and when they found that incredible losses were
ruining them, they stopped the concern and turned it into a company. But they
had done nothing; if at least they had only prevented farther losses, the firm
might have been in existence and in the highest credit now. It was the publicity
of their losses which ruined them. But if they had continued to be a private
partnership they need not have disclosed those losses: they might have written
them off quietly out of the immense profits they could have accumulated. They
had some ten millions of other people's money in their hands which no one
thought of disturbing. The perturbation through the country which their failure
caused in the end, shows how diffused and how unimpaired their popular
reputation was. No one in the rural districts (as I know by experience) would
ever believe a word against them, say what you might. The catastrophe came
because at the change the partners in the old private
firm—the Gurney family especially—had guaranteed the new company against
the previous losses: those losses turned out to be much greater than was
expected. To pay what was necessary the 'Gurneys' had to sell their estates, and
their visible ruin destroyed the credit of the concern. But if there had been no
such guarantee, and no sale of estates, if the great losses had slept a quiet sleep
in a hidden ledger, no one would have been alarmed, and the credit and the
business of 'Overends' might have existed till now, and their name still
continued to be one of our first names. The difficulty of propagating a good
management by inheritance for generations is greatest in private banks and
discount firms because of their essential secrecy.

The danger may indeed be surmounted by the continual infusion of new and
able partners. The deterioration of the old blood may be compensated by the
excellent quality of the fresh blood. But to this again there is an objection, of
little value perhaps in seeming, but of much real influence in practice. The
infusion of new partners requires from the old partners a considerable sacrifice
of income; the old must give up that which the new receive, and the old will
not like this. The effectual remedy is so painful that I fear it often may be
postponed too long.

I cannot, therefore, expect with certainty the continuance of our system of

private banking. I am sure that the days of small banks will before many years
come to an end, and that the difficulties of large private banks are very
important. In the mean time it is very important that large private banks should
be well managed. And the present state of banking makes this peculiarly
difficult. The detail of the business is augmenting with an overwhelming
rapidity. More cheques are drawn year by year; not only more absolutely, but
more by each person, and more in proportion to his income. The payments in,
and payments out of a common account are very much more numerous than
they formerly were. And this causes an enormous growth of detail. And
besides, bankers have of late begun almost a new business. They now not only
keep people's money, but also collect their incomes for them. Many persons
live entirely on the income of shares, or debentures, or foreign bonds, which is
paid in coupons, and these are handed in for the bank to collect. Often enough
the debenture, or the certificate, or the bond is in the custody of the banker,
and he is expected to see when the coupon is due, and to cut it off and transmit
it for payment. And the detail of all this is incredible, and it needs a special
machinery to cope with it.

A large joint stock bank, if well-worked, has that machinery. It has at the head of
the executive a general manager who was tried in the detail of banking, who is
devoted to it, and who is content to live almost wholly in it. He thinks of little
else, and ought to think of little else. One of his first duties is to form a
hierarchy of inferior officers, whose respective duties are defined, and to see
that they can perform and do perform those duties. But a private bank of the
type usual in London has no such officer. It is managed by the partners; now
these are generally rich men, are seldom able to grapple with great business of
detail, and are not disposed to spend their whole lives and devote their entire
minds to it if they were able. A person with the accumulated wealth, the
education and the social place of a great London banker would be a 'fool so to
devote himself. He would sacrifice a suitable and a pleasant life for an
unpleasant and an unsuitable life. But still the detail must be well done; and
some one must be specially chosen to watch it and to preside over it, or it will
not be well done. Until now, or until lately, this difficulty has not been fully
felt. The detail of the business of a small private bank was moderate enough to
be superintended effectually by the partners. But, as has been said, the detail of
banking—the proportion of detail to the size of the bank—is everywhere
increasing. The size of the private banks will have to augment if private banks
are not to cease; and therefore the necessity of a good organisation for detail is
urgent. If the bank grows, and simultaneously the detail grows in proportion to
the bank, a frightful confusion is near unless care be taken.

The only organisation which I can imagine to be effectual is that which exists
in the antagonistic establishments. The great private banks will have, I believe,
to appoint in some form or other, and under some name or other, some species
of general manager who will watch, contrive, and arrange the detail for them.
The precise shape of the organisation is immaterial; each bank may have its
own shape, but the man must be there. The true business of the private
partners in such a bank is much that of the directors in a joint stock bank. They
should form a permanent committee to consult with their general manager, to
watch him, and to attend to large loans and points of principle. They should
not themselves be responsible for detail; if they do there will be two evils at
once: the detail will be done badly, and the minds of those who ought to
decide principal things will be distracted from those principal things. There
will be a continual worry in the bank, and in a worry bad loans are apt to be
made and money is apt to be lost.

A subsidiary advantage of this organisation is that it would render the transition

from private banking to joint stock banking easier, if that transition should be
necessary. The one might merge in the other as convenience suggested and as
events required. There is nothing intrusive in discussing this subject. The
organisation of the private is just like that of the joint stock banks; all the public
are interested that it should be good. The want of a good organisation may cause
the failure of one or more of these banks; and such failure of such banks may
intensify a panic, even if it should not cause one.
CHAPTER XI.
The Bill-Brokers.

Under every system of banking, whether that in which the reserve is kept in
many banks, or one in which it is kept in a single bank only, there will always
be a class of persons who examine more carefully than busy bankers can the
nature of different securities; and who, by attending only to one class, come to
be particularly well acquainted with that class. And as these specially qualified
dealers can for the most part lend much more than their own capital, they will
always be ready to borrow largely from bankers and others, and to deposit the
securities which they know to be good as a pledge for the loan. They act thus
as intermediaries between the borrowing public and the less qualified
capitalist; knowing better than the ordinary capitalist which loans are better
and which are worse, they borrow from him, and gain a profit by charging to
the public more than they pay to him.

Many stock brokers transact such business upon a great scale. They lend large
sums on foreign bonds or railway shares or other such securities, and borrow
those sums from bankers, depositing the securities with the bankers, and
generally, though not always, giving their guarantee. But by far the greatest of
these intermediate dealers are the bill-brokers. Mercantile bills are an
exceedingly difficult kind of security to understand. The relative credit of
different merchants is a great 'tradition'; it is a large mass of most valuable
knowledge which has never been described in books and is probably incapable
of being so described. The subject matter of it, too, is shifting and changing
daily; an accurate representation of the trustworthiness of houses at the
beginning of a year might easily be a most fatal representation at the end of it.
In all years there are great changes; some houses rise a good deal and some fall.
And in some particular years the changes are immense; in years like 1871 many
active men make so much money that at the end of the year they are worthy of
altogether greater credit than anyone would have dreamed of giving to them at
the beginning. On the other hand, in years like 1866 a contagious ruin destroys
the trustworthiness of very many firms and persons, and often, especially, of
many who stood highest immediately before. Such years alter altogether an
important part of the mercantile world: the final question of bill-brokers, 'which
bills will be paid and which will not? which bills are second-rate and which
first- rate?' would be answered very differently at the beginning of the year and
at the end. No one can be a good bill-broker who has not learnt the great
mercantile tradition of what is called 'the standing of parties' and who does not
watch personally and incessantly the inevitable changes which from hour to
hour impair the truth of that tradition. The 'credit' of a person—that is, the
reliance which may be placed on his pecuniary fidelity—is a different thing
from his property. No doubt, other things being equal, a rich man is more likely
to pay than a poor man. But on the other hand, there are many men not of much
wealth who are trusted in the market, 'as a matter of business,' for sums much
exceeding the wealth of those who are many times richer. A firm or a person
who have been long known to 'meet their engagements,' inspire a degree of
confidence not dependent on the quantity of his or their property. Persons who
buy to sell again soon are often liable for amounts altogether much greater than
their own capital; and the power of obtaining those sums depends upon their
'respectability,' their 'standing,' and their 'credit,' as the technical terms express
it, and more simply upon the opinion which those who deal with them have
formed of them. The principal mode in which money is raised by traders is by
'bills of exchange;' the estimated certainty of their paying those bills on the day
they fall due is the measure of their credit; and those who estimate that liability
best, the only persons indeed who can estimate it exceedingly well, are the bill-
brokers. And these dealers, taking advantage of their peculiar knowledge,
borrow immense sums from bankers and others; they generally deposit the bills
as a security; and they generally give their own guarantee of the goodness of the
bill: but neither of such practices indeed is essential, though both are the
ordinary rule. When Overends failed, as I have said before, they had borrowed
in this way very largely. There are others now in the trade who have borrowed
quite as much.

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:'
'What is the nature of the agency for country banks?—It is twofold: in the first
place to procure money for country bankers on bills when they have occasion
to borrow on discount, which is not often the case; and in the next place, to
lend the money for the country bankers on bills on discount. The sums of
money which I lend for country bankers on discount are fifty times more than
the sums borrowed for country bankers.

'Do you send London bills into the country for discount?—Yes.

'Do you receive bills from the country upon London in return, at a date, to
be discounted?—Yes, to a very considerable amount, from particular parts
of the country.

'Are not both sets of bills by this means under discount?—No, the bills
received from one part of the country are sent down to another part for
discount.

'And they are not discounted in London?—No. In some parts of the country
there is but little circulation of bills drawn upon London, as in Norfolk,
Suffolk, Essex, Sussex, &c.; but there is there a considerable circulation in
country bank- notes, principally optional notes. In Lancashire there is little or
no circulation of country bank-notes; but there is a great circulation of bills
drawn upon London at two or three months' date. I receive bills to a
considerable amount from Lancashire in particular, and remit them to Norfolk,
Suffolk, &c., where the bankers have large lodgments, and much surplus
money to advance on bills for discount.'

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.'

It was natural enough that the owners of the money should not pay, though the
owner of the bill did, for in almost all ages the borrower has been a seeker
more or less anxious; he has always been ready to pay for those who will find
him the money he is in search of. But the possessor of money has rarely been
willing to pay anything; he has usually and rightly believed that the borrower
would discover him soon.

Notwithstanding other changes, the distribution of the customers of the bill-

brokers in different parts of the country still remains much as Mr. Richardson
described it sixty years ago. For the most part, agricultural counties do not
employ as much money as they save; manufacturing counties, on the other
hand, can employ much more than they save; and therefore the money of
Norfolk or of Somersetshire is deposited with the London bill-brokers, who
use it to discount the bills of Lancashire and Yorkshire.

The old practice of bill-broking, which Mr. Richardson describes, also still
exists. There are many brokers to be seen about Lombard Street with bills
which they wish to discount but which they do not guarantee. They have
sometimes discounted these bills with their own capital, and if they can re-
discount them at a slightly lower rate they gain a difference which at first
seems but trifling, but with which they are quite content, because this system
of lending first and borrowing again immediately enables them to turn their
capital very frequently, and on a few thousand pounds of capital to discount
hundreds of thousands of bills; as the transactions are so many, they can be
content with a smaller profit on each. In other cases, these non-guaranteeing
brokers are only agents who are
seeking money for bills which they have undertaken to get discounted. But in
either case, as far as the banker or other ultimate capitalist is concerned, the
transaction is essentially that which Mr. Richardson describes. The loan by such
banker is a re-discount of the bill; that banker cannot obtain repayment of that
loan, except by the payment of the bill at maturity. He has no claim upon the
agent who brought him the bill. Bill-broking, in this which we may call its
archaic form, is simply one of the modes in which bankers obtain bills which
are acceptable to them and which they re-discount. No reference is made in it
to the credit of the bill-broker; the bills being discounted 'without recourse' to
him are as good if taken from a pauper as if taken from a millionaire. The
lender exercises his own judgment on the goodness of the bill.

But in modern bill-broking the credit of the bill-broker is a vital element. The
lender considers that the bill-broker—no matter whether an individual, a
company, or a firm—has considerable wealth, and he takes the 'bills,' relying
that the broker would not venture that wealth by guaranteeing them unless he
thought them good. The lender thinks, too, that the bill-broker being daily
conversant with bills and bills only, knows probably all about bills: he lends
partly in reliance on the wealth of the broker and partly in reliance on his skill.
He does not exercise much judgment of his own on the bills deposited with him:
he often does not watch them very closely. Probably not one-thousandth part of
the creditors on security of Overend, Gurney and Co., had ever expected to have
to rely on that security, or had ever given much real attention to it. Sometimes,
indeed, the confidence in the bill-brokers goes farther. A considerable number of
persons lend to them, not only without much looking at the security but even
without taking any security. This is the exact reverse of the practice which Mr.
Richardson described in 1810; then the lender relied wholly on the goodness of
the bill, now, in these particular cases, he relies solely on the bill-broker, and
does not take a bill in any shape. Nothing can be more natural or more
inevitable than this change. It was certain that the bill-broker, being supposed to
understand bills well, would be asked by the lenders to evince his reliance on
the bills he offered by giving a guarantee for them. It was also most natural that
the bill- brokers, having by the constant practice of this lucrative trade obtained
high standing and acquired great wealth, should become, more or less, bankers
too, and should receive money on deposit without giving any security for it.

But the effects of the change have been very remarkable. In the practice as
Mr. Richardson described it, there is no peculiarity very likely to affect the
money market. The bill-broker brought bills to the banker, just as others
brought them;
nothing at all could be said as to it except that the Bank must not discount bad
bills, must not discount too many bills, and must keep a good reserve. But the
modern practice introduces more complex considerations. In the trade of bill-
broking, as it now exists, there is one great difficulty; the bill-broker has to pay
interest for all the money which he receives. How this arose we have just seen.
The present lender to the bill-broker at first always used to discount a bill,
which is as much as saying that he was always a lender at interest. When he
came to take the guarantee of the broker, and only to look at the bills as a
collateral security, naturally he did not forego his interest: still less did he
forego it when he ceased to take security at all. The bill-broker has, in one
shape or other, to pay interest on every sixpence left with him, and that
constant habit of giving interest has this grave consequence: the bill-broker
cannot afford to keep much money unemployed. He has become a banker
owing large sums which he may be called on to repay, but he cannot hold as
much as an ordinary banker, or nearly as much, of such sums in cash, because
the loss of interest would ruin him.
Competition reduces the rate which the bill-broker can charge, and raises the
rate which the bill-broker must give, so that he has to live on a difference
exceedingly narrow. And if he constantly kept a large hoard of barren money he
would soon be found in the 'Gazette.'

The difficulty is aggravated by the terms upon which a great part of the money
at the bill-brokers is deposited with them. Very much of it is repayable at
demand, or at very short notice. The demands on a broker in periods of alarm
may consequently be very great, and in practice they often, are so. In times of
panic there is always a very heavy call, if not a run upon them; and in
consequence of the essential nature of their business, they cannot constantly
keep a large unemployed reserve of their own in actual cash, they are obliged
to ask help of some one who possesses that cash. By the conditions of his
trade, the bill-broker is forced to belong to a class of 'dependent money-
dealers,' as we may term them, that is, of dealers who do not keep their own
reserve, and must, therefore, at every crisis of great difficulty revert to others.

In a natural state of banking, that in which all the principal banks kept their own
reserve, this demand of the bill-brokers and other dependent dealers would be
one of the principal calls on that reserve. At every period of incipient panic the
holders of it would perceive that it was of great importance to themselves to
support these dependent dealers. If the panic destroyed those dealers it would
grow by what it fed upon (as is its nature), and might probably destroy also the
bankers, the holders of the reserve. The public terror at such times is
indiscriminate. When one house of good credit has perished, other houses of
equal credit though of different nature are in danger of perishing. The many
holders of the banking reserve would under the natural system of banking be
obliged to advance out of that reserve to uphold bill-brokers and similar
dealers. It would be essential to their own preservation not to let such dealers
fail, and the protection of such dealers would therefore be reckoned among the
necessary purposes for which they retained that reserve.

Nor probably would the demands on the bill-brokers in such a system of

banking be exceedingly formidable. Considerable sums would no doubt be
drawn from them, but there would be no special reason why money should be
demanded from them more than from any other money dealers. They would
share the panic with the bankers who kept the reserve, but they would not feel
it more than the bankers. In each crisis the set of the storm would be
determined by the cause which had excited it, but there would not be anything
in the nature of bill- broking to attract the advance of the alarm peculiarly to
them. They would not be more likely to suffer than other persons; the only
difference would be that when they did suffer, having no adequate reserve of
their own, they would be obliged to ask the aid of others.

But under a one-reserve system of banking, the position of the bill-brokers is

much more singular and much more precarious. In fact, in Lombard Street, the
principal depositors of the bill-brokers are the bankers, whether of London, or
of provincial England, or of Scotland, or Ireland. Such deposits are, in fact, a
portion of the reserve of these bankers; they make an essential part of the sums
which they have provided and laid by against a panic. Accordingly, in every
panic these sums are sure to be called in from the bill-brokers; they were
wanted to be used by their owners in time of panic, and in time of panic they
ask for them. 'Perhaps it may be interesting,' said Alderman Salomons,
speaking on behalf of the London and Westminster Bank, after the panic of
1857, to the committee, 'to know that, on November 11, we held discounted
bills for brokers to the amount of 5,623,000 L. Out of these bills 2,800,000 L.
matured between November 1 and December 4; 2,000,000 L. more between
December 1 and December 31; consequently we were prepared merely by the
maturing of our bills of exchange for any demand that might come upon us.'
This is not indeed a direct withdrawal of money on deposit, but its principal
effect is identical. At the beginning of the time the London and Westminster
Bank had lent 5,000,000 L. more to the bill-brokers than they had at the end of
it; and that 5,000,000 L. the bank had added to its reserve against a time of
difficulty.
The intensity of the demand on the bill-broker is aggravated therefore by our
peculiar system of banking. Just at the moment when, by the nature of their
business, they have to resort to the reserves of bankers for necessary support,
the bankers remove from them large sums in order to strengthen those reserves.
A great additional strain is thrown upon them just at the moment when they are
least able to bear it; and it is thrown by those who under a natural system of
banking would not aggravate the pressure on the bill-brokers, but relieve it.

And the profits of bill-broking are proportionably raised. The reserves of the
bankers so deposited with the bill-broker form a most profitable part of his
business; they are on the whole of very large amount, and at all times, except
those of panic, may well be depended upon. The bankers are pretty sure to
keep them there, just because they must keep a reserve, and they consider it
one of the best places in which to keep it. Under a more natural system, no part
of the banking reserve would ever be lodged at the brokers. Bankers would
deposit with the brokers only their extra money, the money which they
considered they could safely lend, and which they would not require during a
panic. In the eye of the banker, money at the brokers would then be one of the
investments of cash, it would not be a part of such cash. The deposits of bill-
brokers and the profits of bill-broking are increased by our present system, just
in proportion as the dangers of bill-brokers during a panic are increased by it.

The strain, too, on our banking reserve which is caused by the demands of the
bill-brokers, is also more dangerous than it would be under a natural system,
because that reserve is in itself less. The system of keeping the entire ultimate
reserve at a single bank, undoubtedly diminishes the amount of reserve which
is kept. And exactly on that very account the danger of any particular demand
on that reserve is augmented, because the magnitude of the fund upon which
that demand falls is diminished. So that our one-reserve system of banking
combines two evils: first, it makes the demand of the brokers upon the final
reserve greater, because under it so many bankers remove so much money
from the brokers; and under it also the final reserve is reduced to its minimum
point, and the entire system of credit is made more delicate, and more
sensitive.

The peculiarity, indeed, of the effects of the one reserve is indeed even greater
in this respect. Under the natural system, the bill-brokers would be in no respect
the rivals of the bankers which kept the ultimate reserve. They would be rather
the agents for these bankers in lending upon certain securities which they did
not themselves like, or on which they did not feel competent to lend safely. The
bankers who in time of panic had to help them would in ordinary times derive
much advantage from them. But under our present system all this is reversed.
The Bank of England never deposits any money with the bill-brokers; in
ordinary times it never derives any advantage from them. On the other hand, as
the Bank carries on itself a large discount business, as it considers that it is
itself competent to lend on all kinds of bills, the bill-brokers are its most
formidable rivals. As they constantly give high rates for money it is necessary
that they should undersell the Bank, and in ordinary times they do undersell it.
But as the Bank of England alone keeps the final banking reserve, the bill-
brokers of necessity have to resort to that final reserve; so that at every panic,
and by the essential constitution of the money market, the Bank of England has
to help, has to maintain in existence, the dealers, who never in return help the
Bank at any time, but who are in ordinary times its closest competitors and its
keenest rivals.

It might be expected that such a state of things would cause much discontent at
the Bank of England, and in matter of fact there has been much discussion
about it, and much objection taken to it. After the panic of 1857, this was so
especially. During that panic, the Bank of England advanced to the bill-brokers
more than 9,000,000 L., though their advances to bankers, whether London or
country, were only 8,000,000 L.; and, not unnaturally, the Bank thought it
unreasonable that so large an inroad upon their resources should be made by
their rivals. In consequence, in 1858 they made a rule that they would only
advance to the bill- brokers at certain seasons of the year, when the public
money is particularly large at the bank, and that at other times any application
for an advance should be considered exceptional, and dealt with accordingly.
And the object of that regulation was officially stated to be 'to make them keep
their own reserve, and not to be dependent on the Bank of England.' As might
be supposed, this rule was exceedingly unpopular with the brokers, and the
greatest of them, Overend, Gurney and Co., resolved on a strange policy in the
hope of abolishing it. They thought they could frighten the Bank of England,
and could show that if they were dependent on it, it was also dependent on
them. They accordingly accumulated a large deposit at the Bank to the amount
of 3,000,000 L., and then withdrew it all at once. But this policy had no effect,
except that of exciting a distrust of 'Overends': the credit of the Bank of
England was not diminished; Overends had to return the money in a few days,
and had the dissatisfaction of feeling that they had in vain attempted to assail
the solid basis of everyone's credit, and that everyone disliked them for doing
so. But though this un- conceived attempt failed as it deserved, the rule itself
could not be maintained.
The Bank does, in fact, at every period of pressure, advance to the bin-brokers;
the case may be considered 'exceptional,' but the advance is always made if the
security offered is really good. However much the Bank may dislike to aid
their rivals, yet they must aid them; at a crisis they feel that they would only be
aggravating incipient demand, and be augmenting the probable pressure on
themselves if they refused to do so.

I shall be asked if this anomaly is inevitable, and I am afraid that for practical
purposes we must consider it to be so. It may be lessened; the bill-brokers may,
and should, discourage as much as they can the deposit of money with them on
demand, and encourage the deposit of it at distant fixed dates or long notice.
This will diminish the anomaly, but it will not cure it. Practically, bin-brokers
cannot refuse to receive money at call. In every market a dealer must conduct
his business according to the custom of the market, or he will not be able to
conduct it at all. All the bin-brokers can do is to offer better rates for more
permanent money, and this (though possibly not so much as might be wished)
they do at present. In its essence, this anomaly is, I believe, an inevitable part
of the system of banking which history has given us, and which we have only
to make the best of, since we cannot alter it.
CHAPTER XII.
The Principles Which Should Regulate the Amount of the Banking
Reserve to Be Kept by the Bank of England.

There is a very common notion that the amount of the reserve which the Bank
of England ought to keep can be determined at once from the face of their
weekly balance sheet. It is imagined that you have only to take the liabilities of
the Banking department, and that a third or some other fixed proportion will in
all cases be the amount of reserve which the Bank should keep against those
liabilities. But to this there are several objections, some arising from the
general nature of the banking trade, and others from the special position of the
Bank of England.

That the amount of the liabilities of a bank is a principal element in

determining the proper amount of its reserve is plainly true; but that it is the
only element by which that amount is determined is plainly false. The intrinsic
nature of these liabilities must be considered, as well as their numerical
quantity. For example, no one would say that the same amount of reserve
ought to be kept against acceptances which cannot be paid except at a certain
day, and against deposits at call, which may be demanded at any moment. If a
bank groups these liabilities together in the balance-sheet, you cannot tell the
amount of reserve it ought to keep. The necessary information is not given you.

Nor can you certainly determine the amount of reserve necessary to be kept
against deposits unless you know something as to the nature of these deposits. If
out of 3,000,000 L. of money, one depositor has 1,000,000 L. to his credit, and
may draw it out when he pleases, a much larger reserve will be necessary
against that liability of 1,000,000 L. than against the remaining 2,000,000 L.
The intensity of the liability, so to say, is much greater; and therefore the
provision in store must be much greater also. On the other hand, supposing that
this single depositor is one of calculable habits—suppose that it is a public
body, the time of
whose demands is known, and the time of whose receipts is known also—this
single liability requires a less reserve than that of an equal amount of ordinary
liabilities. The danger that it will be called for is much less; and therefore the
security taken against it may be much less too. Unless the quality of the
liabilities is considered as well as their quantity, the due provision for their
payment cannot be determined.

These are general truths as to all banks, and they have a very particular
application to the Bank of England. The first application is favourable to the
Bank; for it shows the danger of one of the principal liabilities to be much
smaller than it seems. The largest account at the Bank of England is that of the
English Government; and probably there has never been any account of which
it was so easy in time of peace to calculate the course. All the material facts
relative to the English revenue, and the English expenditure, are exceedingly
well known; and the amount of the coming payments to and from this account
are always, except in war times, to be calculated with wonderful accuracy. In
war, no doubt, this is all reversed; the account of a government at war is
probably the most uncertain of all accounts, especially of a government of a
scattered empire, like the English, whose places of outlay in time of war are so
many and so distant, and the amount of whose payments is therefore so
incalculable. Ordinarily, however, there is no account of which the course can
be so easily predicted; and therefore no account which needs in ordinary times
so little reserve. The principal payments, when they are made, are also of the
most satisfactory kind to a banker; they are, to a great extent, made to another
account at his bank. These largest ordinary payments of the Government are
the dividends on the debt, and these are mostly made to bankers who act as
agents for the creditors of the nation. The payment of the dividends for the
Government is, therefore, in great part a transfer from the account of the
Government to the accounts of the various bankers. A certain amount no doubt
goes almost at once to the non-banking classes; to those who keep coin and
notes in house, and have no account at any bank. But even this amount is
calculable, for it is always nearly the same. And the entire operation is, to
those who can watch it, singularly invariable time after time.

But it is important to observe, that the published accounts of the Bank give no
such information to the public as will enable them to make their own
calculations. The account of which we have been speaking is the yearly
account of the English Government—what we may call the Budget account,
that of revenue and expenditure. And the laws of this are, as we have shown,
already
known. But under the head 'Public Deposits' in the accounts of the Bank, are
contained also other accounts, and particularly that of the Secretary for India in
Council, the laws of which must be different and are quite unknown. The
Secretary for India is a large lender on its account. If any one proposed to give
such power to the Chancellor of the Exchequer, there would be great fear and
outcry. But so much depends on habit and tradition, that the India Office on
one side of Downing Street can do without remark, and with universal assent,
what it would be thought 'unsound' and extravagant to propose that the other
side should do. The present India Office inherits this independence from the
old Board of the Company, which, being mercantile and business-like, used to
lend its own money on the Stock Exchange as it pleased; the Council of India,
its successor, retains the power. Nothing can be better than that it should be
allowed to do as it likes; but the mixing up the account of a body which has
such a power, and which draws money from India, with that of the Home
government clearly prevents the general public from being able to draw
inferences as to the course of the combined account from its knowledge of
home finance only. The account of 'public deposits' in the Bank return includes
other accounts too, as the Savings' Bank balance, the Chancery Funds account,
and others; and in consequence, till lately the public had but little knowledge
of the real changes of the account of our Government, properly so called. But
Mr. Lowe has lately given us a weekly account, and from this, and not from
the Bank account, we are able to form a judgment. This account and the return
of the Bank of England, it is true, unhappily appear on different days; but
except for that accident our knowledge would be perfect; and as it is, for
almost all purposes what we know is reasonably sufficient. We can now
calculate the course of the Government account nearly as well as it is possible to
calculate it.

So far, as we have said, an analysis of the return of the Bank of England is very
favourable to the Bank. So great a reserve need not usually be kept against the
Government account as if it were a common account. We know the laws of its
changes peculiarly well: we can tell when its principal changes will happen with
great accuracy; and we know that at such changes most of what is paid away by
the Government is only paid to other depositors at the Bank, and that it will
really stay at the Bank, though under another name. If we look to the private
deposits of the Bank of England, at first sight we may think that the result is the
same. By far the most important of these are the 'Bankers' deposits'; and, for the
most part, these deposits as a whole are likely to vary very little. Each banker,
we will suppose, keeps as little as he can, but in all domestic transactions
payment from one is really payment to the other. All the most important
transactions in the country are settled by cheques; these cheques are paid in to
the 'clearing-house,' and the balances resulting from them are settled by
transfers from the account of one banker to another at the Bank of England.
Payments out of the bankers' balances, therefore, correspond with payments in.
As a whole, the deposit of the bankers' balances at the Bank of England would
at first sight seem to be a deposit singularly stable.

Indeed, they would seem, so to say, to be better than stable. They augment when
everything else tends to diminish. At a panic, when all other deposits are likely
to be taken away, the bankers' deposits, augment; in fact they did so in 1866,
though we do not know the particulars; and it is natural that they should so
increase. At such moments all bankers are extremely anxious, and they try to
strengthen themselves by every means in their power; they try to have as much
money as it is possible at command; they augment their reserve as much as they
can, and they place that reserve at the Bank of England. A deposit which is not
likely to vary in ordinary times, and which is likely to augment in times of
danger, seems, in some sort, the model of a deposit. It might seem not only that
a large proportion of it might be lent, but that the whole of it might be so. But a
further analysis will, as I believe, show that this conclusion is entirely false; that
the bankers' deposits are a singularly treacherous form of liability; that the
utmost caution ought to be used in dealing with them; that, as a rule, a less
proportion of them ought to be lent than of ordinary deposits.

The easiest mode of explaining anything is, usually, to exemplify it by a single

actual case. And in this subject, fortunately, there is a most conspicuous case
near at hand. The German Government has lately taken large sums in bullion
from this country, in part from the Bank of England, and in part not, according
as it chose. It was in the main well advised, and considerate in its action; and
did not take nearly as much from the Bank as it might, or as would have been
dangerous. Still it took large sums from the Bank; and it might easily have
taken more. How then did the German Government obtain this vast power over
the Bank? The answer is, that it obtained it by means of the bankers' balances,
and that it did so in two ways.

First, the German Government had a large balance of its own lying at a
particular Joint Stock Bank. That bank lent this balance at its own discretion, to
bill- brokers or others, and it formed a single item in the general funds of the
London market. There was nothing special about it, except that it belonged to a
foreign government, and that its owner was always likely to call it in, and
sometimes did
so. As long as it stayed unlent in the London Joint Stock Bank, it increased the
balances of that bank at the Bank of England; but so soon as it was lent, say, to
a bill-broker, it increased the bill-broker's balance; and as soon as it was
employed by the bill-broker in the discount of bills, the owners of those bills
paid it to their credit at their separate banks, and it augmented the balances of
those bankers at the Bank of England. Of course if it were employed in the
discount of bills belonging to foreigners, the money might be taken abroad,
and by similar operations it might also be transferred to the English provinces
or to Scotland.
But, as a rule, such money when deposited in London, for a considerable time
remains in London; and so long as it does so, it swells the aggregate balances
of the body of bankers at the Bank of England. It is now in the balance of one
bank, now of another, but it is always dispersed about those balances
somewhere. The evident consequence is that this part of the bankers' balances
is at the mercy of the German Government when it chooses to apply for it.
Supposing, then, the sum to be three or four millions and I believe that on
more than one occasion in the last year or two it has been quite as much, if not
more—that sum might at once be withdrawn from the Bank of England. In this
case the Bank of England is in the position of a banker who is liable for a large
amount to a single customer, but with this addition, that it is liable for an
unknown amount. The German Government, as is well known, keeps its
account (and a very valuable one it must be) at the London Joint Stock Bank;
but the Bank of England has no access to the account of the German
Government at that bank; they cannot tell how much German money is lying
to the credit there. Nor can the Bank of England infer much from the balance
of the London Joint Stock Bank in their Bank, for the German money was
probably paid in various sums to that bank, and lent out again in other various
sums. It might to some extent augment that bank's balance at the Bank of
England, or it might not, but it certainly would not be so much added to that
balance; and inspection of that bank's balance would not enable the Bank of
England to determine even in the vaguest manner what the entire sum was for
which it might be asked at any moment. Nor would the inspection of the
bankers' balances as a whole lead to any certain and sure conclusions.
Something might be inferred from them, but not anything certain.
Those balances are no doubt in a state of constant fluctuation; and very possibly
during the time that the German money was coming in some other might be
going out. Any sudden increase in the bankers' balances would be a probable
indication of new foreign money, but new foreign money might come in without
causing an increase, since some other and contemporaneous cause might effect a
counteracting decrease.
This is the first, and the plainest way in which the German Government could
take, and did take, money from this country; and in which it might have broken
the Bank of England if it had liked. The German Government had money here
and took it away, which is very easy to understand. But the Government also
possessed a far greater power, of a somewhat more complex kind. It was the
owner of many debts from England. A large part of the 'indemnity' was paid by
France to Germany in bills on England, and the German Government, as those
bills became due, acquired an unprecedented command over the market. As
each bill arrived at maturity, the German Government could, if it chose, take
the proceeds abroad; and it could do so in bullion, as for coinage purposes it
wanted bullion. This would at first naturally cause a reduction in the bankers'
balances; at least that would be its tendency. Supposing the German
Government to hold bill A, a good bill, the banker at whose bank bill A was
payable would have to pay it; and that would reduce his balance; and as the sum
so paid would go to Germany, it would not appear to the credit of any other
banker: the aggregate of the bankers' balances would thus be reduced. But this
reduction would not be permanent. A banker who has to pay 100,000 L. cannot
afford to reduce his balance at the Bank of England 100,000 L.; suppose that his
liabilities are 2,000,000 L., and that as a rule he finds it necessary to keep at the
Bank one- tenth of these liabilities, or 200,000 L., the payment of 100,000 L.
would reduce his reserve to 100,000 L.; but his liabilities would be still
1,900,000 L. and therefore to keep up his tenth he would have 90,000 L. to
find. His process for finding it is this: he calls in, say, a loan to the bill-brokers;
and if no equal additional money is contemporaneously carried to these brokers
(which in the case of a large withdrawal of foreign money is not probable),
they must reduce their business and discount less. But the effect of this is to
throw additional business on the Bank of England. They hold the ultimate
reserve of the country, and they must discount out of it if no one else will: if
they declined to do so there would be panic and collapse. As soon, therefore, as
the withdrawal of the German money reduces the bankers' balances, there is a
new demand on the Bank for fresh discounts to make up those balances. The
drain on the Bank is twofold: first, the banking reserve is reduced by
exportation of the German money, which reduces the means of the Bank of
England; and then out of those reduced means the Bank of England has to
make greater advances.

The same result may be arrived at more easily. Supposing any foreign
Government or person to have any sort of securities which he can pledge in the
market, that operation gives it, or him, a credit on some banker, and enables it,
or him, to take money from the banking reserve at the Bank of England, and
from
the bankers' balances; and to replace the bankers' balances at their inevitable
minimum, the Bank of England must lend. Every sudden demand on the country
causes, in proportion to its magnitude, this peculiar effect. And this is the reason
why the Bank of England ought, I think, to deal most cautiously and delicately
with their banking deposits. They are the symbol of an indefinite liability: by
means of them, as we see, an amount of money so great that it is impossible to
assign a limit to it might be abstracted from the Bank of England. As the Bank
of England lends money to keep up the bankers' balances, at their usual amount,
and as by means of that usual amount whatever sum foreigners can get credit for
may be taken from us, it is not possible to assign a superior limit (to use the
scientific word) to the demands which by means of the bankers' balances may
be made upon the Bank of England.

The result comes round to the simple point, on which this book is a
commentary: the Bank of England, by the effect of a long history, holds the
ultimate cash reserve of the country; whatever cash the country has to pay
comes out of that reserve, and therefore the Bank of England has to pay it. And
it is as the Bankers' Bank that the Bank of England has to pay it, for it is by
being so that it becomes the keeper of the final cash reserve.

Some persons have been so much impressed with such considerations as these,
that they have contended that the Bank of England ought never to lend the
'bankers' balances' at all, that they ought to keep them intact, and as an unused
deposit. I am not sure, indeed, that I have seen that extreme form of the
opinion in print, but I have often heard it in Lombard Street, from persons very
influential and very qualified to judge; even in print I have seen close
approximations to it. But I am satisfied that the laying down such a 'hard and
fast' rule would be very dangerous; in very important and very changeable
business rigid rules are apt to be often dangerous. In a panic, as has been said,
the bankers' balances greatly augment. It is true the Bank of England has to
lend the money by which they are filled. The banker calls in his money from
the bill- broker, ceases to re-discount for that broker, or borrows on securities,
or sells securities; and in one or other of these ways he causes a new demand
for money which can only at such times be met from the Bank of England.
Every one else is in want too. But without inquiring into the origin of the
increase at panics, the amount of the bankers' deposits in fact increases very
rapidly; an immense amount of unused money is at such moments often poured
by them into the Bank of England. And nothing can more surely aggravate the
panic than to forbid the Bank of England to lend that money. Just when money
is most scarce you
happen to have an unusually large fund of this particular species of money,
and you should lend it as fast as you can at such moments, for it is ready
lending which cures panics, and non-lending or niggardly lending which
aggravates them.

At other times, particularly at the quarterly payment of the dividends, an

absolute rule which laid down that the bankers' balances were never to be lent,
would be productive of great inconvenience. A large sum is just then paid from
the Government balance to the bankers' balances, and if you permitted the
Bank to lend it while it was still in the hands of the Government, but forbad
them to lend it when it came into the hands of the bankers, a great tilt upwards
in the value of money would be the consequence, for a most important amount
of it would suddenly have become ineffective.

But the idea that the bankers' balances ought never to be lent is only a natural
aggravation of the truth that these balances ought to be used with extreme
caution; that as they entail a liability peculiarly great and singularly difficult
to foresee, they ought never to be used like a common deposit.

It follows from what has been said that there are always possible and very
heavy demands on the Bank of England which are not shown in the account of
the Banking department at all: these demands may be greatest when the
liabilities shown by that account are smallest, and lowest when those liabilities
are largest. If, for example, the German Government brings bills or other good
securities to this market, obtains money with them, and removes that money
from the market in bullion, that money may, if the German Government
choose, be taken wholly from the Bank of England. If the wants of the German
Government be urgent, and if the amount of gold 'arrivals,' that is, the gold
coming here from the mining countries, be but small, that gold will be taken
from the Bank of England, for there is no other large store in the country. The
German Government is only a conspicuous example of a foreign power which
happens lately to have had an unusual command of good securities, and an
unusually continuous wish to use them in England. Any foreign state hereafter
which wants cash will be likely to come here for it; so long as the Bank of
France should continue not to pay in specie, a foreign state which wants it
must of necessity come to London for it.

And no indication of the likelihood or unlikelihood of that want can be found

in the books of the Bank of England.
What is almost a revolution in the policy of the Bank of England necessarily
follows: no certain or fixed proportion of its liabilities can in the present times
be laid down as that which the Bank ought to keep in reserve. The old notion
that one-third, or any other such fraction, is in all cases enough, must be
abandoned. The probable demands upon the Bank are so various in amount,
and so little disclosed by the figures of the account, that no simple and easy
calculation is a sufficient guide. A definite proportion of the liabilities might
often be too small for the reserve, and sometimes too great. The forces of the
enemy being variable, those of the defence cannot always be the same.

I admit that this conclusion is very inconvenient. In past times it has been a
great aid to the Bank and to the public to be able to decide on the proper policy
of the Bank from a mere inspection of its account. In that way the Bank knew
easily what to do and the public knew easily what to foresee. But, unhappily,
the rule which is most simple is not always the rule which is most to be relied
upon. The practical difficulties of life often cannot be met by very simple rules;
those dangers being complex and many, the rules for encountering them cannot
well be single or simple. A uniform remedy for many diseases often ends by
killing the patient.

Another simple rule often laid down for the management of the Bank of
England must now be abandoned also. It has been said that the Bank of
England should look to the market rate, and make its own rate conform to that.
This rule was, indeed, always erroneous. The first duty of the Bank of England
was to protect the ultimate cash of the country, and to raise the rate of interest
so as to protect it. But this rule was never so erroneous as now, because the
number of sudden demands upon that reserve was never formerly so great. The
market rate of Lombard Street is not influenced by those demands. That rate is
determined by the amount of deposits in the hands of bill-brokers and bankers,
and the amount of good bills and acceptable securities offered at the moment.
The probable efflux of bullion from the Bank scarcely affects it at all; even the
real efflux affects it but little; if the open market did not believe that the Bank
rate would be altered in consequence of such effluxes the market rate would
not rise. If the Bank choose to let its bullion go unheeded, and is seen to be
going so to choose, the value of money in Lombard Street will remain
unaltered. The more numerous the demands on the Bank for bullion, and the
more variable their magnitude, the more dangerous is the rule that the Bank
rate of discount should conform to the market rate. In former quiet times the
influence, or the partial influence, of that rule has often produced grave
disasters. In the present difficult
times an adherence to it is a recipe for making a large number of panics.

A more distinct view of abstract principle must be taken before we can fix on the
amount of the reserve which the Bank of England ought to keep. Why should a
bank keep any reserve? Because it may be called on to pay certain liabilities at
once and in a moment. Why does any bank publish an account? In order to
satisfy the public that it possesses cash—or available securities—enough to
meet its liabilities. The object of publishing the account of the banking
department of the Bank of England is to let the nation see how the national
reserve of cash stands, to assure the public that there is enough and more than
enough to meet not only all probable calls, but all calls of which there can be a
chance of reasonable apprehension. And there is no doubt that the publication
of the Bank account gives more stability to the money market than any other
kind of precaution would give. Some persons, indeed, feared that the opposite
result would happen; they feared that the constant publication of the incessant
changes in the reserve would terrify and harass the public mind. An old banker
once told me: 'Sir, I was on Lord Althorp's committee which decided on the
publication of the Bank account, and I voted against it. I thought it would
frighten people. But I am bound to own that the committee was right and I was
wrong, for that publication has given the money market a greater sense of
security than anything else which has happened in my time.' The diffusion of
confidence through Lombard Street and the world is the object of the
publication of the Bank accounts and of the Bank reserve.

But that object is not attained if the amount of that reserve when so published
is not enough to tranquillise people. A panic is sure to be caused if that reserve is,
from whatever cause, exceedingly low. At every moment there is a certain
minimum which I will call the apprehension minimum,' below which the
reserve cannot fall without great risk of diffused fear; and by this I do not mean
absolute panic, but only a vague fright and timorousness which spreads itself
instantly, and as if by magic, over the public mind. Such seasons of incipient
alarm are exceedingly dangerous, because they beget the calamities they dread.
What is most feared at such moments of susceptibility is the destruction of
credit; and if any grave failure or bad event happens at such moments, the
public fancy seizes on it, there is a general run, and credit is suspended. The
Bank reserve then never ought to be diminished below the 'apprehension point.'
And this is as much as to say, that it never ought very closely to approach that
point; since, if it gets very near, some accident may easily bring it down to that
point and cause the evil that is feared.
There is no 'royal road' to the amount of the 'apprehension minimum': no
abstract argument, and no mathematical computation will teach it to us. And we
cannot expect that they should. Credit is an opinion generated by circumstances
and varying with those circumstances. The state of credit at any particular time
is a matter of fact only to be ascertained like other matters of fact; it can only be
known by trial and inquiry. And in the same way, nothing but experience can
tell us what amount of 'reserve' will create a diffused confidence; on such a
subject there is no way of arriving at a just conclusion except by incessantly
watching the public mind, and seeing at each juncture how it is affected.

Of course in such a matter the cardinal rule to be observed is, that errors of
excess are innocuous but errors of defect are destructive. Too much reserve only
means a small loss of profit, but too small a reserve may mean 'ruin.' Credit
may be at once shaken, and if some terrifying accident happen to supervene,
there may be a run on the Banking department that may be too much for it, as
in 1857 and 1866, and may make it unable to pay its way without assistance—
as it was in those years.

And the observance of this maxim is the more necessary because the
'apprehension minimum' is not always the same. On the contrary, in times
when the public has recently seen the Bank of England exposed to remarkable
demands, it is likely to expect that such demands may come again.
Conspicuous and recent events educate it, so to speak; it expects that much
will be demanded when much has of late often been demanded, and that little
will be so, when in general but little has been so. A bank like the Bank of
England must always, therefore, be on the watch for a rise, if I may so express
it, in the apprehension minimum; it must provide an adequate fund not only to
allay the misgivings of to-day, but also to allay what may be the still greater
misgivings of to-morrow. And the only practical mode of obtaining this object
is—to keep the actual reserve always in advance of the minimum
'apprehension' reserve.

And this involves something much more. As the actual reserve is never to be
less, and is always, if possible, to exceed by a reasonable amount the
'minimum' apprehension reserve, it must when the Bank is quiet and taking no
precautions very considerably exceed that minimum. All the precautions of the
Bank take time to operate. The principal precaution is a rise in the rate of
discount, and such a rise certainly does attract money from the Continent and
from all the world much faster than could have been anticipated. But it does
not act instantaneously; even the right rate, the ultimately attractive rate,
requires an
interval for its action, and before the money can come here. And the right rate
is often not discovered for some time. It requires several 'moves,' as the phrase
goes, several augmentations of the rate of discount by the Bank, before the
really effectual rate is reached, and in the mean time bullion is ebbing away
and the 'reserve' is diminishing. Unless, therefore, in times without precaution
the actual reserve exceed the 'apprehension minimum' by at least the amount
which may be taken away in the inevitable interval, and before the available
precautions begin to operate, the rule prescribed will be infringed, and the
actual reserve will be less than the 'apprehension' minimum. In time the
precautions taken may attract gold and raise the reserve to the needful amount,
but in the interim the evils may happen against which the rule was devised,
diffused apprehension may arise, and then any unlucky accident may cause
many calamities.

I may be asked, 'What does all this reasoning in practice come to? At the
present moment how much reserve do you say the Bank of England should
keep? state your recommendation clearly (I know it will be said) if you wish
to have it attended to.' And I will answer the question plainly, though in so
doing there is a great risk that the principles I advocate may be in some degree
injured through some mistake I may make in applying them.

I should say that at the present time the mind of the monetary world would
become feverish and fearful if the reserve in the Banking department of the
Bank of England went below 10,000,000 L. Estimated by the idea of old times,
by the idea even of ten years ago, that sum, I know, sounds extremely large. My
own nerves were educated to smaller figures, because I was trained in times
when the demands on us were less, when neither was so much reserve wanted
nor did the public expect so much. But I judge from such observations as I can
make of the present state of men's minds, that in fact, and whether justifiably or
not, the important and intelligent part of the public which watches the Bank
reserve becomes anxious and dissatisfied if that reserve falls below 10,000,000
L. That sum, therefore, I call the 'apprehension minimum' for the present times.
Circumstances may change and may make it less or more, but according to
the most careful estimate I can make, that is what I should call it now.

It will be said that this estimate is arbitrary and these figures are conjectures. I
reply that I only submit them for the judgment of others. The main question is
one of fact—Does not the public mind begin to be anxious and timorous just
where I have placed the apprehension point? and the deductions from that are
comparatively simple questions of mixed fact and reasoning. The final appeal in
such cases necessarily is to those who are conversant with and who closely
watch the facts.

I shall perhaps be told also that a body like the Court of the Directors of the
Bank of England cannot act on estimates like these: that such a body must have
a plain rule and keep to it. I say in reply, that if the correct framing of such
estimates is necessary for the good guidance of the Bank, we must make a
governing body which can correctly frame such estimates. We must not suffer
from a dangerous policy because we have inherited an imperfect form of
administration. I have before explained in what manner the government of the
Bank of England should, I consider, be strengthened, and that government so
strengthened would, I believe, be altogether competent to a wise policy.

Then I should say, putting the foregoing reasoning into figures, that the Bank
ought never to keep less than 11,000,000 L.. or 11,500,000 L. since experience
shows that a million, or a million and a half, may be taken from us at any time. I
should regard this as the practical minimum at which, roughly of course, the
Bank should aim, and which it should try never to be below. And, in order not
to be below 11,500,000 L., the Bank must begin to take precautions when the
reserve is between 14,000,000 L. and 15,000,000 l.; for experience shows that
between 2,000,000 L. and 3,000,000 L. may, probably enough, be withdrawn
from the Bank store before the right rate of interest is found which will attract
money from abroad, and before that rate has had time to attract it. When the
reserve is between 14,000,000 L. and 15,000,000 L., and when it begins to be
diminished by foreign demand, the Bank of England should, I think, begin to
act, and to raise the rate of interest.
CHAPTER XIII.
Conclusion.

I know it will be said that in this work I have pointed out a deep malady, and
only suggested a superficial remedy. I have tediously insisted that the natural
system of banking is that of many banks keeping their own cash reserve, with
the penalty of failure before them if they neglect it. I have shown that our
system is that of a single bank keeping the whole reserve under no effectual
penalty of failure. And yet I propose to retain that system, and only attempt to
mend and palliate it.

I can only reply that I propose to retain this system because I am quite sure that
it is of no manner of use proposing to alter it. A system of credit which has
slowly grown up as years went on, which has suited itself to the course of
business, which has forced itself on the habits of men, will not be altered
because theorists disapprove of it, or because books are written against it. You
might as well, or better, try to alter the English monarchy and substitute a
republic, as to alter the present constitution of the English money market,
founded on the Bank of England, and substitute for it a system in which each
bank shall keep its own reserve. There is no force to be found adequate to so
vast a reconstruction, and so vast a destructions and therefore it is useless
proposing them.

No one who has not long considered the subject can have a notion how much
this dependence on the Bank of England is fixed in our national habits. I have
given so many illustrations in this book that I fear I must have exhausted my
reader's patience, but I will risk giving another. I suppose almost everyone
thinks that our system of savings' banks is sound and good. Almost everyone
would be surprised to hear that there is any possible objection to it. Yet see what
it amounts to. By the last return the savings' banks—the old and the Post Office
together—contain about 60,000,000 L. of deposits, and against this they hold in
the funds securities of the best kind. But they hold no cash whatever. They
have of course the petty cash about the various branches necessary for daily
work. But of cash in ultimate reserve—cash in reserve against a panic—the
savings' banks have not a sixpence. These banks depend on being able in a
panic to realise their securities. But it has been shown over and over again, that
in a panic such securities can only be realised by the help of the Bank of
England—that it is only the Bank with the ultimate cash reserve which has at
such moments any new money, or any power to lend and act. If in a general
panic there were a run on the savings' banks, those banks could not sell
100,000 L. of Consols without the help of the Bank of England; not holding
themselves a cash reserve for times of panic, they are entirely dependent on the
one Bank which does hold that reserve.

This is only a single additional instance beyond the innumerable ones given,
which shows how deeply our system of banking is fixed in our ways of
thinking. The Government keeps the money of the poor upon it, and the nation
fully approves of their doing so. No one hears a syllable of objection. And every
practical man—every man who knows the scene of action—will agree that our
system of banking, based on a single reserve in the Bank of England, cannot be
altered, or a system of many banks, each keeping its own reserve, be substituted
for it. Nothing but a revolution would effect it, and there is nothing to cause a
revolution.

This being so, there is nothing for it but to make the best of our banking
system, and to work it in the best way that it is capable of. We can only use
palliatives, and the point is to get the best palliative we can. I have endeavoured
to show why it seems to me that the palliatives which I have suggested are the
best that are at our disposal.

I have explained why the French plan will not suit our English world. The
direct appointment of the Governor and Deputy-Governor of the Bank of
England by the executive Government would not lessen our evils or help our
difficulties. I fear it would rather make both worse. But possibly it may be
suggested that I ought to explain why the American system, or some
modification, would not or might not be suitable to us. The American law
says that each national bank shall have a fixed proportion of cash to its
liabilities (there are two classes of banks, and two different proportions; but
that is not to the present purpose), and it ascertains by inspectors, who inspect
at their own times, whether the required amount of cash is in the bank or not.
It may be asked, could nothing like this be
attempted in England? could not it, or some modification, help us out of our
difficulties? As far as the American banking system is one of many reserves, I
have said why I think it is of no use considering whether we should adopt it or
not. We cannot adopt it if we would. The one-reserve system is fixed upon us.
The only practical imitation of the American system would be to enact that the
Banking department of the Bank of England should always keep a fixed
proportion—say one-third of its liabilities—in reserve. But, as we have seen
before, a fixed proportion of the liabilities, even when that proportion is
voluntarily chosen by the directors, and not imposed by law, is not the proper
standard for a bank reserve. Liabilities may be imminent or distant, and a fixed
rule which imposes the same reserve for both will sometimes err by excess,
and sometimes by defect. It will waste profits by over-provision against
ordinary danger, and yet it may not always save the bank; for this provision is
often likely enough to be insufficient against rare and unusual dangers. But
bad as is this system when voluntarily chosen, it becomes far worse when
legally and compulsorily imposed. In a sensitive state of the English money
market the near approach to the legal limit of reserve would be a sure incentive
to panic; if one- third were fixed by law, the moment the banks were close to
one-third, alarm would begin, and would run like magic. And the fear would
be worse because it would not be unfounded—at least, not wholly. If you say
that the Bank shall always hold one-third of its liabilities as a reserve, you say
in fact that this one- third shall always be useless, for out of it the Bank cannot
make advances, cannot give extra help, cannot do what we have seen the
holders of the ultimate reserve ought to do and must do. There is no help for us
in the American system; its very essence and principle are faulty.

We must therefore, I think, have recourse to feeble and humble palliatives such
as I have suggested. With good sense, good judgment, and good care, I have
no doubt that they may be enough. But I have written in vain if I require to say
now that the problem is delicate, that the solution is varying and difficult, and
that the result is inestimable to us all.
APPENDIX.
Note A.

Liabilities and Cash Reserve of the Chief Banking Systems.

The following is a comparison of the liabilities to the public, and of the cash
reserve, of the banking systems of the United Kingdom, France, Germany, and
the United States. For the United Kingdom the figures are the most defective,
as they only include the deposits of the Bank of England, and of the London
joint stock banks, and the banking reserve of the Bank of England, which is the
only cash available against these liabilities is also the only cash reserve against
the similar liabilities of the London private banks, the provincial English banks,
and the Scotch and Irish banks. In the case of England, therefore, the method
of comparison exhibits a larger proportion of cash to liabilities than what really
exists.

(1) ENGLISH BANKING.

Liabilities.
Deposits of Bank of England, less
estimated Joint Stock Bank balances, at December 31, 1872 L 29,000,000
Deposits of London Joint Stock Banks
at December 31 1872 (see 'Economist,' February 8, 1873) L 91,000,000
——————
Total liabilities L 120,000,000
=============
Reserve of Cash
Banking Reserve in Bank of England. L 13,500,000
=============

Making proportion of cash reserve to liabilities to the public about 11'2 per cent.

(2) BANK of FRANCE (FEBRUARY, 1873).

 Liabilities
Circulation L 110,000,000
Deposits L 15,000,000
——————-
Total liabilities L 125,000,000
=============

Reserve of Cash.

Coin and bullion in hand L 32,000,000

Making proportion of cash reserve to liabilities to the public about 25 per cent.

(3) BANKS OF GERMANY (JANUARY, 1873).

Liabilities

Circulation L 63,000,000
Deposits L 8,000,000
Acceptances and Indorsements L 17,000,000
——————
Total liabilities L 88,000,000
============

Reserves of Cash

Cash in Hand L 41,000,000

============

Making proportion of cash reserve to liabilities to the public about per cent.

(4) NATIONAL BANKS OF UNITED STATES (OCTOBER 3, 1872).

Liabilities

Circulation L 67,000,000
Deposits L 145,000,000
——————-
Total liabilities L 212,000,000
=============
Reserve of Cash

Coin and legal tenders in hand L 26,000,000

============

Making proportion of cash reserve to liabilities to the public about 12.3 per
cent.

SUMMARY

Liabilities Cash held Proportion of

cash to the public to liabilities per
cent
Bank of England and London
Joint Stock Banks 20,000,000 13,500,000 11.2
Bank of France 125,000,000 32,000,000 25.0
Banks of Germany 88,000,000 41,000,000 47.0
National Banks of
United States 212,000,000 26,000,000 12.3

Note B.

Extract from Evidence Given by Mr. Alderman Salomons before House of

Commons Select Committee in 1858.

1146. [Chairman.] The effect upon yourselves of the pressure in November

was, I presume, to induce you to increase your reserve in your own hands, and
also to increase your deposits with the Bank of England?—Yes, that was so;
but I wish to tell the Committee that that was done almost entirely by allowing
the bills of exchange which we held to mature, and not by raising any money,
or curtailing our accommodation to our customers. Perhaps it may be
interesting to the Committee to know that on the 11th of November we held
discounted bills for brokers to the amount of 5,623,000 L. Out of those bills,
2,800,000 L. matured between the 11th of November and the 4th of
December, and 2,000,000 L. more between the 4th of December and the 31st.
So that about 5,000,000 L. of bills matured between the 11th of November and
the 31st of December; consequently we were prepared, merely by the maturing
of our bills of exchange, for any demands that might possibly come upon us.

1147. I understand you to say that you did not withdraw your usual
accommodation from your own customers, but that you ceased to have in
deposit with the bill-brokers so large a sum of money as you had before?—Not
exactly that; the bills which we had discounted were allowed to mature, and we
discounted less; we kept a large reserve of cash.

1148. That is to say, you withdrew from the commercial world a part of that
accommodation which you had previously given, and at the same time you
increased your deposits with the Bank of England?—Yes, our deposits with the
Bank of England were increased. We did not otherwise withdraw
accommodation.

1149. [Mr. Weguelin.] Had you any money at call with the bill-brokers?—A
small amount; perhaps about 500,000 L. or less, which we did not call in.

1150. [Chairman.] What I understand you to say is, that the effect of the
commercial pressure upon you was to induce you upon the whole to withdraw
from commerce an amount of accommodation which in other times you had
given, and at the same time to increase your deposits with the Bank of England?
—So far only as ceasing to discount with strangers, persons not having
current accounts with us.

1151. Or to give the same amount to the bill-broker?—For a while, instead of

discounting for brokers and strangers, we allowed our bills to mature, and
remained quiescent with a view to enable us to meet any demand that might
be made on ourselves.

1152. Except what you felt bound to your own customers to continue to give,
you ceased to make advances?—Quite so; perhaps I might say at the same
time, that besides a large balance which we kept at the Bank of England, which
of course was as available as in our own tills, we increased our notes in our
tills at the head office and at all the branches.

1153. I suppose at that time large sales of public securities were made by the
London joint stock banks, which securities were purchased by the public?—It is
understood that some joint stock and other banks sold, but I believe it is quite
certain that the public purchased largely, because they always purchase when the
funds fall.

1154. Are you prepared to give the Committee any opinion of your own as to
the effect, one way or the other, which the system of the joint stock banks may
have
produced with regard to aggravating or diminishing the commercial pressure in
the autumn of last year?—I should state, generally, that the joint stock banks,
as well as all other banks, in London, by collecting money from those who had
it to spare, must of necessity have assisted, and could not do otherwise than
assist commerce, both then and at all other times.

1155. You say that your discounts, either at your own counter or through the bill-
brokers, are ordinarily very large, but that at the time of severest pressure you
contracted them so far as you thought was just to your own immediate
customers?—Yes; but the capital was still there, because it was at the Bank of
England, and it was capable of being used for short periods; if we did not want
it, others might have used it.

1156. [Mr. Weguelin.] In fact, it was used by the Bank of England?—

Undoubtedly; I should suppose so; there is no question about it.

1157. You, of course, felt quite certain that your deposits in the Bank of England
might be had upon demand?—We had no doubt about it.

1158 You did not take into consideration the effect of the law of 1844, which
might have placed the Banking Department of the Bank of England in such a
position as not to be able to meet the demands of its depositors? I must say
that that never gave us the smallest concern.

1159. You therefore considered that, if the time should arrive, the Government
would interfere with some measure as they had previously done to enable the
Bank to meet the demands upon it?—We should always have thought that if the
Bank of England had stopped payment, all the machinery of Government would
have stopped with it, and we never could have believed that so formidable a
calamity would have arisen if the Government could have prevented it.

1160. [Chairman.] The notion of the convertibility of the note being in danger
never crossed your mind?—Never for a moment; nothing of the kind.

1161. [Mr. Weguelin.] I refer not to the convertibility of the note, but to the
state of the Banking Department of the Bank of England?—If we had thought
that there was any doubt whatever about it, we should have taken our bank-
notes and put them in our own strong chest. We could never for a moment
believe an event of that kind as likely to happen.
1162. Therefore you think that the measure taken by the Government, of
issuing a letter authorising the Bank of England to increase their issues of
notes upon securities, was what was generally expected by the commercial
world, and what in future the commercial world would look to in such a
conjunction of circumstances?—We looked for some measure of that nature.
That, no doubt, was the most obvious one. We had great doubts whether it
would come when it did, until the very last moment.

1163. Have you ever contemplated the possibility of the Bank refusing to
advance, under circumstances similar to those which existed in November, 1857,
upon good banking securities?—Of course I have, and it is a very difficult
question to answer as to what its effect might be; but the notion appears to me
to be so thoroughly ingrained in the minds of the commercial world, that
whenever you have good security it ought to be convertible at the Bank in some
shape or way, that I have very great doubt indeed whether the Bank can ever
take a position to refuse to assist persons who have good commercial securities
to offer.

1164. [Mr. Cayley.] When you say that you have come to some fresh
arrangement with regard to your allowance of interest upon deposits, do you
speak of yourselves as the London and Westminster Bank, or of some of the
other banks in combination with yourselves?—I think all the banks have come
to an understanding that it is not desirable, either for their proprietors or for the
public, to follow closely at all times the alterations of the Bank. I believe it is
understood amongst them all that they do not intend following that course in
future.

1165. Is that from a feeling that it is rather dangerous under particular

circumstances?—I cannot admit as to its being dangerous, but there can be no
doubt of this, that there is a notion in the public mind which we ought not to
contend against, that when you offer a high rate of interest for money, you
rather do it because you want the person's money, than because you are obeying
the market rate; and I think it is desirable that we should show that if persons
wish to employ their money, and want an excessive rate, they may take it away
and employ it themselves.

1166. You think that there is now a general understanding amongst the banks
which you have mentioned, to act upon a different principle from that on
which they acted during last October and November?—I think I may say that
I know that to be the case.
1167. Was not it the fact that this system of giving so high a rate of interest
upon money at call commenced very much with the establishment of some
banks during the last year or two, which, instead of demanding 10 days' or a
month's notice, were willing to allow interest upon only three days' notice; did
not that system begin about two years ago?—I do not think it began with the
new banks; I think it began with one of the older banks; I know that as regards
my own bank, that we were forced into it; I forgot to say, that with regard to
ourselves in taking money on deposit, the parties must leave the money a
month, or they lose interest. We do not take money from any depositor at interest
unless upon the understanding and condition that it remains a month with us; he
may withdraw it within the month, but then he forfeits interest; it will not carry
interest unless it is with us a month, and then it is removable on demand
without notice.

1168. Is it or is it not a fact that some of the banks pay interest upon their
current accounts?—Yes, I think most of the new banks do so; and the Union
Bank of London does it.

1169. At a smaller rate than upon their deposits, I presume?—I think at a

smaller rate, but I believe it is a fixed rate on the minimum balance for some
period, either six months or one month, I do not exactly know the period. I
think I ought to add (and I believe it is the case with all the banks) that the
London and Westminster Bank, from the day of its first institution until the
present day, has never re-discounted a bill. No bill has ever left our bank
unless it has been for payment.

1170. Is not that generally the case with the London joint stock banks?—I
believe it is the case.

1171. [Mr. Weguelin.] But you sometimes lend money upon bills deposited with
you by bill-brokers?—Yes.

1172. And you occasionally call in that money and re-deliver those securities?—
Yes; but that we do to a very small extent.

1173. Is not that equivalent to a re-discount of bills?—No; the discount of a bill

and the lending money on bills are very different things. When we discount a
bill, that bill becomes our property; it is in our control, and we keep it and lock
it up until it falls due; but when brokers come to us and want to borrow, say
50,000
L. on a deposit of bills, and we let them have the money and afterwards return
those bills to them and we get back our money, surely that is not a re-discount.

1174. When you want to employ your money for a short period, do you not
frequently take bills of long date, and advance upon them?—But that is not a
re- discount on our part. Very often brokers in borrowing money send in bills
of long date, and afterwards we call in that loan; but that is no more a re-
discount than lending money upon consols and calling in that money again. It
is not an advance of ours; we do not seek it; they come to us and borrow our
money, and give us a security; when we want our money we call for that
money, and return their security. Surely that is not a re-discount.

1175. [Mr. Hankey.] Is there not this clear distinction between returning a bill
on which you have made an advance and discounting a bill, that if you have
discounted a bill your liability continues upon the bill until that bill has come to
maturity?—Yes.

1176. In the other case you have no further liability whatever?—Certainly.

1177. Should you not consider that a very important distinction?—I think it is
an important distinction. Take this case: suppose a party comes to us and
borrows 50,000 L., and we lend it him, and when the loan becomes due we take
our money back again. Surely that is not a discount on our part.

1178. Is there not this distinction, that if you re-discount you may go on
pledging the liability of your bank to an almost unlimited amount, whereas in
the other case you only get back that money which you have lent?—
Undoubtedly.

1179. [Mr. Cayley.] The late Chancellor of the Exchequer stated before the
adjournment, in a speech in the House of Commons, that during the Monday,
Tuesday, Wednesday, and Thursday of the panic, the Bank was almost, if not
entirely, the only body that discounted commercial bills; how can you
reconcile that with what you have said, that you gave as much
accommodation as usual to your customers?—I am not responsible for what
the Chancellor of the Exchequer said; I am responsible for what I am now
stating as to the course of our bank, that our advances to our customers on the
31st of December were nearly 500,000 L. higher than they were on the 1st of
October. With regard to our not discounting for other parties, it was in
consequence of the discredit which prevailed, that it was necessary we should
hold a portion of our deposits in order that they should be available in case
persons called for them; a certain
number of persons did so; in the month of November we had a reduction of
our deposits, and if we had gone on discounting for brokers we should have
had to go into the market ourselves to raise money on our Government
securities, but we avoided that by not discounting, and leaving our money at
the Bank of England.

1180. Then you did not discount as much as usual for your customers during
that period?—Yes, we did, and more.

1181. But not to strangers?—Not to strangers; I make a distinction between

our transactions with our customers, who of course expect us to give
accommodation, and discounts for brokers, which is entirely voluntary,
depending upon our having money to employ.

1182. How would it have been if the letter had not issued at the last moment?
That is a question which I can hardly answer.

1183. What do you mean by that general expression of yours?—It is

impossible to predicate what may happen in time of panic and alarm. A great
alarm prevailed certainly amongst the commercial world, and it could never
have been alleviated, except by some extraordinary means of relief. We might
probably have been in the state in which Hamburg was, where they have no
bank-notes in circulation.

1184. [Mr. Spooner.] What did you mean by the expression, 'the last moment'?
You said that the letter came out at the last moment; the last moment of what?—
It was late in the day; it was a day of great distress. For two days there was a
great deal of anxiety, and everybody expected that there would be some relief;
and it was when expectation, I suppose, was highly excited that the letter came,
and it gave relief.

1185. Cannot you tell us what your opinion would have been, if that last
moment had happened to have elapsed, and the letter had not come?—It is very
difficult to say; it is too much to say that it could not have been got over. There
can be no doubt whatever that what created the difficulty existed out of
London, and not in it; and therefore it is much more difficult for me to give an
opinion. I believe that the banking interest, both private and joint stock, was in
a perfectly sound condition, and able to bear any strain which might have been
brought upon it in London.
1186. [Mr. Hankey.] Can you give the Committee any idea as to what
proportion of deposits you consider generally desirable to keep in reserve?—
You must be very much guided by circumstances. In times of alarm, when
there are failures, of course all bankers strengthen their reserves; our reserve
then is larger. In times of ordinary business we find, both as regards our
deposits at interest as well as those which are not at interest, that there is a
constant circulation; that the receipts of money very nearly meet the payments.

1187. You probably keep at all times a certain amount of your deposits totally
unemployed; in reserve?—Yes.

1188. In a normal state of commercial affairs, is there any fixed proportion, or

can you give the Committee any idea of what you would consider about a fair
and desirable proportion which should be so kept unemployed?—I think the best
idea which I can give upon that subject is to give our annual statement, or
balance sheet, for the 31st of December.

1189. Does that show what amount of unemployed money you had on that day?
—Yes. I will put in a statement, which perhaps will be the best means of
meeting the question, showing the cash in hand on the 30th of June and the
31st of December in every year, as shown by our published accounts, together
with our money at call and our Government securities; that will be perhaps the
best and most convenient way of giving the information you desire to have.
(See Table below.)

1190. Do you consider that when your deposits are materially on the increase
it is necessary to keep a larger amount of money in reserve than you would
keep at other times?—I may say that, as a general rule, our reserve would
always bear some proportion to our deposits.

Total Lodgments with London and Westminster Bank; also Amount of Cash in
Hand, Moneys with Bill-Brokers at Call, and Government Securities held by
the Bank.

DATE Deposits Cash Money Government TOTAL. in Hand at Call Securities

L L L L L 31 December 1845 3,590,014 563,072 628,500 1,039,745
2,231,317 31 December 1846 3,280,864 634,575 423,060 938,717 1,996,352
31 December 1847 2,733,753 7,231,325 350,108 791,899 1,863,332 30 June
1848 3,170,118 588,871 159,724 1,295,047 2,043,642 31 December 1848
 3,089,659 645,468 176,824 1,189,213 2,011,505 30 June 1849 3,392,857
552,642 246,494 964,800 1,763,936 31 December 1849 3,680,623 686,761
264,577 973,691 1,224,029 30 June 1850 3,821,022 654,649 258,177
972,055 1,884,881 31 December 1850 3,969,648 566,039 334,982 1,089,794
1,990,815 30 June 1851 4,414,179 691,719 424,195 1,054,018 2,169,932 31
December 1851 4,677,298 653,946 378,337 1,054,018 2,080,301 30 June
1852 5,245,135 861,778 136,687 1,054,018 2,122,483 31 December 1852
5,581,706 855,057 397,087 1,119,477 2,371,621 30 June 1853 6,219,817
904,252 499,467 1,218,852 2,622,571 31 December 1853 6,259,540 791,699
677,392 1,468,902 2,937,993 30 June 1854 6,892,470 827,397 917,557
1,457,415 3,202,369 31 December 1854 7,177,244 694,309 486,400
1,451,074 2,631,783 30 June 1855 8,166,553 722,243 483,890 1,754,074
2,960,207 31 December 1855 8,744,095 847,856 451,575 1,949,074
3,248,505 30 June 1856 11,170,010 906,876 601,800 1,980,489 3,489,165 31
December 1856 11,438,461 1,119,591 432,000 2,922,625 4,474,216 30 June
1857 13,913,058 967,078 687,730 3,353,179 5,007,987 31 December 1857
113,889,021 2,226,441 1,115,883 3,582,797 6,923,121

1191. Do you employ your money in the discounting of bills for other persons
than your own customers?—Discount brokers.

1192. Only to discount brokers? Yes.

1193. Not to strangers who are in the habit of bringing you in bills;
commercial houses?—I should say generally not. We have one or two houses
for whom we discount who have not accounts with us as bankers, but
generally we do not discount except for our customers or for bill-brokers.

1194. Do you consider that any advantage can arise to the public by the Bank
of England advancing to a greater extent than can be considered strictly
prudent on the soundest principle of banking, under the idea of their affording
aid to the commercial world?—As I said before, as long as there are good bills
in circulation, that is, bills about which there would be no doubt of their being
paid at maturity, there should be some means by which those bills could be
discounted.

1195. And do you think that it is part of the functions of the Bank of England
to discount a bill for anybody, merely because the party holding the bill
wishes to convert it into cash?—As I said before, the Bank of England will
have great
difficulty in getting rid of that inconvenient idea which there is in the mind of
the public, that the Bank of England is something more than an ordinary joint
stock bank. I think it must depend very much upon circumstances whether you
can or cannot refuse the discount of good bills which are offered to you.

Note C.

Statement of Circulation and Deposits of the Bank of Dundee at

Intervals of Ten Years between 1764 and 1864.

Year Circulation Deposits L L 1764 30,395 — 1774 27,670 — 1784 56,342

— 1794 50,354 — 1804 54,096 157,821 1814 46,627 445,066 1824 29,675
343,948 1834 26,467 563,202 1844 27,504 535,253 1854 40,774 705,222
1864 41,118 684,898

The Bank did not begin to receive deposits until 1792, in which year they
amounted to 35,944 L.

Note D.

Meeting of the Proprietors of the Bank of

England. September 13, 1866.

(From 'Economist,' September 22, 1866.)

A General Court of the Bank of England was held at the Bank at twelve o'clock
on the 3th instant, for the purpose of declaring a dividend for the past half-
year.

Mr. Launcelot Holland, the Governor of the Bank, who presided upon the
occasion, addressed the proprietors as follows: This is one of the quarterly
general courts appointed by our charter, and it is also one of our half-yearly
general courts, held under our bye-laws, for the purpose of declaring a
dividend. From a statement which I hold in my hand it appears that the net
profits of the Bank for the half-year ending on the 31st of August last
amounted to 970,014 L. 17s. 10d.; making the amount of the rest on that day,
3,981,783 L. 18s. 11d.; and after providing for a dividend at the rate of 6 L.
10s. per cent, the rest will stand at 3,035,838 L.. 18s. 11d. The court of
directors, therefore, propose that a half- yearly dividend of interest and profits,
to the amount of 6 L. 10s. per cent, without deduction on account of income
tax, shall be made on the 10th of
October next. That is the proposal I have now to lay before the general court;
but as important events have occurred since we last met, I think it right I
should briefly advert to them upon this occasion. A great strain has within the
last few months been put upon the resources of this house, and of the whole
banking community of London; and I think I am entitled to say that not only
this house but the entire banking body acquitted themselves most honourably
and creditably throughout that very trying period. Banking is a very peculiar
business, and it depends so much upon credit that the least blast of suspicion is
sufficient to sweep away, as it were, the harvest of a whole year. But the
manner in which the banking establishments generally of London met the
demands made upon them during the greater portion of the past half-year
affords a most satisfactory proof of the soundness of the principles on which
their business is conducted. This house exerted itself to the utmost—and
exerted itself most successfully—to meet the crisis. We did not flinch from our
post. When the storm came upon us, on the morning on which it became
known that the house of Overend and Co. had failed, we were in as sound and
healthy a position as any banking establishment could hold; and on that day
and throughout the succeeding week, we made advances which would hardly
be credited. I do not believe that any one would have thought of predicting,
even at the shortest period beforehand, the greatness of those advances. It was
not unnatural that in this state of things a certain degree of alarm should have
taken possession of the public mind, and that those who required
accommodation from the Bank should have gone to the Chancellor of the
Exchequer and requested the Government to empower us to issue notes
beyond the statutory amount, if we should think that such a measure was
desirable. But we had to act before we could receive any such power, and
before the Chancellor of the Exchequer was perhaps out of his bed we had
advanced one-half of our reserves, which were certainly thus reduced to an
amount which we could not witness without regret. But we could not flinch
from the duty which we conceived was imposed upon us of supporting the
banking community, and I am not aware that any legitimate application for
assistance made to this house was refused. Every gentleman who came here
with adequate security was liberally dealt with, and if accommodation could
not be afforded to the full extent which was demanded, no one who offered
proper security failed to obtain relief from this house. I have perhaps gone a
little more into details than is customary upon these occasions, but the times
have been unusually interesting, and I thought it desirable to say this much in
justification of the course adopted by this house of running its balances down
to a point which some gentlemen may consider dangerous. Looking back,
however, upon recent events, I cannot take any blame to this court for not
having been prepared
for such a tornado as that which burst upon us on the 11th of May; and I hope
the court of proprietors will feel that their directors acted properly upon that
occasion, and that they did their best to meet a very extraordinary state of
circumstances. I have now only to move that a dividend be declared at the rate
of 6 L. 10s. per cent for the past half-year.
Mr. Hyam said that before the question was put he wished to offer a few
observations to the court. He believed that the statement of accounts which had
just been laid before them was perfectly satisfactory. He also thought that the
directors had done their best to assist the commercial classes throughout the
late monetary crisis; but it appeared to him at the same time that they were in
fault in not having applied at an earlier period to the Chancellor of the
Exchequer for a suspension of the Bank Act. It was well known that the
demand on the Bank was materially lessened in the earlier part of the day, in
consequence of a rumour which had been extensively circulated that
permission to overstep the limits laid down in the Act had been granted. That
concession, however, had only been made after the most urgent representations
had been addressed to the Chancellor of the Exchequer at a late hour in the
night, and if it had then been refused he felt persuaded that the state of affairs
would have been much worse on the Saturday than it had been on the Friday.
The fact was that the Act of 1844 was totally unsuited to the present
requirements of the country, which since that period had tripled or quadrupled
its commerce; and he was sorry to know that the measure seemed to meet with
the approval of many of their directors. Any one who read the speeches made
in the course of the discussion on Mr. Watkins' motion must see that the
subject called for further inquiry; and he trusted that the demand for that
inquiry would yet be conceded.

Mr. Jones said he entirely dissented from the views with respect to the Bank
Act entertained by the hon. proprietor who had just addressed the court. In his
opinion the main cause of the recent monetary crisis was that, while we had
bought 275,000,000 L. worth of foreign produce in the year 1865, the value of
our exports had only been 165,000,000 L., so that we had a balance against us
to the amount of 110,000,000 L. He believed that the Bank acted wisely in
resisting every attempt to increase the paper currency, and he felt convinced
that the working classes would be the people least likely to benefit by the rise
in prices which would take place under such a change.

Mr. Moxon said he should be glad to know what was the amount of bad debts
made by the Bank during the past half-year. It was stated very confidently out
of doors that during that period the directors had between 3,000,000 L. and
4,000,000 L. of bills returned to them.

The Governor of the Bank.—May I ask what is your authority for that
statement? We are rather amused at hearing it, and we have never been able to
trace any rumour of the kind to an authentic source.

Mr. Moxon continued—Whether the bad debts were large or small, he thought
it was desirable that they should all know what was their actual amount. They
had been told at their last meeting that the Bank held a great many railway
debentures; and he should like to know whether any of those debentures came
from railway companies that had since been unable to meet their obligations.
He understood that a portion of their property was locked up in advances made
on account of the Thames Embankment, and in other ways which did not leave
the money available for general banking and commercial purposes; and if that
were so, he should express his disapproval of such a policy. There was another
important point to which he wished to advert. He was anxious to know what
was the aggregate balance of the joint stock banks in the Bank of England. He
feared that some time or other the joint stock banks would be in a position to
command perhaps the stoppage of the Bank of England. If that were not so, the
sooner the public were full & informed upon the point the better. But if ten or
twelve joint stock banks had large balances in the Bank of England, and if the
Bank balances were to run very low, people would naturally begin to suspect
that the joint stock banks had more power over the Bank of England than they
ought to have. He wished further to ask whether the directors had of late taken
into consideration the expediency of paying interest on deposits. He believed
that under their present mode of carrying on their business they were foregoing
large profits which they might receive with advantage to themselves and to the
public; and he would recommend that they should undertake the custody of
securities after the system adopted by the Bank of France. In conclusion, he
proposed to move three resolutions, for the purpose of providing, first, that a
list of all the proprietors of Bank stock should be printed, with a separate entry
of the names of all those persons not entitled to vote from the smallness of their
stock, or from the shortness of time during which they held it; secondly, that a
copy of the charter of the Bank, with the rules, orders, and bye-laws passed for
the good government of their corporation, should be printed for the use of the
shareholders; and thirdly, that auditors should be appointed to make detailed
audits of their accounts.

Mr. Gerstenberg recommended that the directors should take some step for the
purpose of preventing the spread of such erroneous notions as that which lately
prevailed on the Continent, that the Bank was about to suspend specie
payments.

Mr. W. Botly said he wished to see the directors taking into their consideration
the expediency of allowing interest on deposits.

Mr. Alderman Salomons said he wished to take that opportunity of stating that
he believed nothing could be more satisfactory to the managers and
shareholders of joint stock banks than the testimony which the Governor of the
Bank of England had that day borne to the sound and honourable manner in
which their business was conducted. It was mainfestly desirable that the joint
stock banks and the banking interest generally should work in harmony with
the Bank of England; and he sincerely thanked the Governor of the Bank for
the kindly manner in which he had alluded to the mode in which the joint stock
banks had met the late monetary crisis.

The Governor of the Bank said—Before putting the question for the
declaration of a dividend, I wish to refer to one or two points that have been
raised by the gentlemen who have addressed the court on this occasion. The
most prominent topic brought under our notice is the expediency of allowing
interest on deposits; and upon that point I must say that I believe a more
dangerous innovation could not be made in the practice of the Bank of
England. The downfall of Overend and Gurney, and of many other houses,
must be traced to the policy which they adopted of paying interest on deposits
at call, while they were themselves tempted to invest the money so received in
speculations in Ireland or in America, or at the bottom of the sea, where it was
not available when a moment of pressure arrived.

Mr. Botly said he did not mean deposits on call.

The Governor of the Bank of England continued—That is only a matter of

detail; the main question is whether we ought to pay interest on deposits, and
of such policy I must express my entire disapproval. Mr. Moxon has referred
to the amount of our debts, but, as I stated when I took the liberty of
interrupting him, we could never trace the origin of any rumour which
prevailed upon that subject. As far as it can be said to have ever existed it had
its origin most probably in the vast amount advanced by the Bank. It must,
however, be remembered that we did not make our advances without ample
security, and the best proof of that is the marvelously small amount of bad
debts which we contracted. It has never been a feature of the Bank to state
what was the precise amount of those debts; but I believe that if I were to
mention it upon the present occasion, it would be found to be so inconsiderable
that I should hardly obtain credence for the announcement I should have to
make. I am convinced that our present dividend
has been as honestly and as hardly earned as any that we have ever realised;
but it has been obtained by means of great vigilance and great anxiety on the
part of each and all of your directors; and I will add that I believe you would
only diminish their sense of responsibility, and introduce confusion into the
management of your business, if you were to transfer to auditors the making
up of your accounts. If your directors deserve your confidence they are surely
capable of performing that duty, and if they do not deserve it you ought not to
continue them in their present office. With regard to the supposed lock-up of
our capital, I must observe that, with 14,000,000 L. on our hands, we must
necessarily invest it in a variety of securities; but there is no ground for
imagining that our money is locked up and is not available for the purpose of
making commercial advances. We advanced in the space of three months the
sum of 45,000,000 L.; and what more than that do you want? It has been
recommended that we should take charge of securities; but we have found it
necessary to refuse all securities except those of our customers; and I believe
the custody of securities is becoming a growing evil. With regard to railway
debentures, I do not believe we have one of a doubtful character. We have no
debentures except those of first-class railway companies and companies which
we know are acting within their Parliamentary limits. Having alluded to those
subjects, I will now put the motion for the declaration of the dividend.

The motion was accordingly put and unanimously adopted.

The chairman then announced that that resolution should be confirmed by ballot
on Tuesday next, inasmuch as the Bank could not, under the provisions of its
Act of Parliament, declare otherwise than in that form a dividend higher than
that which it had distributed during the preceding half-year.

The three resolutions proposed by Mr. Moxon were then read; but they were not
put to the meeting, inasmuch as they found no seconders.

Mr. Alderman Salomons said that their Governor had observed that he thought
the payment of interests on deposits was objectionable; and everyone must see
that such a practice ought not to be adopted by the Bank of England. But he
took it for granted that the Governor did not mean that his statement should
apply to joint stock banks which he had himself told them had conducted their
business so creditably and so successfully.

The Governor of the Bank said that what he stated was that such a system
would
be dangerous for the Bank of England, and dangerous if carried into effect in
the way contemplated by Mr. Moxon.

Mr. P. N. Laurie said he understood the Governor of the Bank to say that it
would be dangerous to take deposits on call, and in that opinion he concurred.

Mr. Alderman Salomons said that he, too, was of the same opinion.

On the motion of Mr. Alderman Salomons, seconded by Mr. Botly, a vote of

thanks was passed to the Governor and the directors for their able and
successful management of the Bank during the past half-year, and the
proceedings then terminated.

End of the Project Gutenberg EBook of Lombard Street: A Description of the

Money Market, by Walter Bagehot

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