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diff --git a/old/lsadm10.txt b/old/lsadm10.txt new file mode 100644 index 0000000..56be346 --- /dev/null +++ b/old/lsadm10.txt @@ -0,0 +1,8138 @@ +The Project Gutenberg Etext of Lombard Street: A Description of the Money Market +by Walter Bagehot +(#2 in our series by Walter Bagehot) + +Copyright laws are changing all over the world. Be sure to check the +copyright laws for your country before distributing this or any other +Project Gutenberg file. + +We encourage you to keep this file, exactly as it is, on your +own disk, thereby keeping an electronic path open for future +readers. Please do not remove this. + +This header should be the first thing seen when anyone starts to +view the etext. 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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 purposeis 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 modem 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 +modem 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 dangersnotions +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 plainthat 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 +simplycredit 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' systemthe '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 notesand 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 cashthat 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 systemin 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 Londonand 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 transituthe 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 wellconducted 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 cashof cash which yields no interestthat the Banking +Department of the Bank of England keeps lying idle. If we compare +the London and Westminster Bankwhich is the first of the joint-stock +banks in the public estimation and known to be very cautiously and +carefully managedwith 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 fall 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 discreditit 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 banka 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 kind--sone 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 personsone bank or many banksin 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 Bankif 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 maladiesan 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 larged 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 holdersone 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 reservethat +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 loansvery 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 the--man 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 againwhatever 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 reserveruns 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 securitystill 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 worldhas +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 banknotes 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 arecirculation, +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 Germanytwo +countries where note issue and deposit banking would seem as natural +as in England and Scotlandthere 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 worthiess 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 injuries 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 Goverment 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 pmdence, +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 buythat 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 0 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 effiux. 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 compellingother 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 today 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 tooat 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 wayby keeping a large cash reserve. + +But it is of great importance to point out that our industrial +organisation is liable not only to irregnlar external accidents, but +likewise to regnlar 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 Bhe 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 labourersare 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 +additionalthat 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 leastassumes 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 highiy 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 bedchambers 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 +gnineas, 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 866, _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 +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 capitalhave 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 articlesas far as it is based on +the increased rapidity with which commodities of every kind reach +those who want themits 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 organisationof 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 +increasedcertainly 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 +discoveredthe 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 profitsa 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 degreeand the ablest and the +cleverest the mostwork 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 +yearsfrom 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 utmostand +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 reserveany such sum of actual cashof +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 businesslike 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 securityeven 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 Englandthe holders of our ultimate +bank reserveacknowledge 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 membersits average +membersand 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 thereand 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 banknotes 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' billsbills which sound +merchants know to be gooddoes not rapidiy 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 paymentsa suspension which +lasted twenty-two yearsall 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 L10,721,000 + +On Dec. 25, 1825, it was reduced to L1,260,000 + +and the consequence was a panic so tremendous that its results are +well remembered after nearly fifty years. In the next period of +extreme trialin 1837, 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 1864the drain of silver in 1864 and the +preceding year was beyond comparison greater than in 1857 and the +years before itand 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 timea +sufficient reserve, in all probability, to have coped with the +crises of 1847 and 1857. The suspension of Overend and Gurneythe +most trusted private firm in Englandcaused 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 keepto +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 Departmentthat 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 gonot, 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 +practicecredit being goodis 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 banknotes.' 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 +banknotes, 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 caunot +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 banknotes. +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 securityon 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 onessay 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 +amountin 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 pamc 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 m 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 chairform 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 bankbanks 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 countriesa +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 bankthe 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 bankas 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 heada 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 assemblyabounding in experience, and guided by +traditionwill soon discover what he is. But the Governor of the Bank +would only perform quiet functions, which look like routine, though +they are not, m 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 temptas by social privilege we should temptexactly 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 nowbut 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 m 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 oneon 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 muchon 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 L Dividend +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 +experi-ence 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 themsome of the best of them +perhapswill 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 secretsrigidly 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 +ourserves 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 firmthe Gurney family +especiallyhad 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 bankingthe proportion of detail to the size of the +bankis 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 personthat is, the reliance which may be placed on his +pecuniary fidelityis 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 nonguaranteeing 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 rediscount 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. Billbroking, 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 rediscount. 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-brokerno matter whether +an individual, a company, or a firmhas 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 m 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 +billbrokers 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 excep tonal, 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 win enable them to +make their own calculations. The account of which we have been +speaking is the yearly account of the English Governmentwhat 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 +win 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 cashor available securitiesenough 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 assistanceas it was m +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 panicthe 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 Englandthat 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 manevery man who +knows the scene of actionwill 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 +proportionsay one-third of its liabilitiesin 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 unfoundedat 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 +billbrokers?--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 +understand ing 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 Unlon 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?--Certamly. + +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 in Hand Money at Call Government Securities TOTAL. +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 billbrokers. + +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 +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 35,9441. + +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 ith 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 convmced +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 ac counts. 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 Etext of Lombard Street: A Description of the Money Market +by Walter Bagehot + |