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LOMBARD STREET

iNational

Monetary Commission,
1912

LOMBARD STREET
A DESCRIPTION OF

THE MONEY MARKET

BY

WALTER BAGEHOT

NEW EDITION
WITH AN INTRODUCTION AND CORRIGENDA BY

HARTLEY WITHERS
AUTHOR OF 'THE MEANING OF MONEY'

NEW YORK
E.
P.
31

BUTTON
1910

&

COMPANY

WEST TWENTY-THIRD STREET

SdO
Hft

U22-

LOMBARD STREET
Bagehot's
tells
'

IN 1910.

Lombard
'

us in his
It
is

was begun, as he Advertisement,' in the autumn


Street
'

of 1870.

a wonderful

achievement, that

book dealing
be a

with the

shifting
still,

quicksands
after

of the
years,
to

money market should


classic of

forty

which no one who wishes


can
it

understand

the
it

subject
is

afford

to

be
de-

ignorant.

Since

so,

is

evidently

sirable to give, for those of its readers

who

are

not acquainted with the

a brief

account of

money market of to-day, the chief movements and


altered

tendencies
since

which have
the

the

conditions

Bagehot wrote.
is

This task
notable

all

easier,

since the

most

movements and tendencies have amply confirmed what he said. Lombard Street has accepted the bill that Bagehot drew on it. I'here are two chief outstanding facts of modern monetary development. One is the reliance of the London money market
results

of

these

vi

LOMBARD STREET IN igio

and the money markets of the world on the

Bank

of

England

as the custodian of the central


is

gold reserve.

This

the

principal
all its

theme of
other
is

Bagehot's argument, to which

digressions

and excursions ultimately

return.

The

the development of joint stock banking in

Eng-

land by the gradual diminution of the old private

banking firms and the coincident expansion of


the

banking companies by
All
this

growth and amal-

gamation.
dicted.

Bagehot foresaw and pre-

The Cheque Currency of To-day.


This development has modified the problem of
the

money market

in several

important respects.

Since the ordinary joint stock banks with offices


in

London were

forbidden,

by the Bank of Eng-

land's charter, to exercise the right of note issue,


it

has been their special function to spread the

use of cheques in England and to

make them

the

predominant form of paper currency,

reducing

the banknote to a secondary place as currency,

and

at the

same time

raising

it

to a

more imSince

portant one as part of the basis of credit.


the joint stock banks have covered

branch
facilities

offices,

England with ready and eager to give banking

to

customers of quite moderate means.

LOMBARD STREET IN
the cheque

igio

vii

has

become

the

chief

circulating

medium

in

commercial payments, and the bank-

note has almost ceased to circulate.

The

out-

standing note issues of


other than the

all

the

English banks,

Bank

of England, have
it

now sunk

below 250,000/., and

is

significant to observe

that they are habitually below the


rised

amount autho-

by the Act of 1844, so that their diminution has been due, not so much to the reduction of
the

number of banks with


change

the right of issue, as

to a

in the habits of the people,

which
as
it

does not

now want even


it

as

many banknotes

might have, since

has been accustomed to the

greater convenience and safety of the cheque.

same time what is usually described as the circulation of the Bank of England note has
the
increased, but
its

At

actual circulation as currency in


is

the

hands of the people

probably

less

than

when Bagehot wrote. last week of 1869, which he quotes


shows notes Issued

The Bank

return for the


in

Chapter

II.,

by the Issue Department 33,288,640/., and notes held by the Banking Department 10,389,690/, making the amount in In recent circulation just below 23 millions.
years the circulation

has fluctuated from

28 to

30 millions, but
this

It

is

probable that the whole of


has

apparent

Increase

been

due,

not

to

viii

LOMBARD STREET IN

igio

circulation in the strict sense of the word,

but to

the use of

Bank

of

England notes as
at definite

till

money
is

and cash reserve by the other banks.


possible
to

It

imthis

arrive

figures
not,

on
in

subject

because

the

banks

do

their

published statements, give any clue to the details


of which their cash holding
is

composed

how
Bank
both
the

much
of

of

it is

coin and
notes.

how much

consists of

England

But the great increase that


last forty years,

has taken place during the


in the

number of bank
liabilities

offices

open and

in

aggregate
bability of

makes the prothe above assumption almost amount


of the banks,

to certainty.

The Banknote and


This change
in

the Fidticiai^y Issue.

the position of the

Bank

of

England note is highly important. It is due, not to any action by the Bank of England, but to an
external process arising out of the development

of the other joint stock banks and the rapidity

with which they have multiplied


their

offices,

sowing

banking crop
it

all

over the country.

By

means of
hand
to

the

Bank

of

England note has largely

ceased to be an instrument of credit passed from

hand

in

the course of commercial trans-


LOMBARD STREET IN
actions,

i^io

ix

and has become part of the cash on which

the other banks base their credit operations,

and

multiply the ever-growing volume of the cheque

currency which

is

now, to an overwhelming extent,

the money of modern England. This development has greatly modified the views of the com-

community on the subject of the regulations imposed by Peel's Act of 1 844 on the issue of the Bank of England note. By this Act the
mercial

note issue could only be increased beyond a certain


point

by the holding of actual bullion

against

each

new note

issued.

As long

as the

Bank

of

England note was currency required


circulation, this restriction

for business

was open to criticism as the infliction of a cast-iron fetter where elasticity was most of all desirable and the advantages of
;

the

German

system, which provided for an ex-

pansion in the issue of notes against securities


the fiduciary issue as
it is

generally called

when

money
it

is

in

great demand, was frequently held


for

up as an example
is

England.

But now that

more clearly perceived that the money of England is the cheque, which can be multiplied to an extent which is only limited by the prudence of bankers and the security that their customers may be able to provide, and that the Bank of
England note
is

chiefly

used

as

part

of

the

LOMBARD STREET IN

igio
is

banking cash reserve, the opinion

commonly
its

held in the City that the restrictions on

issue
still

imposed by
further,

Peel's

Act should be carried


securities,

and that that part of the issue which


based on
the
securities

is

fiduciary, or

should gradually

be abolished,

behind

it

being

replaced by gold.

Since most of the profit on

the fiduciary issue goes to the


difficulty

Government
change
;

the

of
Its

introducing
abolition
it is

any

tending
but
as

towards

is

redoubled

matter of theory

safe to say that a majority


is

of well-informed City opinion

now

In

favour of

making the Bank of England note a pure and simple bullion certificate. And this change of
opinion concerning the only law which seriously
restricts the
is

banker

in the

conduct of his business

striking evidence of the extent to

which English

banking has been modified by the development


of the use of the cheque.
It

has been revolutionised rather than modified,

for the

cheque has freed banking from the

fetters

of the

Bank

Act.

The Bank Act

said that there

should be no increase in the note currency except

by an increase
If

in the Bank of England's bullion. commerce had continued to use the note currency and had expanded as It has, there would by

this

time have been a vast pile of useless gold in

LOMBARD STREET IN
the Bank's vaults.

igio

xi

But the Act

laid
all

no restriction
the

new joint stock banks, which had sprung up when it was discovered that banking did not necessarily mean
on the drawing of cheques, and
note-issuing,

pushed on the use of the cheque


carried
their
victories.

currency wherever they

They
was

thus developed that side of banking which

free

from legal restriction and at the same

time gave the commercial community the most perfectly safe, elastic,

and adaptable form of currency

that the

world has yet seen.


the

And

in

another

respect

growth of these great


this

institutions

which have carried out

important develop-

ment has modified


to

In a

very Important respect the


It

problem of the money market as


Bagehot.

showed
the

Itself

When

he wrote,

Bank of
most im-

England was

at all ordinary times the


'

portant factor in the market.

moments,' he wrote,
In

'

there

is

At all ordinary not money enough

Lombard Street to discount all the bills in Lombard Street without taking some money from the Bank of England.' This is no longer true.
The Power of the Outer Banks,

So
of
'

far is the

above quotation
'

from Chapter V.

Lombard Street from being verified by modern conditions that It may be said that at all

xii

LOMBARD STREET IN
moments Lombard

igio
its

ordinary

Street carries on

business without any necessity for taking

money
will

from the Bank of England, and that consequently


the

Bank rate the


bills

rate at

which the Bank

discount

is

at all ordinary

moments

not a

direct influence in the rate at

which the outside


bill

consisting of brokers working.


market
is

the other banks and


It is

only in times of special


col-

demands, such as quarter-day payments, the


lection of the direct taxes in the

January to March
or

quarter,

abnormally active trade,

a foreign

drain of gold, that the

Bank
its

of England's assis-

tance

is

required, and

rate only

becomes an
or lowered.

influence

when

there

is
it

apprehension or expecta-

tion in the

market that

may be raised

Since Bagehot wrote, the process that he foretold


of the growth and predominance of the joint stock

banks has gone so

far that

they have not only

almost obliterated the old private firms, but have

taken out of the Bank of England's hands the


business of providing currency and regulating the

London money market, except on


sions.

special occa-

They provide
in
bill

the

cheque currency of

to-day, and

ordinary times the rate at which


brokers makes the price of

they lend to the

short loans, and the rate at which they discount


bills

makes the discount rati^ in London.

Between

LOMBARD STREET IN
these rates
official rate

ipio

xiii

made by the outer banks and the of the Bank of England, there is only
shadowy connection which comes
fact that the rate
is

a slender and

into being from the

allowed to
i^ per

depositors by the outer banks


cent,

usually

below Bank

rate.

But of the sum of money


it

held by the banks on behalf of customers,

is

probable that less than half


of
it

is

on deposit, the

rest
in

being held on current account, and so


at
all.

most cases receiving no rate


sible to

It

is

impos-

be certain on

this

point, since

very few

of the banks

show

in their

balance sheets separate

statements of current and deposit accounts.

But

among those which do


amount, or
less,
it

so,

deposits are half the

of the current accounts.

And

consequently

often happens that bankers lend

money
loose

to bill brokers at the

they are paying to depositors.

same rate at which There is thus this


is

connection

between Bank rate and the


not as a

market rate
rule likely to

for loans, that the latter

be more than i^ per cent, below the


is

former, but the connection

so indefinite and

untrustworthy, and the funds over which the outside

market now has control are so

vast, that
it

when
any

the

Bank

of

England considers
its rate, it

necessary,
for

owing to the threat of a foreign drain or


other reason, to raise

often has to

make

xiv

LOMBARD STREET IN

igio

this action effective

by borrowing from the outcurtail


artificially

side

market
so as to

in

order to

the

supplies of the latter, and compel applications to


itself,

make
in

its

rate

an effective influence

on those current

the

market

The Probkjn Modified.


Modified by
this

development, the problem of


is

Lombard
of the

Street to-day

concerned rather with

the conduct of the outer joint stock banks than

Bank

of England.

The

difficulties

and

responsibilities of the

Bank

of England have been

increased, but at least they are recognised

and

provided

for.

If

Bagehot could look back over

the history of the

money market through


'

the forty

years that have passed since he wrote


Street,'

Lombard
had

he would see that his criticisms of the

attitude of the

Bank towards
Its

its

position

borne good

fruit.

duty as custodian of the


its

gold reserve has been definitely recognised by


consistent action,

and by the equally constant

pressure of public opinion.

Between them the


produced a marked

Bank's sense of duty and the public's insistence

on

its

responsibility

have
line

advance along the

indicated

by Bagehot.

He

pointed to ten millions as

the limit below

which the Bank's reserve should not be allowed

LOMBARD STREET IN
to
fall
;

igio

xv

now

it

is

rarely below
'

twenty
its

millions.

He

maintained that

one third of

banking

liabilities is at

means an adequate reserve for the Banking Department.' During the years 1907 to 1909, which included an American
present by no
crisis,

involving a great drain on England's gold,


liabili-

the average proportion of the reserve to


ties

has been 48*0 per cent.


in spite of the

And

all

this

has

been achieved
has

growth of banking

development outside, which, as has been shown,

made Lombard

Street independent of assis-

tance from the Bank, save at exceptional times,


instead of being normally dependent on
it

and so

constantly under

its

control.

It

is

this outside

development that has changed the face of the


problem.
It

has already been shown to have

altered England's currency, which


chiefly

now
the

consists

of cheques, and

it

is

also the cause of

continued

heart-searchings

among

banking

community concerning the adequacy of its cash reserves, in spite of the improvement achieved by the Bank of England. The increase in the
Bank's reserve has been great, both absolutely

and

relatively to

its

own

direct liabilities, but

it is

criticised as insufficient

when compared with

the

mass of banking

liabilities

of the country, which


in-

are based on the outer banks' cash holding,

xvi

LOMBARD STREET IN

iQio

eluded in which are their balances at the

Bank

of

England.

It is

the proportion of cash to liabilities


is

shown by the outer banks which


that

the problem

vexes the banking world to-day, and has


it

vexed

for nearly

twenty years.

This problem

has been aired and discussed at bank meetings

and

in

addresses to the Bankers' Institute ever

since the crisis of 1890.

No

definite step has

been taken towards


is

its solution, but the discussion

very far from having been

fruitless.

The

pro-

portion of cash held by the leading banks has

improved steadily and


in

rapidly.

Bagehot quotes,

Chapter IX., Mr. Weguelin, Governor of the


in

Bank, as stating
of

1857 that the joint stock banks

London had deposits of 30 millions and 2 millions Here the proportion is 6*6 per of cash reserve. The latest statement* of the London joint cent.
stock

banks shows deposits 475

millions,

cash

75 millions, proportion 1 5 "8 per cent. The improvement is remarkable, and if we could be sure that
the rest oi the banks were equally prudent, and

shown by the London banks were normal and habitual, and not to some extent and in some cases specially arranged for purposes
that the proportion

of publication, critics could find


this subject.

little

more

to say

on

Unfortunately,
*

we cannot be

sure of

At the end

of April 19 10.

LOMBARD STREET IN
either of these things.

ipio
is all

xvii

The

evidence

on the

other side.
for

Banking reformers press continually

more frequent and clearer statements of their position by the country banks, and for the adoption of the average system in all bank statements,
so that there

arranged displays.

may be no possibility of specially And they contend, with much


that, if this

good reason behind them,

system were

adopted, the question of an adequate cash reserve

would very quickly be solved.


It

should be noted that experience in

this
s

country and elsewhere has not endorsed Bagehot


gold store held by one chief bank,

view that our one-reserve system, based on a


is

unnatural
it is

and wrong, and only

to

be tolerated because

now
that

so deeply ingrained in our banking habits


its

alteration
It is

would be a dangerous experigenerally recognised that this

ment.

now

system gives us a credit organisation of unrivalled


elasticity,

and banking reformers


longing
at
its

in

America look

with

regretful

efficiency.

Monetary Commission appointed by the United


States

Government
and
is

is

about to make a report

to Congress,

generally expected to recom-

mend

the foundation of a central bank.

In his concluding chapter Bagehot states that


the account of the Secretary for India in Council

xviii

LOMBARD STREET IN

ipio

is

contained in the public deposits in the

Bank

return.

This was so when he wrote, but the

public deposits are

now

only those of the various

departments of the British Government.


India Council's balance
deposits,
is

The

included in the other

and has been so since 1892.

Such are the main points in which the problem of Lombard Street and the relations of the various components of the money market have been modified since Bagehot wrote. It should also be noted that the progress of banking development abroad has lessened the difference which he described between England and other
countries in the matter of the use of credit.

Hartley Withers.
Ittne 1910.

REVISED FIGURES
Since
this

revision

is

designed to cause no

disturbance of the text of the latest edition of


'

Lombard
to

Street,' but at the

same time

to bring

the

statistics

of the subject as far as

possible
is

up

date,

the

following

information

here

appended,

with reference to the pages


it

of the

book

to

which

applies.

The

figures

have been
always

prepared

in the office of the

Economist, the paper

with which Walter Bagehot's

name

will

be connected.
P. 20.

The
past.

distinction

between

London and other

joint stock

banks

is

now

virtually a thing of the

given

The modern analogy of the comparison in the text may be expressed as follows
:

Aggregate Deposits of English Banks (excluding Bank of England) at December 31, 1909 ^685,040,062 Private Deposits of the Bankof England 50,210,065

....

P. 24.

The

account of the Issue Department of the


thus on the Return dated

Bank of England stood December 29, 1909


:

a 2


7SX

REVISED FIG [/RES


Issue Department.

Notes issued

^50,286,430

Government debt

;^i 1,015,100

Other securities Gold coin and bullion


.

7,434,900 31,836,430

^50,286,430

^50,286,430

P. 27.

The Bank Return


showed
liabilities
:

dated December 29, 1909,

Public Deposits Private Deposits 7-day and other Bills

^10,782,722

....
.
.

50,210,065
16,601

^61,009,388

The Cash Reserve was


p. 31.

;^22,2 19,750

The average Reserve


for

of the

Bank

of England

each week from January 1906 to December

iQOQ inclusive (4 years) was 25,244,700/.


P. 40.

The
the

proportion of cash

to

deposits

held by

London County and Westminster Bank on December 31, 1909, was 17 "9 per cent. Ratio of Bank of England Reserve to Liabilities on December 29, 1909, was 36f per cent.
P. Sy.

The Bank

of France at the end of 1909 had


_;^26,386,ooo

Private Deposits

Note Circulation

212,956,000

REVISED FIGURES
P. %Z,

xxi

The

Imperial
:

Bank

of

Germany

at the

end of

1909 had

Deposits
Circulation

^31,484,000
81,987,000

P. 90.

The Bank
Head

of France at the end of 1909


:

had

the following offices


Office

Branches
Auxiliary Offices

127

56
295

Agencies
Total

479

The Swiss
end of 1909
Deposits
Circulation

note issue has

now been

practically-

absorbed by the Swiss National Bank.


it

At the

had

^3,041,000
10,460,000

P. 248.
Stock Banks of the U.K. puband loss accounts for 1909 (excluding Bank of England) were ^^10,224,200 Total dividends paid (excluding Bank of England) 9,001,000 The average dividend on paid-up capital of ^62,300,000 paid by Banks of the U.K. (excluding Bank of = 14-4 % p.a. England) = 147 % p.a. Average dividend paid by Enghsh Banks for J909 =i5'5%p.a. Scotch Banks Irish Banks =U'6%p.a.
profits of all Joint

The

lishing profit

REVISED FIGURES
P. 249.

The Reserve Funds of Joint Stock Banks (excluding Bank of England)


Paid-up Capital of ditto

of U.K.

......
p. 250.
in

^49,118,000
64,000,000

Dividends paid by Scotch Banks


Paid-up Capital

1909

--^1,430,000

9,241,100

The
to
5

rate of dividend

ranged from 20 per


rate

cent,

per cent.

The

latter

was paid by a

small and unimportant bank, the rate above this

being 10 per cent.

PREFATORY NOTE
TO

THE TWELFTH EDITION


As more than
thirty years
little

have elapsed since the


it

first

publication of this

book,

has been thought de-

sirable to bring the figures,

and some of the examples

used,

up

to the present time.

My
\.

best thanks are due to the friend

who has

placed

his services at

my

disposal for this purpose.


is

The new matter


the original

confined to notes, and the text of

work has not been touched.


,

., May

1906.

Eliza Bagehot.

PREFATORY NOTE TO THE ELEVENTH


EDITION
In
this

Edition additional Notes have been


in

inserted

by Mr. E. Johnstone,

Appendix

II.,

and the other

Notes have been revised by him, so as to bring up the

work to the present


July 1899.

date.

ADVERTISEMENT
The composition of this little book has occupied a much longer time than, perhaps, my readers may think its length or its importance deserves.
It

was begun

as long

ago as the autumn of 1870

and though

its

progress has been often suspended


I

by pressing occupations and imperfect health,


have never ceased to .work at
But
I

it

when

could.

fear that in consequence, in

some

casual

illustrations at least,

every part of the book


'

may

not seem, as the lawyers would say,

to

speak

from the same time.'

The

figures

and the exone time


to use

amples which

it is

most natural
which
it is

to use at

are not quite those


at

most natural

another

and a slowly written book on a


is

living

and changing subject


in this respect.

apt a

little

to

want unity

fear that

must not expect a very favourable


It

reception for this work.

speaks mainly of four

xxvi

ADVERTISEMENT

sets of persons

the Bank of England, Joint Stock


I

Banks other than that Bank, private bankers, and


bill

brokers

and

am much afraid that neither will


is

altogether like what

said of them.

can only
not been
;

say that the opinions

now expressed have


from the

formed hastily or

at a distance

facts

that,
in

on the contrary, they have been slowly matured


'

Lombard

Street

'

itself,

and

that,

perhaps, as they
I

will

not be altogether pleasing to anyone,

may

at least ask for the credit of


in

having been impartial

my
I

criticism.
I

should also say that

am

indebted to a friend

for the correction of the final proof sheets,

which

an attack of
vising.
If
it

illness

prevented

me

from

fully re-

had not been

for his

kind assistance,

the publication of the book must have been post-

poned

till

the autumn, which, as

its

production has

already been so slow,

would have been very

annoying to me.

Walter Bagehot.
The
Poplars,

Wimbledon

April 26, 1873.

CONTENTS
I
CHAP.
I.

PAGE

INTRODUCTORY

'

II.

A GENERAL VIEW OF LOMBARD STREET

21

MI.

HOW LOMBARD STREET CAME TO


ASSUMED
ITS

EXIST,

AND WHY

11

PRESENT FORM

77

IV.

THE POSITION OF THE CHANCELLOR OF THE EXCHE-

QUER
V.

IN

THE MONEY MARKET


IN

I03
IS

THE MODE

WHICH THE VALUE OF MONEY

SETTLED IN LOMBARD STREET


VI.

II

WHY LOMBARD STREET

IS

OFTEN VERY DULL, AND


I2J

SOMETIMES EXTREMELY EXCITED


VII.

A MORE EXACT ACCOUNT OF THE MODE IN WHICH

THE BANK OF ENGLAND HAS DISCHARGED


OF

ITS

DUTY

RETAINING A GOOD BANK


IT

RESERVE, AND OF
.

ADMINISTERING
nil.
IX.

EFFECTUALLY

162

THE GOVERNMENT OF THE BANK OF ENGLAND


THE JOINT STOCK BANKS

210

.345

xxviii

CONTENTS
THE PRIVATE BANKS THE
BILL BROKERS

;haf
X.
XI.
XII.

......
REGULATE THE

pa^b

269

283

THE PRINCIPLES WHICH SHOULD


BY THE BANK OF ENGLAND

AMOUNT OF THE BANKING RESERVE TO BE KEPT


303
33^

xin.

CONCLUSION

APPENDIX

By Walter Bagehot

NOTE

A.

LIABILITIES

AND CASH RESERVE OF THE CHIEF


337

BANKING SYSTEMS
NOTE
B.

EXTRACT FROM EVIDENCE GIVEN BY MR. ALDER-

MAN SALOMONS BEFORE THE HOUSE OF COMMONS SELECT COMMITTEE


NOTE
C.

IN

858

339

STATEMENT OF CIRCULATION AND DEPOSITS OF

THE BANK OF DUNDEE AT INTERVALS OF TEN


YEARS,

BETWEEN

764

AND

864

.352

NOTE

D.

MEETING OF THE PROPRIETORS OF THE BANK


OF ENGLAND, SEPTEMBER
1

3,

866

.352

APPENDIX
Bv
E.

II

Johnstone

.362

Index

365

LOMBARD STREET.
CHAPTER
I

I.

INTRODUCTORY.

VENTURE
I

to call thIs
'

Essay

Lombard

Street/

and not the


because

Money

Market,' or any such phrase,


I

wish to deal, and to show that

mean

to deal, with concrete realities.

A notion prevails

that the

Money Market
it

is

something so impalp-

able that

can only be spoken of in very abstract


it

words, and that therefore books on

must always
real as anyin as plain

be exceedingly

difficult.
is
it

But

maintain that the

Money Market
thing else
;

as concrete

and
if

that
it is

can be described

words
is
I

that

the writer's fault

what he says
1

not clear.

In one respect, however,

admit that

am

about to take perhaps an unfair advantage.

Half,
culty
'

and more than


of the

half,

of the supposed

diffi-

Money Market

has arisen out of the

INTRODUCTORY
*

controversies as to

Peel's Act,'

discussions on the theory on which that

and the abstract Act is


But
as
In the ensuI

based, or supposed to be based.

ing pages

mean

to

speak as
I

little

can of the
it,

Act of 1844;
and scarcely
at
I

3.nd

when
at

do speak of
its

shall

deal nearly exclusively with


all, if
all,

experienced
its

effects,

with

refined basis.

For

this

have several reasons,

one, that

if

lif

you say anything about the Act of 1844, it is tie matter what else you say, for few will attend
it.

to

Most

critics will seize


it

on the passage as
or defend
it,

to

the Act, either to attack

as

if it

were the main


fierce

point.

There has been so

much

controversy as to this Act of Parliament


is still

and there

much animosity that a single sentence respecting it is far more interesting to very many than a whole book on any other part
so
of the subject.
this

Two

hosts of eager disputants on

subject ask

of every

new

writer the
us.f*

one

question

Are

you with us or against


else.
is

and

they care for

little

Of

course

if

the Act of

1844 really were, as

commonly
to

thought, the

primnm

mobile of the English


all

Money
to

Market,

the source of

source of

all

good according harm according


excited
for not

some, and the

others, the
it

extreme

irritation

by an opinion on

would be no reason

giving a free opinion.


INTRODUCTORY
3

writer

on any subject must not neglect

Its

cardinal fact, for fear that others

may abuse
Is
;

him.

But, In

my judgment,
it

the Act of 1844

only a

subordinate matter In the

Money Market

what

has to be said on
tionate length
;

has been said at dispropor-

the

phenomena connected with


all

it

have been magnified into greater relative Importance than they at


deserve.

We

must never
its its

forget that a quarter of a century has passed since

1S44,

period

singularly

remarkable for
marvellous in
if

material progress, and almost

banking development.
facts so

Even, therefore,

the

much

referred to in 1844

had the ImportI

ance then ascribed to them,

and

believe that In

some
in

respects they were even then overstated,

there would be nothing surprising In finding that

new world new phenomena had


are larger and stronger.
since 1844,

arisen which

now
is

In

my
of

opinion this
Street
It

the truth:
that

Lombard

is

so

changed

we cannot judge

without

describing and discussing a most vigorous adult

world which then was small and weak.


account
of the
I

On

this

wish to say as

little

as

is fairly

possible

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 wellworn theme (and they are very many) may not be
B 2

INTRODUCTORY
new and neglected
truest
-jDarts

wearied, and that the

of

the subject

may

be seen as they really

are.

The Lombard

briefest

and
Is

way
It

of
Is

describing

Street

to say that

by

far the

greatest combination

of economical

power and
will

economical delicacy that the world has ever seen.

Of
Is

the greatness of the

power there
Is

be no

doubt.

Money

Is

economical power.
the greatest

Everyone

aware that England


;

moneyed
It

country In the world

everyone admits that

has

much more Immediately


cash

disposable and ready

than any other country.

But very few

persons are aware


balance
to
it

how

mttch greater the ready

the floating
for

loan-fund which can be lent

anyone or
Is

any purpose

Is

in

England than

anywhere

else In the world.

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


London
(31st

are, In
.

December, 1872)

.
,

^120,000,000
13,000,000

Paris (27th February, 1873) New York (February, 1873)

40,000,000
8,000,000

German Empire

(31st January, 1873)

And

the

unknown

deposits

the deposits
are
in

in

banks

which do not publish

their accounts

London
cities.

much

greater than those in any other of these

rNmoDUCTORV
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


accurate

strictly

measure of the resources of a

Money
in all in

Market.

On the contrary, much more cash


in

exists out of

banks

France and Germany, and

non-banking countries, than could be found

England or Scotland, where banking is developed. But that cash is not, so to speak, Money*

Market money
their
in their

:
'

it is

not attainable.

Nothing but

immense misfortunes, nothing but a vast loan

own

securities,

could have extracted the

hoards of France from the custody of the French


people.

The

offer of

no other

securities v/ould

have tempted them,


other securities.

for

they had confidence in no

For all other purposes the money hoarded was useless and might as well not have been hoarded. But the English money is borrow*

able

'

money.

with their

Our people are bolder in dealing money than any continental nation, and
is

even
their

if

they were not bolder, the mere fact that


deposited in a bank makes
it

money
is

far

more

obtainable.

million in the
;

hands of a single
it

banker

a great power

he can at once lend


Note
I,

See Appendix

II.,

p. 362.

INTRODUCTORY
will,

and borrowers can come to him, But because they know or believe that he has it. the same sum scattered in tens and fifties through a whole nation is no power at all no one knows
where he
:

where to
tion

find

it

or

whom to ask for

it.

Concentranot the sole

of
is

money

in

banks, though

cause,

the principal cause which has

made

the

Money Market
so

of England so exceedingly rich,

much beyond that of other countries. The effect is seen constantly. We are asked
and do
that
lend, vast sums,

to

lend,

which
can

it

would be

impossible to obtain elsewhere.


said

It is

sometimes

any foreign country


:

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
it

an exaggeration
not

but confined, as of course


to civilised

was meant
is

to be,

Governments,

it

much
few

of an

exaggeration.

There

are

very

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

INTRODUCTORY
very great lenders to foreign
are
states.

But they

great

lenders

to

those

who

lend.
is,

They
with

advance on foreign stocks, as the phrase


*

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

likely to pay,

lost the idea that any undertaking 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

have entirely

most

countries.

A
He

citizen of

London

in

Queen
it

Elizabeth's

time could not have imagined our

state of mind.

would have thought that

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
colonies

to

make them.
all

At
;

this

moment,
is

in

and

rude countries, there

no large

sum

of transferable

money

there

is

no fund from
as a

which you can borrow, and out of which you can

make immense works. whole either now or

Taking the world


in

the past
is

it

is

certain
for

that in poor states there

no spare money
that in

new and great undertakings, and

most

rich

'

INTRODUCTORY

states the

money
the

is

too scattered, and clings too


to

close

to

hands of the owners,

be often
purposes.

obtainable in large quantities for

new

place like

rarest times

Lombard Street, where in all but the money can be always obtained upon
upon decent prospects of probable
ever

good
gain,

security or
is

a luxury which no country has

enjoyed with even comparable equality before.

But though these


enterprises

occasional

loans

to

new

and foreign

states are the

most conStreet,

spicuous instances of the power of

Lombard

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
In

extent of which few foreigners have an idea, and

none of our ancestors could have conceived.


every
'

district

small
bills
'

traders
largely,

have

arisen,

who

discount their

and with the


if

capital

so borrowed, harass and press upon,


eradicate, the old capitalist*

they do not
trader has

The new

obviously an immense advantage in the struggle of


trade.
If

a merchant have 50,000/.


It

all his

own,

to

he must make 5,000/. a year, and must charge for his goods accordingly
gain 10 per cent, on

but

if

another has only 10,000/.,

40,000/.
*

and borrows by discounts (no extreme Instance in our


is

In his turn the small trader

now being

displaced by the

joint stock

company.

INTRODUCTORY

modern trade), he has the same capital of 50,000/. 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/. a year and if, like the old trader, he
;

make 5,000/ a
interest, obtain

year,

he

will

still,

after

paying his

3,000/ a year, or 30 per cent, on

his

with
if

own 10,000/. As most merchants are content much less than 30 per cent, he will be able,
some of that profit, lower of the commodity, and drive the oldto forego

he wishes,

the price

fashioned trader
capital

the man who trades on


markets
bills

his

own

out of the
owing

In modern English

business,

to the certainty of obtaining loans

on discount of

or otherwise at a moderate
is

rate of interest, there

a steady bounty on trad-

ing with borrowed

capital,'

and a constant

dis-

couragement to confine yourself solely or mainly


to

your own

capital.

This increasingly democratic structure of English

commerce
and
its

is

very unpopular

in

many

quarters,

effects are
it

no doubt exceedingly mixed.


prevents the long duration of

On

the one hand,

great families of merchant princes, such as those of

Venice and Genoa,

who inherited
and who,
to

nice cultivation as

well as great wealth,

some

extent,

com-

bined the tastes of an aristocracy with the insight and

verve of

men

of business.
dirty

so to say,

by the

These are pushed out, crowd of little men. After

lo

WtkODVCTORY

a generation or two they retire into idle luxury.

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
their

Upon

constant levelling of our commercial houses


too,

is,

unfavourable to commercial morality.

Great
re-

firms,

with a reputation which

they

have

ceived

from the

past,

and which they wish

to

transmit to the future, cannot be guilty of small

by a contimcity of trade, which detected fraud would spoil. When we scrutinise


frauds.
live

They

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


at

discounts.*

These men want business


produce an inferior
article to

once,
it.

and they
rely

get

They

on

cheapness, and rely successfully.

But these defects and others


structure of

in the

democratic

commerce are compensated by one

great excellence.
trade,
little
*

No

country of great hereditary


at least,
fit

no European country
sleepy/ to use the only

was ever so word, as England


;

no other was ever so prompt at once to seize new


advantages.

A country dependent mainly on great


will

merchant princes'

never be so prompt

their

commerce perpetually

slips

more and more

into a

INTRODUCTORY
commerce
of routine.

man
to

of large wealth, how-

ever intelligent, always thinks, more or less

have

a great income, and

want

keep

it.

If things
it
;

go on as they are
they change
I

shall certainly
it.'

keep

but

if

may not keep

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,
ties
;

knows
he
is

that such changes are his opportuni-

always on the look-out for them,


finds

and always heeds them when he

them.

The rough and


commerce
*

vulgar

structure
its life
;

of
it

English
contains
in

is

the secret of
to

for

the

propensity

variation,'

which,
is

the

social as in the

animal kingdom,

the principle

of progress.

In this constant and chronic borrowing,

Lom-

bard Street

is

the great go-between. It

is

a sort of

standing broker between quiet saving districts of


the country

and the active employing


but one thing

districts.

Why
it is

particular trades settled in particular places


;

often difficult to say

is

certain,
it

that
is

when a

trade has settled in any one spot,

very

difficult for

another to oust it impossible

unless the second place possesses


intrinsic

some very
is

great

advantage.
its

Commerce

is
it

curiously con-

servative in

homes, unless

imperiously

ti

imkoDucTokY
Partly from this cause, and
districts in

obliged to migrate.
partly

from others, there are whole

England which cannot and do not employ

their

own money. No so. The savings


can be safely lent
are
first

purely agricultural county does


of a county with good land but

no manufactures and no trade much exceed what


in the county.

These savings

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
districts
is

thus sent

up from the accumulating


Deposits are
brokers in

employed

in discounting the bills of the industrial districts.

made with the bankers and bill Lombard Street by the bankers of such
brokers

counties as Somersetshire

those
in

bill

and
bills

and Hampshire, and bankers employ them


from
is

the

discount of

Yorkshire

and

Lancashire.

Lombard
the

Street

thus a perpetual

agent between the two great divisions of England,

between

rapidly-growing

districts,

where almost any amount of money can be well and easily employed, and the stationary and the
declining
districts,

where there
so

is

more money
it

than can be used.

This organisation
so easily adjusted.

is

useful because

is

Political

economists say that

INTRODUCTORY
capital sets

13

towards the most profitable trades,


rapidly
trades.

and that
this is

it

leaves

the less

profitable

and non-paying

But

in ordinary countries

a slow process, and some persons

who

want to have ocular demonstration of abstract


truths

have been inclined to doubt


not
see
it.

it

because they

could

In

England, however, the

process would be visible enough


see the books of the
bill

you could only brokers and the bankers.


if

Their

bill

cases as a rule are

full

of the

bills

drawn

in the

most

profitable trades,

and

cceteris

paribus and in comparison empty of those drawn


in the less profitable.

If the iron trade ceases to


less iron is

be as profitable as usual,
fewer
the sales
the

sold
;

the
in

fewer

the

bills

and

consequence the number of iron


Street
is

bills in

Lombard
if in

diminished.

On

the other hand,

consequence of a bad

harvest the corn trade


profitable,

becomes
*

on
'

a sudden

immediately
if

corn

bills

are created in great numbers, and


in

good are discounted


it is

Lombard

Street.

Thus

English capital runs as surely and instantly where

most wanted, and where there


of
it,

is

most to be

made

as water runs to find

its level.

This

efficient

and

instantly ready organisation

gives us an enormous advantage in competition

with less advanced countries


is,

less

advanced, that
In a

in this particular respect of credit.

new

14

TNTRODUCTORY
is

trade English capital

instantly at the disposal of

persons capable of understanding the


tunities

new opporIn

and of making good use of them.

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
trades

skill

and knowledge are


to England,

useless. in so

All sudden

come

and

doing often

disappoint both rational probability and the predictions of philosophers.

The Suez Canal

is

curious case of

this.

All predicted that the Canal


to

would undo what the discovery of the passage


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 TQcqueville, the Styrlans, the Italians, the Dalmatians, and the
*

Sicilians, are the

people

who

will

use the Canal

If

any use
nations
* In

It.'

But, on the contrary, the main use of

the Canal has been by the English.*

None

of the

named by Tocquevllle had


merchant
steamships
with

the capital, or

1905,

9)398,374 tons passed through the Canal, Germany, however, tons were British.

a total tonnage of and of these 7,224,181 came first with mail*

tons British.

steamers, which were returned at 1,013,645 tons, against 705,890 The total net tonnage of all ships using the Canal

was 13,134,105 tons, out of which 8,356,940 were

British.

INTRODUCTORY
a
tithe

\\

of

It,

ready to build the large screw

steamers which alone can use the Canal profitably.


Ultimately these plausible predictions
not be
right,

may or may

but as yet they have been quite

wrong, not because England has rich peoplethere are wealthy people in
all

countries

but be-

cause she possesses an unequalled fund of floating

money, which

will

help in a

who sees a great^prospect ^^^nd not only does this

moment any merchant of new profit,


unconscious
*

organisa-

tion of capital,' to use a continental phrase,

make

the English specially quick in comparison with


their

neighbours on the continent at seizing on


it

novel mercantile opportunities, but


likely also to retain

makes them

once regularly fastened.

any trade on which they have Mr. Macculloch, following


all

Ricardo, used to teach that

old nations had a


capital

special aptitude for trades in


is

which much

required.

The

interest of capital

having been

reduced in such countries,

he argued, by the
soils,

necessity of continually resorting to inferior

they can undersell countries where profit


in all trades

is

high

needing great
is

capital.

And

in this
it

theory there

doubtless
in

much

truth,

though

can

only be applied
limitations

practice

after

a number of

and with a number of deductions of


political

which the older school of


not take enouorh notice.

economists did

But the same principle

i6

INTRODUCTOR Y
and
practically

plainly

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

can undersell
capital only.

own and a large borrowed capital, a rich man who depends on his own The rich man wants the full rate of
but the poor

mercantile profit on the whole of the capital em-

ployed

in his trade,

man wants
uses,

only

the interest of
rate of profit)

money

(perhaps not a third of the

on very much of what he

and

therefore an income will be an


to the poor

ample recompense

out of the
the

man which would starve the rich man trade. All the common notions about
its

new

competition of foreign countries with

England and
is

dangers

notions

In

which there

in other

aspects

much

truth-require to be

reconsidered in relation to this aspect.

England

has a special machinery for getting into trade

new
and

men who
this

will

be content with low


will

prices,

machinery

probably secure her success,


is

for

no other country

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.
plain

The main conclusion is very


Is

that

English trade

become

essentially a
it

trade on borrowed capital, and that

Is

only by

INTRODUCTORY
this

ly

refinement of our banking system that

we

cim

able to do the sort of trade


the quantity of
it.

we do,

or to get through

But in exact proportion to the power of this


system
is
I

its

delicacy I should hardly say too


its

much

if

said

danger.

Only our

familiarity

blinds us to the marvellous nature of the system.

There never was so much borrowed money


lected in

col-

the world as

is

Of the many
the

millions in

now collected in London, Lombard Street, infinitely


is

greater proportion

held

by bankers or
;

others

on short notice or on demand


owners could ask
:

that

Is

to say, the

they please
for

in

a panic

for it all any day some of them do ask

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
war,

of those deposits too are of a peculiar and

very distinct nature.

Since the Franco- German


to a

we have become
money
is

before the Bankers of Europe.


of foreign

much larger e^^tent than A very large sum


for

on various accounts and

various

purposes held here.

And

in

a time of

panic

it

might be asked

for.

In 1866

we

held

only a
that

much smaller sum of foreign money, but smaller sum was demanded and we had tp pay

INTRODUCTORY
at great cost
if

it

and
to

suffering,

and

it

would be

far

worse

we had

pay the greater sums we now

hold, without better resources than


It

we had

then.

may be

replied,

that

though our instant

liabilities

are great, our present

means are large

that though

pay

at

we have much we may be asked to any moment, we have very much always
it

ready to pay
is

with.

But, on the contrary, there

no country at present, and there never was


before, in

any country

which the

ratio of the cash


it is

reserve to the bank deposits was so small as

now
to

in

England.*

So

far

from our being able

rely

on the proportional magnitude of our


is

cash in hand, the amount of that cash

so ex-

ceedingly small that a bystander almost trembles

when he compares
sity of the credit

its

minuteness with the immenrests

which

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 exit,

perience the

way
with
it

of controlling
discretion.

and always

manage

it

But

we do
There
is

not

always manage
to the contrary.

with discretion.

the

astounding instance of Overend, Gurney, and Co.

Ten

years ago that house stood

next to the

Bank
*

of England in the City of Lonsimilar

don

it

was better known abroad than any


Sec Appendix
I.,

Note A-


INTRODUCTORY
firm
ig

known,
firm.
still

perhaps,

better

than any purely

EngHsh

The

partners had great estates,


In

which had mostly been made

the business.
It.

They
Yet

derived an Immense Income from

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
that
in the

in

a manner so reckless and so foolish,


lent
It

one would think a child who had


City of

money

London would have

lent

better.*

After this example

we must

not confide too surely

In long-established credit,

or In firmly-rooted tra-

ditions of business.

We must examine the system


that
it Is

on which these great masses of money are manipulated,

and assure ourselves


it Is

safe

and

right.

But
before

not easy to rouse

men

of business to
float

the task.

They
;

let

the tide of business

them
it it

they

make money
Even
it

or strive to do so
to think

while

passes,
Is

and they are unwilling


caused a panic.

where
to
*

going.

the great collapse of


Is

Overends, though

beginning

be forgotten.
this

Most men of business think


will

Anyhow

system

probably
Is

last

my

time.

It

has gone on a long time, and

likely to
It

still.*

But the exact point

Is,

that

go on has not gone

* More recent instances of amazing indiscretion on the part of ^eat firms have been afforded by the collapse of Messrs. Baring Brothers and Messrs. Murrieta & Co. C 2

IN TROD UCTOR Y
k)]ig time.

on a

The

collection of these
in

immense
perfectly

sums
new.

in
I

one place and

few hands

is

n 1 844 the

liabilities of the

four great
;

London

they now Joint Stock Banks were 10,637,000/. are more than 60,000,000/.* The private deposits of the Bank of England then were 9,000,000/ There was in 1844 they now are 18,000,000/
;

throughout the country but a fraction of the vast


deposit business which

now
is,

exists.

We

cannot

appeal, therefore, to experience to prove the safety

of our system as

it

now
is

for the present

magni-

tude of that system

entirely new.

Obviously a
cope with
'

system

may be

fit

to regulate a

few millions, and


set to

yet quite Inadequate

when
thus

it is
it

many
bard

millions.

And
is its

may be
its

with

Lom-

Street,' so rapid

has been

growth, and so

unprecedented
I

nature.

am by no means
safely
it.
;

an alarmist.

believe that

our system, though curious and peculiar,

worked

but

if

we wish

must study

We
an

must not

may be so to work it, we think we have an


or that
are

easy task when

we have a
artificial

difficult task,

we

are living in a natural

state

when we

really living in

one.

Money

will

not

manage Itself, and Lombard deal of money to manage.

Street has a great

See Appendix

II.,

Note

II., p.

363.

21

CHAPTER

II.

A GENERAL VIEW OF LOMBARD STREET.


I.

The
and
it,

objects which you see in

Lombard

Street,

In that

the

money world which is grouped about Bank of England, the Private Banks, the
Banks, and the
bill

Joint Stock

brokers.

But

before

describing
at

each of these separately


all

we

must look

what

have

in

common, and

at the

relation of each to the others.


*

The
'

distinctive function of the banker,'


'

says
m

Ricardo,
others
;

begins as soon as he uses the

as long as he uses his


capitalist.

money of own money he is


all

'

only a

Accordingly
bill

the banks

Lombard

Street (and

brokers are for this

purpose only a kind of bankers) hold much money


belonging to other people on running account and

on deposit.
Street
is

In

continental language,
credit,

an organisation of
is

Lombard and we are to


in its kind,

see

if it

a good or bad organisation

22

A GENERAL VIEW OF LOMBARD STREET


if,

or

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 Credit means differs from another is soundness.*
*

that a certain confidence


trust reposed.

is

given,

and a
?

certain
is

Is that trust justified


}

and

that

confidence wise

These are the cardinal

questions.

To
to
in

put

it
;

more simply
will those

credit

is

a set of promises
?

pay

promises be kept
liabilities,'

Especially

banking, where the

or promises to

pay, are so large, and the time at which to pay

them,

if

exacted,

is

so short, an instant capacity to


is

meet engagements

the cardinal excellence.

All that a banker wants to pay his creditors


is

a sufficient supply of the legal tender of the-

country,
be.

no matter what that


countries
differ

legal tender
in

may

Different
tender,

their

laws of

legal

but for the primary

purposes of

banking these systems are not material.


system of currency

A good
and a
will

will benefit the country,


it.

bad system
benefited

will hurt

Indirectly,

bankers

be

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.


look at the matter simply.

They

say

They
*

am

under an obligation to pay such and such sums of

A GENERAL VIEW OF LOMBARD STREET


legal currency
;

23

how much have


under

in

my
it

till,

or

have

at

once

my command,
*

of
is

that

currency?'

In America, for example,

quite

enough

for a

banker

to hold

greenbacks,' though

the value of these changes as the

Government
But a

chooses to enlarge or contract the issue.*


practical

New York

banker has no need to think


all
;

of the goodness or badness of this system at

he need only keep enough 'greenbacks' to


probable demands, and then he
the risk of failure.
By; the law of
is fairly

pay

all

safe from

England the

legal tenders are

gold and silver coin (the last for small amounts


only),

and Bank of England

notes.
is

But the
not, like

number of our attainable bank notes 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/.

on Government
*

securities

for all the rest

it

must

to the resumppayments by the United States in 1879. Since then there has been no fluctuation in the value of the greenback.' t This was the limit of issue against Government securities at the date of writing, but it has since been increased. By the Act of 1844 the Bank was authorised to issue 14,000,000/. against securities, and it was further provided that if any other English note-issuing banks allow their powers of issue to lapse, the Bank

Mr. Bagehot was dealing with the period prior


'

tion of specie


24

A GENERAL VIEW OF LOMBAIU) STREET


bullion deposited

have

Take,

for

example, an

account,

which

may be
:

considered an average
last

specimen of those of the


the last
the

few years

that for

week

of i86q

A71 account pursuant to the Act

yt/i

andZth

Victo?'ia, cap. ^p-^for

week aiding on Wednesday,


;^33,288,64o

the 2<)tk

day of December^ 1869.


;!^ii,oi5,ioo

Issue Department.
Notes issued
.

Government debt

Other securities 3,984,900 Gold coin and bullion 18,288,640


.

Silver bullion

^33,288,640

1^%2ZZM^

might be authorised

to increase its issue against securities to the

amount of two-thirds of the lapsed issues. Since 1844 issues to the amount of over 6,915,000/. have been suffered to lapse, and the Bank has been empowered by successive Orders in Council to augment its issue against securities to the extent of 4,450,000/., the successive steps by which this increase has been effected being
:

Bank of England
.

Issue against Securities.


.
.

;^i4,ooo,ooo Authorised by Act of 1844 Order in Council December 1855 475,000 ))


.

)> J) ))

5) J5 5)
5) }>

J)
53

June 1861 February 1866


.

?3

April

88
.

J)
5J

J>
J)

J>

It

September 1887 February 1890 January 1894

>

)} J

))
J)

March 1900
August 1902 August 1903

y)

>>

175,000 350,000 750,000 450,000 250,000 350,000 975,000 400,000 275,000

;^ I 8,450,000

of the Issue cordingly stood thus


:

The account

Department
2'jth

at the

end of 1905

ac>

Account for the week ending the


Notes issued
;^45,648,245

day of December, 1905.


;^ii,oi5,ioG>
.

Issue Department.
,

Government debt

Other securities 7,434,900 Gold coin and bullion 27,198,245


^45,648,245
;45,648,245

A GENERAL VIEW OF LOMBARD STREET


Banking Department.
Pro2)rietors* capital

2$

^{^14,553,000

Government
ties
.

securi.

Rest

3,103,301

.^13,311,953
19,781,988

Public deposits, in-

cluding
quer,

ExcheSavings'

Other securities . Notes Gold and silver coin


.
.

10,389,690

907,982

Banks, Commis-

sioners

of

tional Debt,

Naand
ac8,585,215
18,204,60/

dividend
counts

Other deposits

Seven-day and
other
bills

445,490

^44,891,613

;^44,89i,6i3

GEO. TOK^i^S,
Dated the 30th December,
1S69.

Chic/ Cashier.

There are here 15,000,000/. bank notes issued on securities, and 18,288,640/. represented by bulHon. The Bank of England has no power by law It to increase the currency in any other manner.* holds the stipulated amount of securities, and for
all
*

the rest
*

it

must have

bullion.

This
'

is

the

cast iron

system

the

'

hard and

fast

line

which

the opponents of the Act say ruins us, and which


the partisans of the Act say saves us.

But

have nothing to do with


which
is

its
is

expediency here.
that our paper
*

All
legal

to

my

purpose

tender,' our

bank

notes, can only be obtained in

* See note on page 23.

26

A GENERAL VIEW OF LOMBARD STREET


manner.
U,
therefore,

this

an English banker

retains a
in

sum

of

Bank

of

England notes or coin


he has a
suffi-

due proportion

to his liabilities,

cient

amount of the

legal tender of this country,

and he need not think of anything more. But here a distinction must be made.
observed that properly speaking
clude in the
cash,
*

It is to

be
in-

we
*

should not

reserve

of a bank

legal tenders,' or
its
its

which the bank keeps to transact

daily
daily

business.

That

is

as

much a

part of
;

stock-in-trade as

its

desks or offices

or at any rate,

whatever words we
carefully distinguish

may

choose to use,

we must
till

between

this cash in the

which

is

we may
to

call

wanted every day, and the safety -{undy as it, the special reserve held by the bank

meet extraordinary and unfrequent demands.

What
tion, is

then, subject to this preliminary explana-

the

amount of
is

legal tender held

by our
is

bankers against their


remarkable, and
It

liabilities ?

The answer
London

the key to our whole system.


or

may be
it

broadly said that no bank in


holds any considerable

out of

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

* Of late years a few of the more important London banks have begun to keep separate gold reserves. As yet, however, the aggregate amount held by them is comparatively small, so that practically the market is still dependent upon the reserve of the Bank of England.


29th day of December,

27

A GENERAL VIEIV OF LOMBARD STREET


1869, liabilities
as

fol-

lows

Public deposits
Private deposits

^^8,585,000

18,205,000
bills
,

Seven-day and other


Total

445,000

....
1

^27,235,000

and a cash reserve of


the cash
reserve,

1,297,000/.*

And this

is all

we must

carefully

remember,

which, under the law, the Banking Department of

Bank of England, as we cumbrously call it the Bank of England for banking purposes possesses. That department can no more multhe
tiply or

manufacture bank notes than any other

bank can multiply them. the Bank of England


in its
till

At
had

that particular

day

only

11,297,000/.

against liabilities of nearly three times


It

the amount.
ties

had

Consols

'

and other

securi-

which

it

could offer for sale no doubt, and

which,
notes

if sold,

would augment

its

supply of bank

and the
Bank

relation of such securities to real


;

cash will

be discussed presently
of

but of real

cash the

banking bank
*

England for this purpose the had then so much and no more,
were
:

On December

27, 1905, the liabilities

Public deposits
Private deposits
.
.

^7,817,000
,
.

.
.

44,221,000

Seven-day and other

bills

99,000
^^52,137,000

And there was a cash reserve of 17,629,000/.

58

A GENERAL VIEW OF LOMBARD STREET

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

own till beyond what is wanted for daily purposes. All London banks keep their principal
in its

reserve on deposit at the Banking Department of


the

Bank

of England.

This

is

by

far the easiest

safest place for them to use. The Bank oi England thus has the responsibility of taking care of it. The same reasons which make it desirable

and

for a private

person to keep a banker

make
can.

it

also

desirable for every banker, as respects his reserve,


to

bank with another banker


care,

if

he safely

The

custody of very large sums in solid cash entails

much
shift

and some cost


if

everyone wishes to

these upon others

he can do so withthe

out suffering.

Accordingly, the other bankers of


in

London, having perfect confidence


of England, get that
for

Bank

bank

to

keep

their reserve

them.
bill

The London

brokers do

much

the same.

Indeed, they are only a special sort of bankers


allow daily interest on deposits, and

who

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


A GENERAL VIEW OF

LOMBARD STREET

29

some London banker.


what he chooses of
it,

That London banker lends


the rest he leaves at the

bank of England.

You
last.

always come back to the

Bank

of England at

banker gain a convenience


danger.
fail.

But those who keep immense sums with a at the expense of a

They
all

are liable to lose

them

if

the bank

As

other bankers keep their banking re-

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
serve at the

meet that
is

difficulty

and

crisis.

And

in this there
'

Three times Peel's Act' has been suspended because the Banking Department was empty. Before the Act was
certainly considerable risk.

broken
In 1847, the Banking Department was reduced to
j/^

1,994,000

1857 1866

1,462,000

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

30

A GENERAL VIEW OF LOMBARD STREET

but substantially the same danger existed before


the Act.
tender,
in

In 1825,

when only

coin

was a
its

legal

and when there was only one department

the Bank, the

Bank had reduced

reserve to

1,027,000/.,

and was within an ace of stopping


to the depositing

payment.

But the danger


of keeping the
is

banks

is

not

the sole or the principal consequence of this

mode

London

reserve.
to

to cause

the reserve

The main effect be much smaller in


it

proportion to the

liabilities

than

would other-

wise be.

The

reserve of the
in

London bankers
of England, the
it.

being on deposit

the

Bank

Bank always lends a

principal part of

pose, a favourable supposition, that the

SupBanking
of
its its

Department holds more than


liabilities in

two-tifths

cash

that
in

it

lends three-fifths of

deposits and
If

retains

reserve only two-fifths.

then the aggregate of the bankers' deposited


it

reserve be 5,000,000/., 3,000,000/ of


lent
will

will

be

by the Banking Department, and 2,000,000/ be kept in the till. In consequence, that
is

2,000,000/

all

which

is

really held in actual''

cash as against the


banks.
If

liabilities

of the

depositing

Lombard

Street were on a sudden

thrown into
as
it

liquidation,

and made

to

pay as much

could on the spot, that 2,000,000/ would

A GENERAL VIEW OF LOMBARD STREET


be
all

31

which the Bank of England could pay to


all,

the depositing banks, and consequently


sides the small cash In the
till,

be-

which those banks

could on a sudden pay to the persons

who have

deposited with them.

We
Bank
which
Street

see then that the banking reserve of the

of England

some 10,000,000//^ on an averless

age of years now, and formerly much


is
;

Is

all

held against the

liabilities
all,

of

Lombard
well be

and

if

that

were

we might

amazed
system

at the

In plain

Immense development of our credit English, at the immense amount


actual

of our debts payable on demand, and the small-

ness of the
to

to

money which we keep pay them if demanded. But there is more Lombard Street is not only a place come.
sum of
it

requiring to keep a reserve,

is

itself

a place

where reserves are kept.


keep their reserve
in

All

country bankers

in

London.

each country town the

They only retain minimum of cash nebusi-

cessary to the transaction of the current

ness of that country town.


*

Long
:

experience has
In quinquennial

larger reserve has since been maintained.

periods since 1870 the average has been

1871-5 1876-80 1881-5 1886-90 1891-5 1896-1900 1905-5

......

^^12,200,000 14,722,000 13,275,000 13,015,000 20,801,000 25,073,000 24,375,000

32

A GENERAL VIEW OF LOMBARD STREET


them
to

told

a nicety

how much
and

this

is,

and
by
to

they

do not waste
idle.

capital

lose

profit

keeping more

They send
it

the

money
the

London, invest a part of


the rest with the
brokers.
is

in securities,

and keep
bill

London bankers and


All
their

The
the

habit of Scotch and Irish bankers

much

same.
is
;

spare
all

in

London, and
is

invested as

other

money is London

money now
is

and,

therefore,

the

reserve in
of England

the Banking Department of the

Bank

the banking reserve not only of the


all

Bank

of

England, but of
all

London
all

and

not

only of

London, but of

England,

Ireland,

and

Scotland too.

Of
in

late there
liabilities.

has been a

still

further increase

our

Since the Franco-German war,

we may be
also.

said to

keep the European reserve


is

Deposit Banking

indeed so small on the

continent, that no large reserve need be held on

same sort which England and Scotland is not needed But all great communities have at times abroad. 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
account of
is
it.

reserve of the

needed

In

the

Bank

of France, and the other the

Bank

of

But since the suspension of specie payments by the Bank of France, its use as a
England.

GENERAL VIEW OF LOMBARD STREET


is

33

reservoir of specie

at

an end.

No one

can draw

a cheque on

it

and be sure of getting gold or silver


Accordingly the whole
is

for that cheque.

liability

for

such international payments in cash

thrown

on the Bank of England.*


cannot take from us ozir

No

doubt foreigners
;

send here

'

value

'

in

own money they must some shape or other for all


* '

they take away.

But they need not send cash


bills

they

may send good


all

and discount them

in

Lombard

Street and take

away any

part of the
It is

produce, or
putting the
all

the produce, in bullion.


in other

only

same point

words to say that

exchange operations are centering more and


in

many purposes Paris was a European settling-house, but now it has ceased to be so. The note of the Bank of
more
London.

Formerly

for

France has not indeed been depreciated enough


to disorder ordinary transactions.

But any deliability to

preciation,

however small
without
its

depreciation
*

even the enough


reality
is

to

The Bank of France resumed specie payments on January i, when its notes have not suffered any depreciation, and there is now a third available stock of gold in Europe that held by the Imperial Bank of Germany. Neither the stock at Paris
1878, since

nor that at Berlin, however, is so accessible as that held by the Bank of England, because the Bank of France can exercise an option to pay in silver, while the Bank of Germany at times makes a difficulty about paying in gold, not absolutely refusing, but putting obstacles in the way. A stock of about 72,000,000/. in gold is now (end of 1905) held by the Bank of Russia, but that is so safeguarded
as to be unavailable for international payments, as
is

also the stock

Qf about 45,000,000/. held by the Austro-Hungarian Bank.

34

A GENERAL VIEW OF LOMBARD STREET


transactions.

disorder exchange

They

are cal-

culated to such an extremity of fineness that the

change of a decimal
a profit into a loss.

may be

fatal,

and may turn

Accordingly

London has
exchange

become the
one of two.*

sole great settling-house of

transactions In Europe, Instead of being formerly

And
of

this

pre-eminence London

will

probably maintain, for

it is

a natural pre-eminence.
bills

The number
London
receives

mercantile

drawn

upon

incalculably surpasses those


;

drawn on any

other European city

London

Is

the place which

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


Is

regular course of

commerce, which
change.

singularly stable

and hard

to

London Is the clearing-house to foreign countries, London has a new liability to At whatever place many foreign countries. people have to make payments, at that place
that

Now

those people must keep money.


of foreign

A
now

large deposit

money

In

London

Is

necessary for

the business of the world.

payments from France to

During the immense Germany, the sum in

* See note on pag"e 33.

GENERAL VIEW OF LOMBARD STREET

35

tj^ansiht

the sum
The

in

London
it

has
shall

perhaps been

unusually large.
great.

But

will ordinarily

be very

present political

circumstances no

doubt

will

soon change.

We

soon hold

in

Lombard
of the
at

Street far less of the


;

money

of foreign

governments

but

we

shall

hold more and more


;

money

of private persons

for the deposit

a clearing-house necessary to settle the balance

of

commerce must tend


itself increases.

to increase as that

com-

merce
cate

Ajid this foreign deposit

is

evidently of a deli-

and peculiar nature.


foreigners,

It

depends on the good


that

opinion of

and
into a

opinion

may
After

diminish or

may change

bad opinion.

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

g.

run

'

upon

England.

And
meet
It

if

that run should happen, the bullion to

must be taken from the Bank.


In the country.
little

There

Is

no other large store

The

great

exchange dealers may have a


D2

for their

own

36

A GENERAL VIEW OF LOMBARD STREET

purposes, but they have no store worth mention-

ing in comparison with


is

this.

If a foreign creditor

so kind as to wait his time and


it

buy the bulHon


paid with-

as

comes

into the country, he

may be

out troubling the

Market.

Bank or distressing the Money The German Government has recendy


;

been so kind
creditor

it

was

In

no respect

afraid.

But a
if

who

takes fright will not wait, and


in

he

wants buHIon

a hurry he must come to the

Bank

of England.
all

In consequence

our credit ^system depends


for its security.

on the Bank of England

^TJnlhe
be

wisdom of the
company,
but
it

directors of

that

one joint-stock
too strong,

depends whether England shall


This

solvent or insolvent.
it is

may seem

not.

All banks depend on the Bankjof^


all

England, and
banker.
If

merchants depend on
10,000/.
to

some
at
his
in

a merchant have
to

bankers, and wants

pay

it

some one
it

Germany, he
his

will

not be able to pay

unless
will

banker can pay him, and the banker


able
to

not be

pay

If

the

Bank

of

England
his

should be in
*

difficulties

and cannot produce

reserve.*

The
fact, if

directors of the

Bank

are,

therefore,

in

not in name, trustees for the public, to keep

A GENERAL VIEW OF LOMBARD STREET


a banking reserve on their behalf
;

37

and

it

would

naturally be expected either that they distinctly

recognised this duty and engaged to perform


or that their

it,

own

self-interest

was so strong

In the

matter that no engagement was needed.


far

But so

from there being a

distinct

undertaking on the

part of the

Bank

directors to perform this duty,


it,

many

of them would scarcely acknowledge


it.

and

some altogether deny

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


the general

exists

do not intend

here to enter at any length on the subject of

management of
Is

the Bank, meaning

the Banking Department, as the principle upon

which the business


as far as
I

conducted does not

differ,

am

aware, from that of any wellin

conducted

bank

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
the bare

50 per

cent,

of

its

liabilities,

and the

other banks only keep in bank notes and coin

minimum

they need to open shop with.


I

And

such a constant difference indicates,

con-


38

A GENERAL VIEW OF LOMBARD STREET


two are not managed on the same

celve, that the

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
is
;

but though the practice


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
the theory
is

mended

general manner,

keep or
guided.

how much reserve they mean to how much they do not mean, or by what
in this

principle

important matter they

will

be

The
most
opinion

position of the
singular.

Bank
the

directors

is

indeed
city

On

one side a great


I

great national opinion,

the nation has learnt


requires

may say, for much from many panics

the directors to keep a large reserve.

The

newspapers,

on behalf of the nation, are


directors to keep
it
;

always warning

the

it,

and

watching that they do keep


hand, another less visible

but,

on the other

but equally constant

pressure pushes the directors in exactly the re-

verse

way, and inclines

them

to

diminish

the

reserve.

A GENERAL VIEV/ OF LOMBARD STREET


This
is

39

the natural desire of

all

directors to

make a good dividend The more money lying


paribus,
is

for their
idle

shareholders.
less,
ccstei^is

the

the dividend

the less the

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 much money is


Indeed,
it

says that he does not see

why

so

kept

idle,

and hints that the


that

divident ought to be more.

cannot be wondered at

the

Bank
profits

proprietors do not quite like their position.


is

Theirs

the oldest bank in the City, but their


increase, while those of other
increase.

do not

banks

most rapidly

In 1844, the dividend on

of England was 7 percent, and the price of the stock itself 212; the dividend
the stock of the

Bank

now
But

is

9 per
the

cent.,

and the price of the stock 232.


in spite

in

same time the shares of the London


of an addition of
risen
capital,

and Westminster Bank,


100 per cent, to the
66,

have

from 27 to
20 per

and the dividend from 6 per

cent, to

cent.*

That the Bank proprietors should not

'In 1905 the Bank of England paid a dividend of 9 per cent., and the London and Westminster Bank a dividend of 13 per cent. At the end of 1905 the shares of the Bank of England were quoted at 293^, and those of the London and Westminster Bank

at 58.

40

A GENERAL VIEW OF LOMBARD STREET


other companies getting richer than
is

like to see

their

company

only natural.

Some
is

part of the lowness of the

and of the consequent small

Bank dividend, value of Bank stock,


it

undoubtedly caused by the magnitude of the


capital
;

Bank
which

but

much
interest

of

is

also

due to

the great

amount of unproductive cash


no

of cash
Banking

yields

that

the

idle.

Department of the Bank of England keeps lying If we compare the London and Westminster Bank which is the first of the joint-stock banks

in the public estimation

and known

to

be very cauthe

tiously

and

carefully

managed

with
1

Bank

of

England,

we

shall see the difference at once.

The

London and Westminster has only


its liabilities

3 per cent, of

lying

of the

Bank of

The Banking Department England has over 40 per cent.* So


idle.

great a difference in the

management must
of

cause,

and does cause, a great difference


Inevitably
the

in the profits.

shareholders

England
* In

will dislike this

great

Bank of more difference


the
;

common with the other London joint-stock banks, the London and Westminster Bank has considerably increased its
reserve.

On June 30,

1890, the proportion of


its

its

reserve to liabihties

to the pubhc, including


is,

of England, which any rate, required to finance its Clearing House transactions, was 12-6 per cent., while on December 31, 1905, it stood at 13-4 per cent. At the latter date the Ban); of England

balance at the

Bank

in part at

held a reserve of

2)3\

per cent.

A GENERAL VIEW OF LOMBARD STREET

41

or less, they will always urge their directors to

diminish
reserve,

(as

far as

possible) the

unproductive

and

to

augment as

far as possible their

own
In

dividend.

most banks there would be a wholesome


they would fear to impair the
But, fortunately or unfortun-

dread restraining the desire of the shareholders to


reduce the reserve
credit of the bank.
ately,
;

no one has any fear about the Bank of

England.
that
it

The English world


almost that
it

at least believes
fail.

Three times since 1844 the Banking Department has received assistance, and would have failed without
will not,

cannot,

it.

In 1825 the entire concern almost suspended


;

payment
there
is

in

797

it

actually did so.

But

still

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 tdtimately have paid


its

all its

creditors
all

all it

owed, and returned to

shareholders

their

own

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
capital.

But

ultimxate

they should be paid on demand, and

if

they are

42

A GENERAL VIEW OF LOMBARD STREET

not paid on

demand they may be


I

ruined.

And
of,

that instant payment, in the years

speak

the

Bank

of England certainly could not have made.


in

But no one

ing the credit

London ever dreams of questionof the Bank, and the Bank never

dreams that
everybody
In 1797,
the

its

own credit
Bank

is

in danger

Somehow

feels the

is

sure to

when it had scarcely Government said not only that pay away what remained, but that

come right. any money left,


it it

need not

must

not.

The
the

effect of letters of licence

'

to

break Peel's

Act has confirmed the popular conviction that

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
nation.

think, as

soon of 'winding-up' the English

Since, then, the


is

Bank

of England, as a bank,

exempted fromi the perpetual apprehension that makes other bankers keep a large reserve the apprehension of discredit it would seem particularly necessary that its managers should be them-

to

selves specially interested in keeping that reserve,

and specially competent


not say that the

keep

it.

But

n^ed
their

Bank

directors

have not

A GENERAL VIEW OF LOMBARD STREET


personal fortune at stake in the
the Bank.

43

management

of

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
in their
is
;

wound
income
the

up,

most of them would hardly

feel the difference.

And, what
and do not

more,
they

Bank

directors are not trained bankers


to the trade,

were not bred


are merchants,

in general
it.

give the main power of their minds to

They

whose
their
It

real

most of whose time and most of mind are occupied in making money in
this great public

own

business and for themselves.

might be expected that as

duty was cast upon the Banking Department of


the Bank, the principal statesmen
(if

not Parliato per-

ment
form

itself)
it.

would have enjoined on them


scarcely any stray

But no

distinct resolution of Parliament


it
;

has ever enjoined

word

of

any

influential statesman.
is

And, on the contrary,

there

a whole catena of authorities, beginning

with Sir Robert Peel and ending with Mr. Lowe,*

which say that the Banking Department of the

Bank
bank

of

England
it

is

only a

Bank

like

any other
;

a Company
*

like other

companies

that in

this capacity

has no peculiar position, and no


authorities are
still

The

at variance.

44

A GENERAL VIEW OF LOMBARD STREET


duties
if

public

at

all.

Nine-tenths of English

statesmen,

they were asked as to the manage-

ment 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,
'

amateurs,'

who have no particular


in

who
it

might be called
interest

above

other people

keeping

undiminished
it

who

acknowledge no obligation to keep

undiminished

who
to
it

have

never

been

told

by

any great

statesman or public authority that they are so

keep

it

or that they have anything to do with

who

are

named by and

are agents for a proif

prietary
it

which would have a greater income

was diminished,

who
even

do not
if it

fear,
all

and who

need not
wasted.

fear, ruin,

were

gone and

That such an arrangement


plain
;

is

strange must be

but

its

strangeness can only be compre-

hended when we know what the custody of a


national banking reserve means,

and how delicate

and

difficult

it is.


4 GENERAL VIEW OF LOMBARD STREET
45

II

Such a reserve as we have seen sudden and unexpected demands.

is

kept to meet
bankers

If the

of a country are asked for much more than is commonly wanted, then this reserve must be resorted to. What, then, are these extra demands ? and how is this extra reserve to be used ? Speaking broadly, these extra demands are of two kinds one from abroad to meet for-

eign payments requisite to pay large and unusual


foreign debts
;

and the other from


irrational.

at

home to meet

sudden

apprehension

or panic arising in any

manner, rational or

No

country
to

has

ever been so exposed as

England

a foreign

demand on

its

banking
is

reserve, not only because at present

England

large borrower from foreign nations, but also (and

much more) because no


objects, or so ramified

nation has ever had a

foreign trade of such magnitude, in such varied

through the world.

The

ordinary foreign trade of a country requires no


cash
;

the exports on one side balance the imports


other.

on the
like the

But a sudden trade of import

import of foreign corn after a bad harvest


46

A GENERAL VIEW OE LOMBARD STREET


(what
is

common, though there are cases of It) the cessation of any great export causes a balance to become due, which must be
less

or

much

paid in cash.

Now,
ing
is

the only source from which large

cash can be withdrawn in


at all developed,
is

sums of countries where banka 'bank reserve/


In

England

especially, except a

few sums of no very


bullion dealers in the

considerable

amount held by

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
But,

of

necessity

on the banking
cash
}
'

reserve.

then,

what

is

Within a
currency

country the action of a government can settle the


quantity,

and therefore the value, of


its

its

but outside

own
is

country, no

government can
of international

do

so.
;

Bullion

the

cash

'

trade
coins

paper currencies are of no use there, and


pass only as

they contain more or less

bullion.

When,

then, the legal tender of a country is


all

purely metallic,

that

is

necessary
'

is

that banks

should keep a sufficient store of that legal tender.'

But when the

'legal

tender'

is

partly metal and

A GENERAL VIEW OF LOMBARD STREET


partly paper,
it Is

47

necessary that the paper

legal

tender

the

bank note

should
I

be convertible

into bullion.

And

here

should pass
Peel's Act,

my
if
I

limits,

and enter on the theory of

began
I

to discuss the conditions of convertibility.

deal

only with the primary pre-requisite of effectual


foreign payments
legal tender
;

sufficient

supply of the local

with the afterstep

the change of the


for the present,

local legal tender into the universally acceptable

commodity

cannot deal.
is,

What

have to deal with

ample enough.
a reserve of

The Bank
'

of
to

England must keep


be used
for foreign
in

legal tender

payments
bullion
if

if Itself fit,

and

to

be used

obtaining

itself unfit.

And
It Is

sometimes very

large,

foreign payments are and often very sudden.


called

The
Civil

'

cotton drain,* as

the drain

to the

East to pay for Indian cotton during the American

War

took

many

millions from this country

for a series of years.

bad harvest must take


In order to find such

millions In a single year.

great sums, the

Bank
Is

of England requires the

steady use of an effectual instrument.

That Instrument
Interest.

the elevation of the rate of

If the Interest of

proved by experience that

money be raised. It is money does come to


it

Lombard

Street,

and theory shows that

oit^hi to


48

A GENERAL VIEW OF LOMBARD STREET

come.

To fully explain the


is

matter

must go deep
capital,
is

into the theory of the exchanges,

but the general


like

notion

plain enough.

Loanable

every other commodity, comes where there


to

most

be made of

it.

Continental bankers and others

instantly send great


rate of interest

sums
it

here, as soon as the

shows that
credit
is

can be done profitably.

While English
of

good, a rise of the value


Street immediately by a

money

in

Lombard
there
is

banking operation brings


Street.

money

to

Lombard

And

also a slower mercantile

operation.

The
in

rise in the rate of discount acts this country.

immediately on the trade of


fall

Prices

here

consequence imports are diminished,


increased,

exports are

and,

therefore,

there

is

more
this

likelihood of a balance in bullion

coming

to

country after the rise in the rate than there

was before. Whatever persons one bank or many banks in any country hold the banking reserve of that

country, ought at the very beginning of an unfa-

vourable 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


imports of bullion.

it

by

This duty, up to about the year i860, the Bank


of

England did not perform

at

all,

as

shall

show


A GENERAL VIEW OF LOMBARD STREET
farther on.
49

more miserable

history can hardly

be found than that of the attempts of the Bank


If

indeed they can be called attempts

to

keep a

reserve and to

manage a

foreign drain between the

year 1819 (when cash payments were resumed by


the Bank, and

when our modern Money Market


and the year 1857.
first

may be

said to begin)

The

panic of that year for the


directors wisdom,
principles.
infinite

time taught the Bank[v.y

The

present policy of the

and converted them to sound Bank is an

improvement on the policy before 1857: the two must not be for an instant confounded
but nevertheless, as
present policy
is
I

shall hereafter show, the


still

now

most

defective,

and

much

discussion

and much

effort will
it

be wanted
i

before that policy becomes what

ought to be.

domestic drain

is

very

different.

Such a

drain arises from a disturbance of credit within

the country, and the difficulty of dealing with


is

it

the greater, because

it

is

often caused, or at
drain.

>

least often enhanced,

by a foreign

Times

without number the public have been alarmed

mainly because they saw that the banking reserve

was already low, and that it was daily getting lower. The two maladies an external drain and an internal often attack the Money Market at nee. What, then^ ought to be done ?

!ro

A GENERAL VIEW OF LOMBARD STREET


la Opposition to what might be at
first

sight

supposed, the best

way

for the

bank or banks who


is
is

have the custody of the bank reserve to deal with


a drain arising from internal discredit,
freely.

to lend

The

first

instinct of

everyone

the con-

There being a large demand on a fund which you want to preserve, the most obvious
trary.

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.
not the

But every banker knows that


to diminish discredit.

this is

way

This discredit

means, *an opinion that you have not got any


money,' and to dissipate that opinion, you must,
possible,
if

show

that

you have money you have

you must

employ
public
for

it

for the public benefit in order that the

may know

that

it.

The
before.

time

economy and for accumulation is good banker will have accumulated


times the reserve he ordinary times.
Ordinarily discredit does not at
is

in ordinary

to

make use

of in extra-

first

settle

on

any particular bank, still less does it at first concentrate itself on the bank or banks holding the
principal cash reserve.

sure to be those in

These banks are almost best credit, or they would not


having the reserve, they

be

In that position, and,

are likely to look, stronger and seem stronger than

A GENERAL VIEW OF LOMBARD STREET


any others.
he used to be

5'

At
?

first,

Incipient panic
:

amounts

to a

kind of vague conversation

Is

A.

Has

not C. D. lost

a thousand such questions.


talked about, or am
as
it

A
*

good as ? and hundred people


B. as

money

are talked about, and a thousand think


I

Am
*

not

Is

my
?'

credit as

good
every

used to be, or

Is

It

less

And

day, as

a panic grows, this floating

suspicion
;

becomes both more Intense and more diffused more persons, and attacks them attacks

It

all

more
as

virulently than at
therefore, try to

first.
*

All

men

of expe-

rience,
it is

strengthen themselves,*

called. In the early stage of


;

a panic

they

borrow money while they can


banker and
offer bills

they come to their

for discount,

which com-

monly 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
to

if

he does he
himself.

will

be

said, or

be

in

want of money, and so


pecuniary
this

may be said, may attract the


all

panic to

Not only merchants but


liabilities
*

persons under

imminent
selves,'

present or

feel

wish to

strengthen
those

them-

and
Is

in

proportion to

liabilities.

Especially

this the

case with

called the auxiliary dealers In

what may be Under any credit.

system of banking there

will

always group them-

E 2

52

A GENERAL VIEW OF LOMBARD STREET


main bank or banks
the minutiae of
(in

selves about the

which

is

kept the
dealers,

reserve) a crowd of smaller money


bills,

who watch

look into

special securities
for,

which busy bankers have not time


livelihood.

and so gain a

As

business grows,

the

number of such subsidiary persons augments. The various modes in which money may be lent
their
peculiarities,

have each

and persons who


in that

devote themselves to one only lend

way
In

more
will

safely,

and

therefore

more cheaply.
in

time of panic, these subordinate dealers

money
In
is

always come to the principal dealers.

ordinary times, the intercourse between the two

probably close enough.

The

little

dealer
*

is

pro'

bably in the habit of pledging his

securities

to

the larger dealer at a rate less than he has himself charged,

and of running
to

into the

market to

lend again.
capital,

His time and brains are

his principal

and he wants

be always using them.


minor money

But

in times of incipient panic, the

dealer always

becomes alarmed.
the person on

His
;

credit

is

never very established or very wide


fears that

he always
current

he

may be

whom

suspicion will fasten, and often he

is so.

Accord-

ingly he asks the larger dealer for advances.

number of such persons ask all the large dealers -^those who have the money the holders of the

A GENERAL VIEW OF LOMBARD STREET


reserve.

53

And

then the plain problem before the

great dealers comes to


protect ourselves
?

be*

How

shall

we

best

No

doubt the immediate adis

vance to these second-class dealers


but

annoying,
?

may

not the refusal of


it

it

even be dangerous
;

panic grows by what

feeds on

if it

devours

these second-class men, shall we, the


safe
'

first-class,

be

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


it

be ready not only to keep


but to advance
others.
it

for their

own liabilities,

raost freely for the liabilities of

bankers,

They must lend to to this man and


*

merchants, to minor
that man,*

whenever
to

the security

is

good.

In wild periods of alarm,

one

failure

makes many, and the best way


is

prevent the derivative failures

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
*

by every possible means and In modes we had never adopted before we took In stock on security, we purchased Exchequer bills, we m.ade advances on Exchequer bills, we not only
of England,
*
;

54

A GENERAL VIEW OF LOMBARD STREET

discounted outright, but


deposit of
bills

we made advances on the

immense amount, in short, by every possible means consistent with the safety of the Bank, and we Avere not on some
of exchange to an

occasions over nice.

Seeing the dreadful state

in

which the public were, we rendered every


ance
in

assist-

our power.'

Afcer 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


bills

they can only pay those

bills

by discounting
all

on other merchants. In other words,


chants are dependent on borrowing

merchants

are dependent on borrowing money, and large mer-

At
will

the slightest
to

symptom

of panic
;

much money. many merchants


they think they

want

borrow more than usual

supply themselves with the means of meeting

their bills while those

means are
like
it

still

forthcoming.

If the bankers gratify the merchants, they must lend

largely just

when they
is

least

if

they do not

gratify them, there

a panic.

On

the surface there seems a great inconsistency


First,

in all this.

banks a certain

some bank or reserve; you make of it or them a


you establish
in

A GENERAL VIEW OF LOMBARD STREET

55

kind of ultimate treasury, where the last shilling


of the country
is

deposited and kept.

And
is

then

you go on
be the
last

to say that this final treasury

also to

lending-house

that out of

it

unbounded,

or at any rate immense, advances are to be

made

when no one

else lends.

This seems

like saying

first,
it

that the reserve should be kept,

and then
no puzzle

that

should not be kept.

But there

is

in the matter.

The

ultimate banking reserve of a


is

country (by whomsoever kept)

not kept out of

show, but for certain essential purposes, and one of


those purposes
is

the meeting a

demand

for cash
It is

caused by an alarm within the country.

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
comes
the

reduced to abstract principle, the subject

to this.

An

alarm

'

is

an opinion that
their

money of certain persons will not pay creditors when those creditors want to be
If possible,

paid.

that alarm

is

best

met by enabling
little
it

those persons to pay their creditors to the very

moment.
is

For

this

purpose only a
alarm
is is

money
aggra-

waated.

If that

not so met,

vates into a panic, which


people, or very

an opinion that most

many

people, will not

pay

their

56

A GENERAL VIEW OE LOMBARD STREET


;

creditors

and

this

too can only be met by en*

abling

all

those persons to pay what they owe,

which takes a great deal of money.

No

one has

enough money, or anything


holders of the bank reserve.

like

enough, but the

Not

that the help so given

that reserve necessarily diminishes

by the banks holding Very comit.

monly the panic extends as far, or almost as far, as the bank or banks which hold the reserve, In this but does not touch it or them at all. if the dominant bank or banks, case it is enough
so to speak, pledge their credit for those

who
often

want

it.

Under our present system

it

is

quite enough that a merchant or a banker gets

the advance

the

made to him put to his credit in 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.


is

An

increase of loans at such times

often an increase

of the
its

liabilities

of the bank, not a diminution of

reserve.

Just so before 1844, an Issue of notes,

as in 1825, to quell a panic entirely internal did

not diminish the bullion reserve.


out,

but they did not return.

The notes went They were issued


wanted no

as loans to the public, but the public

more

they never presented them for payment

A GENERAL VIEW OF LOMBARD StREET

5;

they never asked that sovereigns should be given


for them.

But the acceptance of a great HablHty


the thing next

during an augmenting alarm, though not as bad


as an equal advance of cash,
worst.
is

At

any

moment

the

cash

may be
it

demanded.
accordingly.

Supposing the panic

to grow,
v/ill

will

be demanded, and the reserve

be lessened

No

doubt

all
*

precautions may, in the end, be

unavailing.

On

extraordinary occasions,

says

Ricardo,

a general panic

may

seize the country,

when everyone becomes


ent

desirous of possessing

himself of the precious metals as the most conveni-

mode

of realising or concealing his property,

against such panic banks have no security on any

system!

reserve

The bank or banks which hold the may last a little longer than the others
apprehension pass a certain bound, they
too.

but

if

must perish
their

The

use of credit

is,

that

it

enables debtors to use a certain part of the


creditors

money
those

have lent them.


all

If

all

creditors

demand
it,

that

money

at once, they

cannot have
used,
is

for that

which their debtors have

for

the time employed,

and not
credit

to

be

obtained.

With the advantages of


;

we must

take the disadvantages too

but to lessen them as


a great store of

much

as

we

can,

we must keep

58

A GENERAL VIEW OF LOMBARD STREET

ready
of
it

money always

available,

and advance out


and
in

very freely

in periods of panic,

times

of incipient alarm.

The management
.more
difficult,

of the

Money Market
demand

is

the

because, as has been said, periods of


for bullion

internal

panic and external


together.
till,

commonly occur
empties the Bank
resulting
rise
in

The

foreign

drain

and that emptiness, and the


rate

the

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
it.

disease

but
look

now we know how


first

to deal with

We

must

to the foreign drain, and raise the rate

of interest as high as

may be

necessary.

Unless
allay

you can stop the foreign export, you cannot


the domestic alarm.

The Bank

will

get poorer

and poorer, and


raised,

its

poverty

will protract or

renew

the apprehension.

And

at the rate of interest so

the holders

one

or

more of

the final

Bank reserve must lend

freely.

at very high rates are the best

Very large loans remedy for the worst


^ GENERAL VIEW OF LOMBARD STREET
59

malady of the Money Market when a foreign drain


is

added
is

to a domestic drain.

money
at

not to be had, or that

Any notion that it may not be had


is

any

price,

only raises alarm to panic, and en-

hances panic to madness.


clear,

But though the rule

the greatest delicacy, the finest and best

skilled

judgment, are needed to deal at once with


evils.

such great and contrary

And
than
it

great as

is

the delicacy of such a problem


far greater in

in all countries,

it is

England now
strain

was or

is

elsewhere.
final

The

thrown

by a panic on the
to the

Bank reserve is

proportional

magnitude of a country's commerce, and to


size of the

the

number and
is,

dependent banks

banks, that

holding no cash reserve

that are
And

grouped around the central bank or banks.


in
strain.

both respects our system causes a stupendous

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


liabilities

means of meeting those


so far from being able to

while they can.


loans.
s

This causes a great demand

for

new

And
wlio

meet

it,

the bankei

6o

A GENERAL VIEW OF LOMBARD STREET


at that time

do not keep an extra reserve


largely, or

borrow
likely

do not renew large loans


bankers,

very
First,

do both.

London
England,

other

than

the

Bank

of

effect this in several

ways.

they

have probably discounted


for the bill brokers,

bills to

a large amount
are paid, they
replace them.

and

if

these

bills

decline discounting

any others

to

The
Bank
bills

directors of the

London and Westminster


justly said that if those

had, in the panic of 1857, discounted millions


bills,

of such

and they

were paid they would have an amount of


bills to

cash far more than sufficient for any demand.^'

But how were those


else
cantile

be paid

must lend the money to pay them. community could not on a sudden bear

Some one The merto

lose so large a

sum

of borrowed
it,

money

they have

been used to rely on

and they could not carry


it.

on

their business without


it

Least of

all

could

they bear

at the beginning of a panic,

when everySpeaking

body wants more money than


of other
bills.

usual.

broadly, those bills can only be paid

by the discount
(suppose) of a
to the

When

the

bills

Manchester warehouseman which he gave


manufacturer become due, he cannot, as a
for

rule,

pay

them

at

once
*

in cash

he has bought on
in

credit,

See Note B,

Appendix

I.

A GENERAL VIEW OF LOMBARD STREET


and he has sold on credit. man. To pay his own bill
goods, he must discount the

6i

He
bills

is

but a middle-

to the

maker of the

he has received

from the shopkeepers to

whom

he has sold the

goods
them.

but

if

there

is

a sudden cessation in the


will not

means of

discount,

he

be able to discount

All our mercantile community must obtain


If

some one else did 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 ?
loans to pay old debts.

new

not pour into the market the

Certainly

not

the

bill

brokers.

They have
such banks as
of
bills,

been used to re-discount with


the

London and Westminster


if

millions

and

they see that they are not likely to be


re-discount

able to

those

bills,

they instantly

protect themselves

and do not discount them. Their business does not allow them to keep much

cash unemployed.

They

give interest for

all

the

money deposited with them

an

interest

often
;

nearly approaching the interest they can charge


as they can only keep a small reserve a panic

tells

on them more quickly than on anyone


stop their discounts, or
counts, immediately.

else.

They

much
is

diminish their dis-

There

no new money to

52

A GENERAL VIEW OF LOMBARD STREET

be had from them, and the only place at which they can have
it is

the

Bank

of England.
:

There
cash,

is

even a simpler case

the banker

who

is

uncertain of his credit, and wants to increase his

may have money on


If

deposit at the
his reserve,

bill

brokers'.

he wants to replenish
it,

he
is

may ask

for

suppose, just
if

when

the alarm

beginning. But

a great number of persons do this


bill

very suddenly, the

brokers will not at once be

able to pay without borrowing.


bills in their case,

They have excellent


be due
for

but

these will not

some
less

days

and the demand from the more or


is

alarmed bankers
Accordingly the

for

payment

at once

and

to-day.

bill

broker takes refuge at the


only place where at such

Bank
a

of

England

the

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
to the saying,
his reserve.

And

in

ordinary times nothing can be better.

According

you

'

can

sell

Consols on a Sunday.'
affecting

In a time of no alarm, or In any alarm

that particular banker only, he can rely on such

reserve

without misgiving.

But not so
sell

in

general panic.

Then,
to

if

he wants to
the

500,000/.

worth of Consols, he

will not find 500,000/. of fresh

money ready

come

into

market.

All

.4

GENERAL VIEW OF LOMBARD STREET


sell,

63

ordinary bankers are wanting to

or thinking
is

they

may have

to

sell.

The

only resource

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.
if

The

case

is

worst

the alarm
is

is

not confined

to the great towns, but

diffused through the

country.

As

rule,

country bankers only keep


as
is

so

much barren
business.

cash

necessary for their

common
bill

All the rest they leave at the


or

brokers', or at the interest-giving banks,

invest in Consols

and such

securities.

But

in

panic they
it.

London and want this money. And 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
to

come

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


it

suddenly and at once come upon


other bank

for aid.

No

was ever exposed

to

a demand so


64

A GENERAL VIEW OF LOMBARD STREET

formidable, for none ever before kept the banking

reserve for such a nation as the English.

The mode
this great

in

which the Bank of England meets


is

responsibility

very curious.

It

unin

questionably does

make enormous advances

every panic
In 1847 the loans on
ties'
*

private securi

18,963,000
to

20^409,000
to to

increased from
ditto
ditto

1857 ditto
1866 ditto

20,404,000
18,507,000

31,350,000
33,447,000

But,

on the other hand, as we have

seen,
it

though

the Bank,
1

more or

less,

does

its

duty,

does not

distinctly

acknowledge that

it is its

duty.

We are

\apt to be solemnly told that the

Banking Departonly a bank like

ment
of

of the

Bank
it

of
it

England
is

is

other banks

that

has no peculiar duty in times


to look to itself alone, as

panicthat

then

other banks look.


the Bank.

And

there

is

this

excuse for

Hitherto questions of banking have


discussed in comparison with ques-

been so

little

tions of currency, that the duty of the

Bank

in

time

wrong ground. It is imagined that because bank notes are a legal tender, the Bank has some peculiar duty But bank notes are only to help other people.
of panic has been put on a

a legal
at the

tender at

the

Issue

Department, not

Banking Department, and the accidental

A GENERAL VIEW OF LOMBARD STREET

65

combination of the two departments in the same


building gives the Banking Department no aid
in

meeting a panic.
at

If

the Issue
if it

Department

were

Somerset House, and

issued Govern-

ment 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
It is

with what

is,

not with what was.

And
'State
is

still

worse argument

is

also used.

said that because the

Bank of England keeps the account' and is the Government banker, it


*

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 Govern-

ment 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


it

the

Bank

to

keep what money


borrowing of
it

may

chance
it

to have, or in

what money
it

may

chance to want, does not hire

to stop

a panic or

much help it if it tries. The real reason has not been distinctly As has been already said but on account

seen.

of

its

66

A GENERAL VIEW OF LOMBARD STREET


its

importance and perhaps


saying again

novelty

it

is

worth

whatever bank
most

or banks keep the

ultimate banking reserve of the country must lend


that reserve
for that
is

freely in time of apprehension,

one of the characteristic uses of the bank


in

reserve,

and the mode


for

which
it

it

attains

one of

the main ends

which

is

kept.
in fact

rightly or wrongly, at present

and

Whether the Bank

of England keeps our ultimate bank reserve, and


therefore they

must use

it

in this

manner.

And
it

though the Bank of England certainly


in

does make great advances

time of panic, yet as


it

does not do so on any distinct principle


docs
it

natur-

ally

hesitatingly, reluctantly,

and with mislatest panic,

giving.

In 1847, even in 1866


in

the
Bank

and the one


acted the best

which on the whole the Bank


nevertheless an instant

there was
believed

when

it

was

the

would
hesitated

not
to

advance on Consols,

or at

least
this

advance on them.
in

The moment
telegraphed to

was reported
country,
it

the

City and

the

made make
the

the panic indefinitely worse.


large advances in this faltering

In

fact,
is

to
to

way

incur the evil of

advantage.

making them without obtaining What is wanted and what is


is

necessary to stop a panic


sion that, though

to diffuse the impres-

money may be

dear,

still

money

A GENERAL VIEW OF LOMBARD STREET


IS

t?

to

be had.

If

people could be really convinced


If

that they could

have money
Is

they wait a day or

two, and that utter ruin

not coming, most likely


In

they would cease to run

such a

mad way

for

money.
will

Bank at once, and say it not lend more than It commonly lends, or lend
Either shut the

freely, boldly,

and so that the public may

feel

you you

mean
will

to

go on lending.

To

lend a great deal,


that

and yet not give the public confidence


lend sufficiently and effectually,
is

the worst

It Is the policy now pursued. Bank does not lend from the motives which should make a bank lend. The holders of the Bank reserve ought to lend at once

of

all policies;

but

In truth, the

and most
not to do

freely

In

an Incipient panic, because

they fear destruction in the panic.


it

They ought
It

to serve others

they ought to do
to

to

serve themselves.

They ought
it.

know

that this

bold policy

is

the only safe one, and for that reason

they ought to choose


are not afraid.

But the Bank directors


at the last

Even

moment they
Both
in

say that 'whatever happens to the community

they can preserve themselves.'

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


F 2

all

gone,

6S

A GENERAL VIEW OF LOMBARD STREET


it

and that
securities
is

could

strengthen

itself

by
of

selling

and by refusing

to discount.

a complete dream.

The Bank
securities.
till

But this England

could not
there
is

sell 'securities/ for in

an extreme panic

no one else to buy


still

The Bank
are paid,

cannot stay

and wait
which

its
it

bills

and so
lent
will

fill

its coffers,

for unless
it

discounts equiva-

bills,

the

bills

has already discounted


the reserve in the
ulti-

not be paid.

When

mate bank or banks

runs low,
means
banks
adopt to

those

keeping the reserve

it

cannot be augmented by the same

that other

and dependent banks commonly maintain their reserve, for the dependent

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.
trust that at such
I

shall

have

failed in

my

purpose

if

have not
all

proved that the


I

system of

entrusting

our

reserve to a single board, like that of the


directors,
is
;

Bank
very

very anomalous
that
its

that

it

is

dangerous

bad consequences, though


fully

much

felt,

have not been

seen

that they

have been obscured by


hidden
in the
it

traditional

arguments and

dust of ancient controversies.

be said What would be better? What other system could there be ? We are so

But

will

A GENERAL VIEW OF LOMBARD STREET

69

accustomed to a system of banking, dependent


for
its

cardinal function

on a single bank, that

we
up
of

can hardly conceive of any other.

But the

natural system
if

that

which would have sprung


let

Government had
In
all

banking alone^s that

many banks
to

of equal or not altogether unequal

size.

other trades competition brings the

traders

rough approximate
single

equality.

In

cotton

spinning, no

firm

far
is
;

and permano tendency


nor,

nently outstrips the others.


to a

There

monarchy

in the cotton
left free, is

world

where

banking has been


to a

there any tendency

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
is

bank with

any

sort of

predominance

nor

there any such

bank

new world of Joint Stock Banks outside the Bank of England, we see much the same phenomenon. One or more get
in Scotland.

In the

for a time a better business than the others, but

no single bank permanently obtains an unquesNone of them gets so tioned predominance.

much
with

before the others that the others voluntarily


its

place their reserves in

keeping.

republic

many

competitors of a size or sizes suitable


is

to the business,

the constitution of every trade

70

A GENERAL
to
itself,

VIE IV

OF LOMBARD STREET

if left

and of banking as much as any

other. A monarchy in any trade is a sign of some anomalous advantage, and of some inter-

vention from without.


I

shall

be at once asked
?

Do
to
is

you propose a

revolution

Do

you propose
answer
it

abandon the onethat

reserve system, and create

anew a many-reserve
I

system

?
it.

My
I

plain

do not
Credit

propose

know

would be
find of

childish.

in business

is

like loyalty in

Government.
it,

You
out a

must take what you can


it

and work with

if

possible.

theorist
in

may

easily

map

scheme of Government
could be dispensed with.
that, since

which Queen Victoria

He may make

a theory

of

we admit and we know that the House Commons is the real sovereign, any other soveis

reign
it is

superfluous

but for practical purposes,

not even worth while to examine these argu-

ments.
doubt,

Queen
and
beings.

Victoria

is

loyally

obeyed

without

reasoning

by

without
of
it

millions

human

If those millions

began to argue,

would not be easy

to

persuade them to obey Queen


Effectual arguments

Victoria, or anything else.

to convince the people

who need

convincing are
credit,

wanting.

Just so, an

immense system of
its

founded on the Bank of England as


its

pivot

and

basis,

now

exists.

The

English people, and

A GENERAL VIEW OF LOMBARD STREET


foreigners too, trust
it

71

Implicitly.

Every banker
is

knows
credit,

that

If

he has

to

prove that he
his

worthy of
In fact

however good may be


Is

arguments,

his credit

gone

but what
rests

we have

requires no

proof

The whole

on an

Instinctive confidence

generated by use and years.


of England

Nothing would
away,

persuade the English people to abolish the Bank


;

and

If

some calamity swept


in

It

generations
trust

must elapse before

at all the

same

would be placed

any other equivalent.

A
put

many-reserve system,
it

down
It.

in

strous

there.

if some miracle should Lombard Street, would seem monNobody would understand it, or
is

confide in

Credit

a power which

but

cannot

be

constructed.

may grow, Those who live

ulider a great and firm system of credit must consider that if they break up that one they will

never see another, for


to

it

will take years


it.

upon years

make a

successor to
account,
I

On

this

do not suggest that we

should return to a natural or many-reserve system


of banking.
if I
I

should only Incur useless ridicule


it

did suggest

Nor can
simple

propose that

we

should

adopt

the

and

straightforward

expedient by which the French have extricated

themselves from the same


all

difficulty.

In France

banking

rests

on the Bank of France, even


73

A GENERAL VIEW OF LOMBARD STREET


in

more than
England.

England

all

rests

on the Bank of
keeps the
final

The Bank
it

of

P' ranee

banking reserve, and


too.

keeps the currency reserve


trust such a function

But the State does not


nation

to a

board of merchants, named by shareholders.


itself

The

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


in so doing, they

interest, and,

may

disregard the

murmurs

of
is

the 'regents'

if

they

like.

And

in theory, there

nmch
single
it is

to

be said for

this plan.

The keeping

the

banking reserve being a national function,


argue that Government

at least plausible to

should choose the functionaries.


a political intervention
is

No

doubt such

contrary to the sound

is a trade, and 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 suqh plan w^ould answer in

economical doctrine that 'banking


only a
trade.'

But

A GENERAL VIEW OF LOMBARD STREET


England.
logical

73

We

have not been trained to care


in

for

sequence

our institutions, or rather


to

we
the

have been trained not


practical result for

care for

it.

And

which we do care would


of the

in this

case be bad.

The governor

Bank would
in the

be a high Parliamentary

official,

perhaps

Cabinet, and would change as chance majorities

and the strength of parties decide.


peculiarly requiring consistency

trade
attain-

and special
shifting

ment would be managed by a


trained ruler.
to

and un-

In

fact,

the whole plan would seem

an Englishman of business palpably absurd


it

he would not consider it, he would not think That it works fairly well w^orth considering.
theory for

in

France, and that there are specious arguments of


it,

would not be

sufficient to his

mind.
I

All such changes being out of the question,

can propose only three remedies.

There should be a clear understanding between the Bank and the public that, since the
First.

Bank hold our


implies
foreign
;

ultimate banking reserve, they will

recognise and act on the obligations which this

that

they will replenish


as fully,

it it

in times of
in

demand

and lend

times of

internal panic as freely


ciples of

and

readily, as plain prin-

banking require.
plan^

This looks very different from the French

74

A GENERAL VIEW OF LOMBARD STREET


It is

but

not so different In reality.


effect,

In England

we

can often
opinion,

by the

Indirect

compulsion of
effect

what other countries must


Government.
directors

by the

direct compulsion of
in this case.

We
now

can do so

The Bank
;

fear public

opinion exceedingly

probably no kind of persons

are so sensitive to newspaper criticism.


is

And
is

this

very

are

Our statesmen, it much more blamed, but they have


natural.
still

true,
^

generally

served a long apprenticeship to sharp criticism.


If they

experience

care for it (and some do after much more than the world
It

years of
thinks),

they care less for


regard
it

than at

first,

and have come to


rid.

as an unavoidable and incessant irritant,

of which they shall never be

But a Bank

director undergoes no similar training


ing.

and hardena very small

His functions at the Bank


;

fill

part of his time


in Parliament)

all

the rest of his

life

(unless

he be

is

spent in retired and mercantile


not
subjected
is

industry.

He

is

to

keen

and
it.

public criticism,

and

not taught to bear

Especially
rotation,

when once

in his life
is

be becomes, by

governor, he
office shall

most anxious that the


well.*

two years of
to

*go off

He

is

apt

be

irritated

even by objections to the prinacts,

ciples

on which he

and cannot bear with


is

equanimity censure which

pointed and personal.

A GENERAL VIEW OF LOMBARD STREET


At present
ness
Is

75

am

not

sure

if

this

sensitive-

beneficial.

As
in

the exact position of the

Bank of England
Bank governor cmn
that
*

the
Is

Money Market

is

indistinctly seen, there

no standard to which a

appeal.

He
said
;*

is

always

in fear

something

may be

but not quite

knowing on what
his fear
Is

side that 'something'

may
it

be,
if

but an indifferent guide to him.


doctrine were
accepted,
is
if

But

the cardinal

were

acknowledged that the Bank


to deal with

charged with the


Is

custody of our sole banking reserve, and


it

bound

according to admitted principles,

then a governor of the Bank could look to those


principles.

He
If

would know which way

criticism

was coming. would have a

he was guided by the code, he

plain defence.

And

then

we may
not

be sure that old

men

of

business would

deviate from the code.


Directors are a sort of
I

At

present the Board of


for the nation.

5'^;;^2:-trustees

would have them


Secondly.

real trustees,

and with a good


should

trust deed.

The government of the Bank


in
*

be improved

a manner to be explained.

We

should diminish the amateur' element;

we
;

should

augment the trained banking element


should ensure more constancy
tion.

and we

In the administra-

76

A GENERAL VIEW OF LOMBARD STREET


Thirdly.

As

these two suggestions are designed


as strong as possible,

to

make

the

Bank

we

should

look at the rest of our banking system, and try to

reduce the demands on the Bank as


can.

much
as

as

we

The

central

machinery being inevitably


as

frail,

we

should carefully and


it.

much

possible

diminish the strain upon

But
full

to explain these proposals,

and

to gain a

understanding of

many arguments

that have
at the

been used, we must look more

in detail

component parts of Lombard Street, and at the curious set of causes which have made it assume
its

present singular structure.

11

CHAPTER
IT

III.

now LOMBARD STREET CAME TO


ASSUMED
ITS
I.

EXIST,

AND WHY

PRESENT FORM.

In the

last century,
*

a favourite subject of literary


it

ingenuity was
called.

conjectural history,' as

was then

Upon grounds
made
If this

of probability a fictitious

sketch was
existing.

of the possible origin of things

kind of speculation were


first

now

applied to banking, the natural and

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
to
It

and the habit of banking, and they take


soon as they can
in their

as

new

world.

Conjectural

78

HO IV LOMBARD STREET CAME TO


would be inclined
:

EXIST,

AND

history

to say that all


Is

banking

began thus

but such history


it

The
it

basis of

is

false.

It

any value. assumes that what


rarely of
is

works most

easily

when

established

that which

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


and not very easy
is

when firmly among new


to them.

established, are very hard to establish

people,

to explain
Its

Deposit banking
is

of this sort.

essence

that a very large

agree to trust
person.
if

number of persons a \ ery few persons, or some one


profitable trade

Banking would not be a

bankers were not a small number, and deposi-

tors in

comparison an immense number.

But

to

get a great

number
is

of persons to do exactly the


difficult,

same thing

always very

and nothing

but a very palpable necessity will

make them
there
If
is

on a sudden

begin to do

it.

And

no such palpable necessity


will not find

in banking.

you
ours.

take a country town in France, even now, you

any such system of banking as


is

Cheque-books are unknown, and money kept on


running account by bankers
their
rare.

People store

money

in a caisse at their houses.

Steady

IVIIV IT

ASSUMED ITS PRESENT FORM

79

savings, which are waiting for investment,

and

which are sure not to be soon wanted,


lodged with bankers
;

may be
floating

but the
is

common

cash of the community


nity themselves at
it

kept by the commu-

home.

They

prefer to keep

so,

and

it

would not answer a banker's purpose


for

to

make expensive arrangements


If a 'brancn,'

keeping

it

otherwise.
Provincial

such as the National

Bank opens
in
its

in

an

English country

town, were opened


one,
it

a corresponding French
expenses.

would not pay

You

could
to
is

not get any sufficient

agree to put their


in
in
all

number of Frenchmen money there. And so it


Deposit banking
is

countries

not of British descent, though a very

various degrees.

difficult

thing to begin, because people

do not

like to let their


cially

money

out of their sight


it

espe-

do not

like

to let

out of sight v^athout


all

security

still

more, cannot
to

at

once agree on

any single person


trust
it

whom
the
in

they are content to

unseen

and

unsecured.
past

Hypothetical

history,

which

explains

by what
is

is

simplest and

commonest
is

the present,

in

banking, as in most things, quite untrue.

The

real history

very

different.

New

wants

are mostly supplied by adaptation, not by creation


or foundation.

Something having been created

go H-QIV

LOMBARD STREET CAME TO


an extreme want,
it

EXIST,

AND

to satisfy

is

used to satisfy

less pressing wants, or to

supply additional con-

veniences.

On

this account, political


in the

Government

the oldest institution


hardest worked.
find
it

world

has been the


we

At

the beginning of history,

doing everything v/hich society wants done,

and forbidding everything which society does not "Wish done. In trade, at present, the first commerce
in

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

the history of banking has been


first

the same.

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,


to our

they, or copies

from them, were applied

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. of money


periods,

The want

is an urgent want of Governments at most and seldom more urgent than it was in the

tumultuous Italian Republics of the Middle Ages.


After these banks

had

been long established,

tVI/y IT

ASSUMED

ITS

PTESENT FORM

81

they began to do what

we

call

banking business
it.

but at

first

they never thought of

The

great
in
its

banks of the North of Europe had their origin


a want
still

more

curious.

The

notion

of

being a prime business of a bank to give good


coin

has passed out of


it

men's memories
is

but

wherever

is

felt,

there

no want of business

more keen and


it

urgent.
It
'

Adam

Smith describes
a great

so admirably that
his

would be stupid not to


currency of
or
Its

quote
State,

words : The
as

such

France
therefore,

England, generally

consists almost entirely of


this

own
at

coin.

Should
standard
its

currency,

be

any time worn,


its

dipt, or otherwise

degraded below

value,

the State

by a reformation of
its

coin

can

effectually

re-establish

currency.

But

the currency of a small State, such as

Genoa or

own

Hamburgh, can seldom consist altogether in its coin, but must be made up, in a great measure,
all

of the coins of

the neighbouring States with

which

its

inhabitants have a continual intercourse.

Such a

State, therefore,

by reforming
its

its

coin, will
If

not always be able to reform

currency.

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

cur-

82

HOW LOMBARD STREET CAME


all
it is

TO EXIST,

AND

rency being, in

foreign States, necessarily valued

even below what


*In order to
this

worth.

remedy the inconvenience to which disadvantageous exchange must have sub-

jected 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
transfer

currency, but
in,

by an order upon, or by a

the books of a certain bank, established upon

the credit
this

and under the protection


to

of the State,

bank being always obliged


State.

pay, in

good

and true money, exactly according


of the

to the standard

The Banks

of

Venice,

Genoa,

Amsterdam, Hamburgh, and Nuremburg seem to Iiave been all originally established with this view,
though some of them

may have

afterwards been

made

subservient to other purposes.

of such banks, being better than the

The money common cur-

rency 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

Hamburgh, for example, which is said to be commonly about 14 per cent., is the supposed difference between the good standard money
of
of the State, and the dipt, worn, and diminished

Bank

PFHV IT ASSUMED ITS PRESENT FORM


currency poured into
states.
*

83

it

from

all

the neighbouring

Before 1609 the great quantity of dipt and worn

foreign coin, which the extensive trade of

Am-

sterdam brought from


the value of
that of
its

all

parts of Europe, reduced

currency about 9 per cent, below

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
to

merchants,

with plenty of

currency, could not always find a sufficient quantity of

good money

pay

their bills of

exchange

and the value of those


regulations which were
in

bills, in

spite of several
it,

made

to prevent

became

a great measure uncertain.


*

In order to

remedy these inconveniences, a bank

was established in 1 609 under the guarantee of the This bank received both foreign coin, and City. 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 For other necessary expense of management.
the value which remained, after this small deduction

was made, This credit was


represented

it

gave a credit
exactly
G
2

in

its

books.
it

called

bank money, which, as


according
to

money

the

84

I/OIV

LOMBARD STREET CAME TO EXIST, AND

Standard of the mint, was always of the same real


value,

and
It

intrhisically

worth more than current

money.
all bills

was at the same time enacted, that 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


bills

In

order to pay his foreign

of exchange, which

necessarily occasioned a certain money.' *

demand

for

bank

Again,

most

Important

function

of early
retain,

banks though
viz.

is
it

one which the present banks


is

subsidiary

to

their

main

use

the

function

of remitting money.

A
a

man
pay-

brings

money

to

the

bank

to

meet

ment 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


is

upon a large
at a place

scale, this

remittance
bills

a very pressing require-

ment.

Such

must be made payable


in

convenient to the seller of the goods


Smith's 'Wealth of Nations,'

payment
*

Book

IV. chap.

ill.

Digression

concerning Banks of Deposit/ &c.

WHY
where
goods
his

IT

ASSUMED ITS PRESENT FORM

85

of which they are given, perhaps at the great town

warehouse

is.

from the

retail

shop of

may be very far the buyer who bought those


But
this
In the country.

to sell

them again

For

these,

and a multitude of purposes, the


remittance of

Instant

and regular

money
;

Is

an early necessity of
it

growing trade

and that remittance

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


far

different, ultimately

keenly pressmore ing. But these wants only affect a few persons, and therefore bring the bank under the notice of a few
important, though at
first less

only.

The
and

real

introductory
first

function
is

which

deposit
popular,
this

banks
it

at
is

perform

much more
that deposit
extensively.

only

when they can perform

more popular kind of business banking ever spreads quickly and


This function
is

the supply

of the
it

paper

cir-

culation to the country,


that
I

and
to

will

be observed

am

not

about

overstep

my

limits

86

HOW LOMBARD STREET CAME

TO EXIST, AND

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
I

theory with which

do not meddle here.

am

only narrating unquestionable history, not dealing with an argument where every step
is

disputed.

And
way
that

part of this certain history


to diffuse

is

that the best


is

banking

in

a community

to allow

the banker to issue bank notes of small amount

can supersede the metal currency.


to a subsidy to each
till

This

amounts
to to

banker to enable him

keep open a bank


it.

depositors choose to
is

come
most

The
is

country where deposit banking

diffused

Scotland, and there the original profits

were

entirely derived
is

from the
trifling
it

circulation.

The
liabili-

note issue
ties of the

now a most

part of the

Scotch banks, but

was once

their main-

stay and source of profit.

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
its

deposits.
it

But

for

twenty-five
at
all.

years from

foundation

had no deposits
note issue, and a

It subsisted

mostly on

its

little

on

its

remittance business.

Only

in

1792, after

IVI/V IT

ASSUMED
It

ITS

PRESENT FORM

87

nearly thirty years,

beg^an 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


which go back so
far.

In detail

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 ddbris of that controversy, for, as
I

have

so often said, people can hardly think of the structure of

Lombard
It

Street, except with reference to

the paper currency and to the


regulates

now.

Act of 1844, which The French are still in the


Their great
enqitete

same epoch
of 1865
matters,
is

of the subject.

almost wholly taken up with currency

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/., and that the Now the private deposits were only 17,127,000/.
private deposits are about the same, and the circulation
-*

is I

i2,ooo,ooo/f
in

So
I.

difficult Is

it

in

even a

See Note C,

Appendix

t At the end of 1905 the private deposits were 28,626,000/., and the circulation 182,635,000/.

88

HOW LO^rBARD

STREET CAME TO EXIST, AND

great country like France for the deposit system

of banking to take root, and establish


the strength and vigour that
It

Itself

with

has In England.
Is

The

experience of

Germany

accounts preceding the war in

The North Germany


the same.

showed the

circulation of the Issuing


to

banks to be

39,875,000/., and the deposits

be 6,472,000/.,

while the corresponding figures at the present

moment are

circulation, 60,000,000/.

and deposits

8,000,000/.*

It

would be

idle to multiply Instances.

The
banks

reason

why
plain.

the use of bank paper comin

monly precedes the habit of making deposits


is

very

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


In

own

promises

'

In loans, in in the get-

wages, or

payment of
Is

debts.

But

ting of deposits he

passive.

His

issues

depend
others.

on himself

his deposits

on the favour of
Is

And to the To collect a

public the change

far easier too.

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

On December

30, 1905, the

Imperial

Bank
it;s

of

Germany held

deposits to the

amount

of 31,540,000/.,

and

note circulatioq

stood at 82,834^000/.

ir//V IT

ASSUMED
to

ITS

PRESENT FORM

89

to take those notes

the banker for payment.

If the

pubHc
Is Is

refrain

from taking trouble, a paper


In existence.

circulation
circulation
effort

Immediately

paper

begun by the banker, and requires no


;

on the part of the public


effort of the public to

on the contrary.
rid of

It

needs an
issued
;

be

notes once

but deposit banking cannot be begun by

the banker, and requires a spontaneous and consistent effort In the community.
issue
Is

And therefore
Issue of

paper

the natural prelude to deposit banking.


in

The way
with him
Is

which the

notes

by a

banker prepares the way


very
plain.

for the deposit of

money
It

When
Is

a private person
will

begins to possess a great heap of bank notes.

soon strike him that he

trusting the banker very

much, and that

In return

he

Is

getting nothing.
If

He

runs the risk of loss and robbery just as


coin.

he

were hoarding

He

would run no more


If

risk

by the
there,

failure of the

bank
free
It

he made a deposit

and he would be

from the risk of keeptakes time before even

ing the cash.


this

No

doubt
Is

simple reasoning

understood by uneducated

minds.

to see their

So strong is the wish of most people money that they for some time conbank notes
the end
:

tinue to hoard

for a

long period a few


sense conquers.

do

so.

But

In

common

The

circulation of

bank notes decreases and the

deposit of

money

with the banker increases.

The


90

HOW LOMBARD
by the
on the
note,

STREET CAME TO EXIST, AND


efficiently adver-

credit of the
tised
lives

banker having been

and accepted by the

public,

he

credit so gained years after the note

issue itself has

ceased to be very Important to


propor-

him.

The

efficiency of this

introduction

Is

tional to the diffijsion of the right of note issue

single

monopolist
its

Issuer,

like

the

Bank

of

France, works
country,

way with

difficulty

through a

and
the

advertises

banking

very slowly.
I

Even now

Bank
to

of France, which^
In

believe,

by law ought

have a branch
in sixty

each Depart-

ment, has only branches

out of eighty-six.*

On
is

the other hand, the Swiss banks, where there

always one or more to every Canton, diffuse


rapidly.

banking
of the

We have seen that the

liabilities

Bank
.

of France stand thus


.

Notes

....

^112,000,000
15,000,000

Deposits

But the aggregate Swiss banks, on the contrary,


stand
:

Notes
Deposits

y6i,ooo
4,709,000

* The Bank of France has now (end of 1905) 127 branches and 295 subsidiary bureaus in 75 Departments, the total number of

offices

being 423.

t These are the amounts at

December 31,

1865.

See' Grundziige

der National-Oekonomie.

Von Max

Wirth.' Dritter Band, p. 491.

The Swiss banks

of issue

culation to the amount of 9,790,000/.,

had on December 30, 1905, notes in cirand their deposits of all kinds

then amounted to 19,800,000/.

IVBV IT ASSUMED ITS PRESENT FORM

91

The

reason
in

is

that

a central

bank,

which

is

governed
district,

the capital and descends on a country

has

much fewer modes

of lending

money

safely than a

to that district, and

bank of which the partners belong know the men and things in it.
mainly begun by loans
:

note issue

is

there are

then no deposits to be paid.

But the mass of

loans in a rural district are of small


bills to

amount

the

be discounted are

trifling

the persons bor-

rowing 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
district

who
and

lives in the district,

who
is

has always lived

there,

whose whole mind


changes,
is

a history of the
to

its

easily able

lend

money

safely there.

But a manager deputed by a single


does
so

central

establishment

with

difficulty.

The
and

worst people will come to him and ask for

loans.

His ignorance

is

a mark for

all

the shrewd
will

crafty

people thereabouts.

He

have

endless difficulties in establishing the circulation


of the distant bank, because he has not the local

knowledge which alone can teach him how


issue that circulation with safety.

to

A
As

system of note issues

is

therefore the best

introduction to a large system of deposit banking.


yet,
historically,
it

is

the

only Introduction

no nation as yet has arrived at a great system of

92

HO IV LOMBARD STREET CAME TO


first

EXIST,

AND

deposit banking without going

through the

preliminary stage of note Issue, and of such note


issues the quickest
is

and most

efficient in this

way

one made by individuals resident


it.

in the district,

and conversant with

And
rare.

this explains

why

deposit banking

is

so
is

Such a note
free

issue as has

been described

possible only in a country

exempt from

invasion,

and

from revolution.

During an invasion
is

note-issuing banks

must stop payment; a run


orreat

nearly Inevitable at such a time, and in a revolution too.

In such
is

and close
;

civil

dano^ers

a nation
to

always demoralised

everyone looks
to possess himto

himself,

and everyone

likes

self of the precious metals.

These are sure

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 doth from invasion
and revolution.
In Holland and

Germany

two

countries where note issue and deposit banking

would seem as natural as in England and Scotland there was never any security from foreign

war.

profound apprehension of external

in-

PVHV IT ASSUMED ITS PRESENT FORM


vasion penetrated their whole habits, and
business would have thouo^ht
It

93

men

of

insane not to con-

template 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 rdgiine she was

exempt from
lution.

serious invasion or attempted revofixed, as

Her Government was


;

was then

thought, and powerful

it

could resist any external


it

enemy, and
too
firm
it

tho^

prestige on which

rested

seemed
But
it

to

fear

any enemy from within.

then

was not an honest Government, and


its

had

shown

dishonesty in this particular matter of

note issue.

The

regent in

Law s

time had given

a monopoly of note issue to a bad bank, and had


paid off the debts of the nation In worthless paper.

The Government had


ruin,

created
it.

a machinery of
so apprefatal.

and had thriven on

Among

hensive a race as the French the result was

For many years no attempt at note deposit banking was possible in France.
as

issue or

So

late

the foundation of the

Caisse d' Escoinpte,

Turgot's time, the remembrance of Law's failure

was

distinctly

felt,

and impeded the commenceis

ment of
Street

better attempts.

This therefore
exists
;

the
is,

that

reason why Lombard why England is a very

94

HOW LOMBARD
Money

STREET CAME TO EXIST, AND

great
tries

Market, and other European counIn England


issues

but small ones In comparison.

and Scotland a diffused system of note


started banks
all

over the country

in

these banks

the savings of the country have been lodged, and

by these they have been sent


similar

to

London.
in
all

No
conti-

system arose elsewhere, and


is

conse-

quence London
nental cities are

full

of money, and
as

empty

compared with

it

II.

The
Bank
it

monarchical form of
to

Lombard

Street

is

due also

the note issue.

The

origin of the

of England has been told by Macaulay, and

is

never wise for an ordinary writer to

tell
is it

again what he has told so


necessary,
for
I

much

better.
in

Nor

his

writings

are

everyone's

hands.

Still

must remind
in

my

readers of the

curious story.

Of

all

institutions
is

the world the

Bank

of

England
origin

now probably
from
*

the most remote from


financing.'

party politics and


it

But

in its

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
* '

IVI/V IT

ASSUMED

ITS

PRESENT FORM

95

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.


smiths,

The

gold-

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 Govern-

ment.

In

the State

many European countries the credit of had been so much better than any other
it

credit, that

had been used

to strengthen the

beginnings of banking.

The credit
:

of the State had


lately

been so used
been a
civil

In

England

though there had

war and several

revolutions, the honesty

Government v/as 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
of the English
'

a taint of violence which capitalists dread Instinctively,

and there

Is

always a rational apprehension

95

HOtV LOMBARD STREET CAME TO EXIST, AiXD


the
fit

that

thought
fit

Government which one revolution to set up another revolution may think


down.
In 1694, the credit of William
in

to pull

III.s

Government was so low


for
it

London

that

it

was impossible
and the
the
evil

to

borrow any large sum


financial straits of

was the

greater, because in conse-

quence of the French war 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


8 per cent.'

at

what was then considered as the moderate rate of


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/. was obtained.

On many
of essential

succeeding occasions, their credit was


use to
the

Government.

Without

their aid, our National

Debt could not have been


not been able to raise

borrowed
that

and

if

we had

money we should have been conquered by


to take

France and compelled

back James

II.

And

for

many

years afterwards the existence of

that debt
classes

was a main reason why the industrial never would think of recalling the

IV/iy IT

ASSUMED ITS PRESENT FORM

97

Pretender, or of upsetting the revolution settle-

ment
in
*

The
'

'fund-holder'
of that
sovereign,

is

always considered

the books

time as opposed to his

legitimate

because

it

was

to

be

feared that this

sovereign would repudiate the

debt which was raised by those

who dethroned

him and his allies. For a long time the Bank of England was the focus of London Liberalism, and in that
him, and which was spent in resisting
capacity rendered to the State
vices.

inestimable serbenefits

In return
of

for

these

substantial

the

Bank

England received from the Governat


first

ment,

either

or afterwards,

three

most

important privileges.
First.

The Bank
I

of

England had the exclusive


balances.

possession of the
first

Government

In

its

period, as

have shown, the Bank gave credit


it

to

the

Government, but afterwards


from the Government.
in

derived
a natural

credit

There

is

tendency

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
their

infinitely greater

than the average of


is

knowledge, and therefore, unless there

conspicuous warning to the contrary, most

men

are


98

HOIV LOMBARD STREET CAME TO EXIST, AND


think their

inclined to

Government

right,

and

when they can, to do what it does. Especially in If the money matters a man might fairly reason Government is right in trusting the Bank of

England with the great balance of the


cannot be wrong
balance.'
In

nation,

trusting

it

with

my

little

Secondly.
lately,

The Bank

of England had,

till

the monopoly of limited liability in England.

The common
any such

law of England knows nothing of


It is

principle.

only possible by Royal


of these

Charter or Statute Law.

And by neither

was any real bank


with limited

(I

do not count absurd schemes

such as Chamberlayne's
liability in

Land Bank) permitted


till

England

within these

few years.
it

Indeed, a good

many

people thought

was

right for the

Bank
I

of England, but not

right for

any other bank.

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?'

*0h!* he replied,

*that

is

an exceptional

case.'

And

no doubt

value to

was an exception of the greatest the Bank of England, because it induced


It

HOW
many

IT

ASSUMED ITS PRESENT FORM

99

quiet and careful merchants to be directors

of the Bank,

who

certainly
their

any bank where all

would not have joined fortunes were liable, and


limited.

where the
Thirdly.

liability

was not

The Bank

of England had the privi-

lege of being the sole joint slock company per-

mitted 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


lege granted to the governor and

privi-

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
iir

100

now LOMBARD

STREET CAME TO EXIST, AA'D

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 thereot 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


did.

words seem

to

mean more than they

The
on

term banking was then applied only


notes and the taking up of

to the issue of
bills

money on

demand.
in

Our

present system of deposit banking,


or promissory notes are issued,

which no

bills

was

not then

known on a
But

great scale, and was not

called banking.
It in

its effect

was very important.


It

time gave the Bank of England the monopoly


Metropolis.
it

of the note issue of the

had at

that time no branches, and so


for the country circulation.

did not compete


in

But

the Metropolis,

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
where
it

did compete,

it

London
if

private bankers might have issued notes

they pleased, but almost a hundred years ago they

HOJV IT ASS [/MED ITS PRESENT FORM


were forced out of the
circulation, that
field.

loi

The Bank

of

Engto

land has so long had a practical monopoly of the


it is

commonly believed always


of

have had a

legal

monopoly.
the clause went

And
further
:

the
It

practical effect

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
was believed
to
*
'

modern sense it was thought to prohibit any other banking company from carrying on our
natural
:

present system of

banking.
in

After joint stock


the
country,

banking was permitted

people
in

began
words

to inquire
}

why

it

should not exist


then
it

the

Metropolis too
I

And

was seen that the


the
issue of

have quoted only forbid

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 But till they began, the Bank of Engfounded. land had among companies not only the exclusive
privilege of note Issue, but that of deposit
too.
It

banking
coxsx-

was
so

in

every sense the only banking

pany

in

London.

With

many advantages over

all

competitors,

102

HOW LOMBARD STREET CAME


quite natural that the

TO EXTST, ETC,

Bank of England should Inevitably it have far outstripped them all. became the bank in London all the other bankers
it is
;

grouped themselves round


reserve v^Ith
it.

it,

and lodged

their

Thus our

^/^^-reserve

system of
definite

banking was not deliberately founded upon


reasons
;

was the gradual consequence of many singular events, and of an accumulation of legal
it

privileges on a single
altered,

bank which has now been

and which no one would now defend.

^3

CHAPTER

IV.

THE rOSITION OF THE CHANCELLOR OF THE EXCHEQUER IN THE MONEY MARKET.

Nothing can be
cal principle that

truer in theory than the economic'

banking

is

a trade and only a

trade,

and nothing can be more surely established

by a larger experience than that a Government which interferes with any trade injures that trade. The best thing undeniably that a Government can do with the Money Market is to let it take care of
itself.

But a

Government can only carry out


if it

this
:

principle universally

observe one condition

it

must keep
cash.

its

own money.

The Government

is

necessarily at
It is
;

times possessed of large sums in


far the richest corporation in the

by

country

its

annual revenue payable in

money

far

body or person. And if it begins to deposit this immense income as it accrues at any bank, at once it becomes interested
surpasses that of any other

104

THE POSITION OF THE CHANCELLOR OF


the welfare of that bank.
It

In

cannot pay the

interest

on

its

debt

if

that

pubUc deposits
cannot pay
expenses^
its

when

that interest

bank cannot produce the becomes due it


;

salaries,

and defray
fail

its

miscellaneous

if

that
is

bank

at

any time.

A
;

modern
credit

Government
is

like a very rich

man
its

with very
its

great debts which he cannot well pay

necessary to
if its

its

prosperity, almost to
fail

existence,

and due

banker

when one
will

of

its

debts becomes

its

difficulty is intense.
it

Another banker,

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
it,

Government

deposit cannot repay

and no banker not having


crisis,

that deposit will, at a bad

be able to find

the

5,000,000/. or 6,000,000/. which the quarter


as ours requires.
his
If

day of a Government such


Finance
Minister,
to a bank, begins to act
in
all

having entrusted
strictly,

money
will

and say he

cases let the

Money Market
that
in

take care of

Itself,

the reply

is

one case the

Money

THE EXCHEQUER IN THE MONEY MARKET


Market
will

105

take care of him too, and he will

be insolvent.
In the infancy of Banking
better that a
its
it
it

is

probably

much
which
not

Government should
If there are not

as a rule keep

own money.
can
place

banks
it

in

secure

reliance,

should
it

seem to rely upon them.


peculiar
it

Still less

should

give

favour to any

one, and

by entrusting
it

with the Government account secure to


all

mischievous supremacy above

other
is

banks.

The

skill

of a financier in such an age

to equalise

the receipt of taxation, and the outgoing of expenditure


;'

it

should be a principal care with him to

more should not be locked up at a particular moment in the Government coffers than If the amount of dead is usually locked up there.
sure that
capital

make

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
nothing
;

the additional

taxation

it

would
evil
is

cause would be inconsiderable.


in

Such an

comparison with
for inevitable

that

of losing

the

money necessary
ing
it

expense by entrustthis

to a

bad bank, or that of recovering


Identifying the

money by

national credit with the

io6

THE POSITION OF THE CHANCELLOR OF


It

bad bank and so propping

up and perpetuating it. So long as the security of the Money Market Is not entirely to be relied on, the Government of a
country had
its

much better leave own money. If the banks


bad and
if

it

to itself

and keep

are bad, they will

certainly continue

will

probably become

worse
them.

the

Government
cardinal
Is

sustains
is,

The

maxim

that

and encourages any aid to a


of preventing

present bad bank

the surest

mode

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


will at

system of finance
public exchequer.

times accumulate in the

Under a
have every
to

natural system of
facility.

banking

it

would

Where there were many banks


because
its

keeping their own reserve, and each most anxious

keep a

sufficient reserve,

own

life

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. course would be very simple, and be Its

and

analogous to that of other public bodies

in thq

THE EXCHEQUER IN THE MONEY MARKET


country.

107

The

Metropolitan Board of Works, which

collects a great

revenue

in

London, has an account


for

at the

London and Westminster Bank, that bank makes a deposit of Consols as a

which

security.*

The

Chancellor of the Exchequer would have no

difficulty in getting
likely, his

such security cither.

If,

as

is

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
influ-

be a lender of such magnitude and so much


ence, that he might

command

his

own

terms.

He

might get
If,

his account kept safe if

anyone could.
he would
so

on the other hand, the Chancellor of the Exis,

chequer were a borrower, as at times he

have every

facility in

obtaining what he wanted.

The

credit of the English

Government

is

good

that he could

borrow better than anyone

else in

the world.

He
for,

would have greater facility, indeed,


except with the leave of Parliament,

than now,

the Chancellor of the Exchequer cannot borrow by * The functions of the old Metropolitan Board of Works are now vested in the London County Council, which has continued
the arrangement with the

bank for the deposit of security, and similar arrangements have been entered into by certain other banks who keep the accounts of other local authorities.

icS

THE POSITION OF THE CHANCELLOR OF

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


fined to a single bank,

artificial

system, he
fix its

Is

con-

which can

own

charge.

If contrary to expectation a collapse occurred,

Government might withdraw, as the American Government actually has withdrawn, Its balance from the bankers. It might give Its aid, lend Exthe

chequer
the

bills,

or otherwise pledge

its

credit for

moment, but when the exigency was passed suffer. it might let the offending banks There would be a penalty for their misconduct. New and better banks, who might take warning from
that misconduct,
trades,
is

would

arise.

As

in all natural

what

is

old

and rotten would

perish,

what
the

new and good would replace it. new banks had proved, by good
fitness for State confidence,
*
It

And

till

conduct, their

the State need not

be noted that Parliaracnt has for the time being endowed the Chancellor of the Exchequer with large powers of borrowing by Treasury bills. And as these are tendered for not only by home, but also by foreign capitalists, his field of borrowing is very extensive, and he gets the full advantage of the competition Still the fact remains that, except with the special of lenders. leave of Parliament, the Chancellor of the Exchequer cannot borrow except from the Bank of England on deficiency bills.' And as regards the fixing of rates by the Bank, while in the case of Ways and iMeans advances the rate of interest to be charged is a matter of negotiation between the Treasury and the Bank, the rate to be paid for Deficiency advances is under existing arrangements fixed at \ per cent, above one-half of the Bank rate at the time.
'

may

THE EXCHEQUER IN THE MONEY MARKET


give
it.

109

The Government

could use

its

favour as

a bounty on prudence, and the withdrawal of that


favour as a punishment for culpable
folly.

Under a good system of banking, a great


collapse, except

from rebellion or invasion, would

probably not happen.

large

number of banks,
at stake in keep;

each feeling that

its

credit

was

ing a good reserve, probably would keep one

if

any one did


disappear.

not,

it

would be
its

criticised constantly,

and would soon

lose

standing, and in the end


in-

And

such banks would meet an

cipient panic freely

and generously

they would

advance out of
for

their reserve boldly

and

largely,

each individual bank would fear suspicion, and


that at such periods
it
it

know
if

must

show
to a

strength,'

at such times

wishes to be thought to have

strength.

Such a system reduces


is

min'mum
If
in

the risk that


national
in

caused by the deposit.


safely

the

money can
this
is

be deposited
to

banks

any way,

the
is

way

make

it

safe.

But
us in

this

system

nearly the opposite to that


for
far

which the law and circumstances have created


England.

The

English Government,

from keeping cash from the


the position of that market
at

Money Market till was reasonably secure, a very early moment, and while credit of all
was most
insecure,
for its

kinds

own

interests

no THE POSITION OF THE CHANCELLOR OF


entered
Into the

Money
It

Market.

In order to
profit of

effect loans better,


its

gave the custody and


practically

own money

(along with other privileges) to a

single bank,
it is

and therefore

and

in fact
It

Identified with the


let

Bank

to this hour.

can-

not
it
it

the

has deposited

Money Market take care of Itself because much money in that market, and
its

cannot pay

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, v/hen

its

till

was empty,

in

1837,

when

it

had
idea

to ask aid

from the Bank of France, no such

was suggested.
in the

By

irresistible tradition the


its

English Government was obliged to deposit

money

Money Market and


Bank.

to deposit with

this particular

And
1st.

this

system has plain and grave

evils.

Because being created by State


likely than a natural

aid,

it

is

more
help.

system to require State

2ndly.

Because, being a ^//^-reserve system,

it

reduces the spare cash of the


smaller amount

Money Market

to a

than any other system, and so

THE EXCHEQUER IN THE MONEY MARKET in


makes
that market

more

delicate.

There being
in the

a less hoard to meet

liabilities,

any error

management
3rdly.

of that reserve has a proportionately

greater effect.

Because our
its

07ie

reserve

Is,

by the ne-

cessity of
directors,

nature, given over to one board of

and we are therefore dependent on the


that

wisdom of
folly,

one

only,

and cannot, as

in

most

trades, strike

an average of the wisdom and the

the discretion and the indiscretion, of

many
like

competitors.
Lastly.

Because that board of directors


its

is,

every other board, pressed on by


to

shareholders

make a high

dividend, and therefore to keep a

small reserve, whereas the public interest imperatively requires that they shall

keep a large one.

were inseparable from the system, but there is besides an additional and
four evils

These

accidental evil.

The
it,

English Government not


system, but
it

only created

this

singular

pro-

ceeded

to

impair

and
it.

demoralise

all

the

public opinion respecting

For more than a

century after

its

creation (notwithstanding occa-

sional errors) the

Bank

of England, in the main,


Its busi-

acted with judgment and with caution.

ness was but small as


for the

we

should

now

reckon, but

most part

it

conducted that business with

112

THE POSITION OF THE CHANCELLOR OF


In 1696,
it

prudence and discretion.

had been

involved in the most serious

been obliged

and had some of its notes. to refuse to pay For a long period it was in wholesome dread of
difficulties,

public opinion,

and the necessity of retaining public

made it cautious. But the English Government removed that necessity. In 1797,
confidence

Mr.

Pitt

feared that he might

not

be able to

obtain sufficient specie for foreign payments, in

consequence of the low


serve,

state of

the

Bank

re-

and he therefore required the Bank not

to

pay

In cash.

He
is

removed the preservative apprethe best security of


all

hension which

banks.

For

this

reason the period under which the


for its notes

Bank

of

England did not pay gold


1797 to 18 19

the period from


the period of the

is

ahvays called

Bank
to

restrictioft.

As
its

the

Bank
of

during that period did not perform, and was not

compelled

by law

perform,
it

contract

paying

Its

notes in cash,

might apparently have


license.

been well called the period of Bank


the

But

word

'

restriction

'

was quite

right,

and was

the only proper


of 1797.

word

as a description of the policy

Mr.

Pitt did not

say that the

Bank
;

of

he England need not pay Its notes in specie them from doing so he said that they restricted
'
'

must

not.

THE EXCHEQUER IN THE MONEY MARKET


In consequence,

113

from 1797 to 1844 (when a new era begins) there never was a proper caution

on the part of the Bank


considered that the
of charmed Hfe, and that

directors.

At

heart they

Bank
pay

of

it

England had a kind was above the ordinary-

banking anxiety

to

its

way.

And
issue,

this

feehng

was very
not pay

natural.

bank of

which need
life
it
;

its

notes in cash, has a charmed


it

it

can lend what


with

wishes, and issue what


itself,

likes,

no fear of harm to
check but
quarter
of
Its

and
the

with

no

substantial

own

inclination.

For
of
it

nearly

a century,

Bank

England was such a bank, could not be in any danger.


public

for all

that time

And
also.

naturally the

mind was demoralised

Since 1797,

the public have always expected the


to

Government
cannot
fully

help the

Bank

if

necessary.

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 Govern-

ment

will

always help the Bank

if

the

Bank

is

in

extremity.

And

this is the sort of anticipation


itself,

which tends to justify


expects.

and

to cause

what

it

On

the whole, therefore, the position

of the

Chancellor

of the
that

Market

is

Exchequer in our Money of one who deposits largely in it,


I

114 ^-^-^

CHANCELLOR IN THE MONEY MARKET


it,

who

created

and who demoralised


it
it.

it.

He

cannot,

therefore, banish

from his thoughts,

or decHne responsiblHty for

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


finance, the natural

efficient.

He

is,

on

exponent of the public opinion


it

of England.

And

is

by that opinion that we

wish the Bank of England to be guided.


a natural
relied

Under

system

of

banking we should have


but
the State prevented
;

on

self-interest,

that

we now
is

rely

on opinion instead
its

the public

approval

a reward,

disapproval
;

a severe
it is

penalty, on the

Bank

directors

and of these

most important that the Finance Minister should


be a sound and
felicitous

exponent.

lis

CHAPTER

V.
IS

THE MODE IN WHICH THE VALUE OF MONEY SETTLED IN LOMBARD STREET.

Many

persons believe that the Bank of England

has some peculiar power of fixing the value of

money.
varies
time,
its

its

They see that the Bank of England minimum rate of discount from time to
that,

and

more or
this
*

less, all
it

other banks follow

lead,

and charge much as

charges
*

and they
only a
its

are puzzled

why

should be.

Money,' as
value
in
?

economists teach,

is

a commodity, and
it

commodity;' why then,


fixed
in

is

asked,

is

so odd a way, and


all

not the

way
is

which the value of

other commodities

fixed

There
that of

is

at bottom,

however, no

difficulty in

the matter.
all

The

value of

money

is

settled, like

other commodities, by supply and deis

mand, and only the form


In other commodities
all

essentially different.
fix their

the large dealers

own

price

they try to underbid one another, and


T

116

THE MODE IN WHICH THE VALUE OF


down
the price
;

that keeps

they try to get as

much
up the
calls

as they can out of the buyer,


price.

and that keeps

Between the two what Adam Smith


it.

the higgling of the market settles


is

And

this

the most simple and natural


it is
it

mode

of doing

business, but

not the only mode.


convenient,

If circum-

stances

make

another

may be
if

adopted.

single large holder

be by

far the greatest

especially his holder may


fix

he

price,

and other dealers may say whether or not they


will undersell

him, or whether or not they will ask


does.

more than he
value
if

very considerable holder


a time, vitally affect
its

of an article may, for

he lay down the minimum price which he


it.

and obstinately adhere to the way in which the value of money


will take,

This

is

in

Lombard

Street

is

setded.

The Bank
is

of

be a predominant, and
dealer in money.

still

England used to a most important,


the least price at
stock,* and this,

It lays

down
its

which alone
for the

it

will

dispose of

most

part, enables other dealers to obtain


it.

that price, or something near

The

reason
is

is

obvious.

At

all

ordinary moin

ments there

not

money enough

Lombard

*In this respect the practice of the Bank of England has undergone a change. In transactions with its own customers its pubHshed rate is not now its minimum rate. To those who keep
their sole, or at all events their principal, accornt with
it, it

will

discount at or about market rates.

MONEY

IS

SETTLED IN LOMBARD STREET


all

ii?

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
Street to discount

the

bills in

these

bills

discounted.

But they seldom can get

them discounted very much cheaper, for if they did every one 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
diminishing,
it

that

its

business

Is

much
and

lowers the rate so as to secure a


Itself,

reasonable portion of the business to


to keep a
fair

part of

Its

deposits employed.

At

Dutch auctions an upset or inaxiimnn price used to be fixed by the seller, and he came down In his
bidding
till

he found a buyer.

The
is

value of

money
all

Is

fixed In

Lombard

Street in

much

the

same way, only


sellers,

that the upset price

not that of
seller,

but that of one very important

some

part of

whose supply
the

Is

essential.

The

notion that

Bank

of England has a
fix

control over the


rate of discount as

Money
It

Market, and can

the

likes,

has survived from the old

days before 1844, when the Bank could issue as

many

notes as

it

liked.

was a mistake.
issue has great

But even then the notion bank with a monopoly of note


in the

sudden power

Money Market,


Ii8

THE MODE IN WHICH THE VALUE OF


:

but no permanent power

it

can

affect the rate of


It

discount at any particular moment, but


affect the

cannot

average
fall in

rate.

And the reason

Is,

that anyof

momentary
and equal
Is

money, caused by the caprice

5uch a bank, of
rise,

Itself

tends to create an Immediate

so that

upon an average the value


If a

not altered.

What happens
poly
of

Is this.

bank with a monocauses a proporprices.

note

Issue

suddenly lends (suppose)


usual,
it

2,000,000/.

more than

tionate increase of trade

and Increase of
up

The

persons to
It

whom
to lock

that 2,000,000/.
It
;

was

lent
It,
'

do not borrow
that

they borrow
*

In

the language of the market, to


Is,

operate with
;

they try to buy with

it

and that new


prices.

attempt to buy

that
is

new demand^ralses
else

And
First.

this rise of prices


It

has three consequences.

makes everybody

want

to

borrow

money.
it

Money
for

not so efficient in buying as


operators
require

was,

and therefore
the

more
last,

money
is

same

dealings.
this

If railway stock

10 per

cent,

dearer

year

than

a
to

speculator

who borrows money


In

to enable
this

him

deal must borrow 10 per cent,


last,

more
is

year than

and

consequence there

an augmented
is

demand
demand,

for loans.

Secondly. This

an effectual

for the Increased price of railway stock

enables those

who wish

it

to

borrow more upon

MONEY
It

IS

SETTLED IN LOMBARD STREET


practice
is

119

The common

to lend

a certain

portion of the market value of such securities, and,


if

that value increases,

loan to
this

amount of the usual In be obtained on them increases too.


the
artificial

way, therefore, any

reduction in the
of the

value of

money
for

causes a

new augmentation
all

demand
to
its

money, and thus restores that value


In
:

natural level.

business this

Is

well

known by experience
becomes a
prising

a stimulated market soon

tight market, for so sanguine are enter-

men

that as soon as they get

any unusual
is

ease

they always fancy that the relaxation


it
is,

greater than

and speculate

till

they want

more than they can obtain. In these two ways sudden loans by an
notes,

issuer of

though they

may

temporarily lower the


it

value of money, do not lower

permanently,
counteraction.

because they generate their

own

And
of

this

they do whether the notes issued are

convertible into coin or not.

During the period

Bank

restriction,

from 1797 to 1819, the Bank


could after 1819,
notes in coin.
is

of England could not absolutely control the

Market, any more than


it

it

Money when
But
in
effect,

was compelled
in

to

pay

Its

the case of convertible notes there

a iJih^d

which works

the

same

direction,

more

quickly.

rise of prices, confined to

and works one

country, tends to increase imports, because other

/20

THE MODE IN WHICH THE VALUE OF

more for their goods if they and it discourages exports, send them there because a merchant who would have gained a profit before the rise by buying here to sell again
countries can obtain
;

will

not gain so much,


this

If

any, profit after that

rise.

By

augmentation of Imports the Indebtedness


Is

of this country

augmented, and by

this

diminu-

tion of exports the proportion of that indebtedness

which

Is

paid in the usual


there
is

way

is

decreased

also.

In consequence,

a larger balance to be

paid in bullion

the store in the bank or banks


is

keeping the reserve


interest

diminished, and the rate of


to stay the efflux.

must be raised by them


is

And

the tightness so produced


to,

often greater than,

and always equal

the preceding unnatural laxity.

There
is

is

therefore no ground for believing, as


that the value of

so

common,

money

is

settled

by

different causes than those

which

affect

the
of
It

value of other commodities, or that the

Bank

England has any despotism


no more. no absolute

in that

matter.

has the power of a large holder of money, and

Even

formerly,
its

when

its

monetary
it

powers were greater and


control.
It

rivals weaker,

had
cor-

was simply a large

porate dealer, making bids and

much

Influencing

though
thereby.

in

no sense compelling

other

dealers

MOXEY

IS

SETTLED IN LOMBARD STREET


is

121

But though the value of money


in

not setth^d a

an exceptional way, there


about
is
it,

is

nevertheless
is

peculiarity
articles.
It

as

there

about
to

many
great

commodity subject
and those
slight

fluctuations of value,
easily

fluctuations

are

produced by a
of
quantity.

excess or a slight
to

deficiency

Up
If

a certain point

money

is

a necessity.

a merchant has acceptwill this

ances to meet to-morrow,


find to-day at

money he must and

some

price or other.

And

it is

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
as
it.

hand,

money
is,

easily
is

becomes a
securities
;

'drug,'

the

phrase

and there

soon too much of


is

The
and

number of accepted

limited,

amount of money seeking these accepted securities Is more


cannot be rapidly increased
if

the

than can be lent on them, the value of

money soon
good bills you may be
or

goes down.

You may

often hear In the market

that bills are not to be had,

meaning

of course,

and

sure that the value of


If

when you hear this money is very low.


all

money were

held by the owners of

It,

by banks which did not pay an interest for it, the Money value of money might not fall so fast.
would, in the market phrase, be
'

well held.'

The

122

THE MODE IN WHICH THE VALUE OF

possessors would be under no necessity to employ


it

all

they might employ part at a high rate


all

rather than

at a
is

low

rate.

But

in

Lombard

Street

money
it

very largely held by those


it,

who

do pay an interest for

and such persons must


for they

employ
to

all,

or almost

all,

have much

pay out with one hand, and unless they receive


the other they will be ruined.

much with
interest at

Such
they

persons do not so

much

care

what

is

the rate of
:

which they employ their money

can reduce the Interest they pay In proportion


to that

which they can make.


to

The
rate.

vital point to

them
(as in

is

employ

it

at

some

If

you hold
millions

Lombard

Street

some persons do)


at
Interest,
if

of other people's

money
if

arithmetic

teaches that you will soon be ruined

you make
is

nothing of
high.

it,

even

the interest you pay

not

The

fluctuations

in

the value of

money
there
is

are

therefore

greater

than

those

In

the value of

most other commodities.


excessive pressure to lend
forced

At times
it,

an

excessive pressure to borrow


it,

and

at times

an
is

and so the price

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

MONEY

IS

SETTLED IN LOMBARD STREET

123

the bank or banks

who by

it

keep the reserve of

bullion or of legal tender exchangeable for bullion.

These banks can


control
Its

In

no degree control the perma


value.

nent value of money, but they can completely

momentary

They cannot change


determine the
the dominant
If

the average value, but they can

deviations from

the average.

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 so much from the average rate
ascend so
hls^h

will
;

not deviate
will neither

it

nor descend so low.

anything can be steady the value of


then be steady, and probably
will
in

As far as money will

consequence trade

be steady too

at least a principal cause of

periodical disturbance will

have been withdrawn

from

it.

124

IV/IV

LOMBARD STREET

IS

OFTEN DULL,

CHAPTER VL
T>"IIY

LOMBARD STREET

IS

OFTEN VERY DULL,

AND SOMETIMES EXTRExMELY EXCITED.

Any sudden
for

event which creates a great demand

actual

cash

may

cause,

and

will

tend
is

to

cause, a panic In a country

where cash

economised, and where debts


are large.
rests

much payable on demand


Immense
credit

In such a country an

on a small cash reserve, and an unexpected


easily

and large diminution of that reserve may


break up and shatter very much,
of that credit.
if

not the whole,

Such accidental events are of the


:

most various nature


great firm which

a bad harvest, an apprehen-

sion of foreign invasion, the sudden failure of a

everybody

trusted,

and many

other similar events, have

all

caused a sudden

demand

for cash.

And some

writers have endea-

voured to

classify panics according to the nature

of the particular accidents producing them.


little,

But

however,

is,

believe, to

be gained by such

AND SOMETIMES EXCITED


classifications.
effect of

125

There

is

little

difference in the

one accident and another upon our credit

system.

We

must be prepared
for all of

for all of
In

them,

and we must prepare

them

the

same

way

by keeping a large cash reserve.


it is

But

of great importance to point out that

our industrial

organisation

is

liable

not only to

irregular external accidents, but likewise to regular


internal
credit

changes

that these changes

make cur

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


to think of the subject

must have one of them.

Most persons who begin


of
*

are puzzled on the threshold.


*
' '

They hear much

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 or loss, by way of ebb ?

diffused

want of

profit,
is

hardly given distinctly in our

The main answer common books

of


126

WHV LOMBARD STREET


economy.
is

IS

OFTEN DULL,
tell

political

These books do not


times, nor

you

what

the fund out of which

large general profits

are paid in
that fund
is

good

do they explain why

not available for the same purpose in

bad

times.

Our

current political

economy does not


an element

suffi-

ciently take account of time as

in trade

operations

but as soon as the division of labour


itself in

has once established

a community, two

principles at once begin to

be important, of which

time

is

the very essence.

These are

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

as quickly as possible.

Secondly.

That

as every producer

is

mainly

occupied

in

producing what others want, and not


himself,
it

what he wants

is

desirable

that

he

should always be able to

find,

without

effort,

without delay, and without uncertainty,

others

who want what he


Everyone
will

can produce.

In themselves these principles are self-evident.


it to be expedient that all goods wanting to be sold should be sold as soon

admit

as they are ready

that every

man who wants


as

to
is

work should
ready for
*

find

employment as soon as he
also,
'

it.

Obviously
is

soon as the

division of labour

really established, there is

AND SOMETIMES EXCITED


a
difficulty

127

about both of these

principles.
it

produces what he thinks

wants, but
it.

a mistake, and B

may

not want

A
not

may be may be
but he
of

able and willing to produce

what B

Vv^ants,

may

not be able to find

B he may

know

his existence.

The

general truth of these principles


is

is

obvious,

but what
of their

not obvious

Is

the extreme greatness

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.


satisfied,

If

they are
for,

everyone knows

whom

to

work

and
in

what

to

make, and he can get immediately

exchange what he wants himself.


idle labour

There
all

is

no

and no sluggish
in

capital in the

whole
of

community, and,

consequence,

which can

be

produced

is

produced,
is

the effectiveness

human
much

industry

augmented, and both kinds


capitalists

of producers

both

and labourers
also

are
to

richer than usual, because the


is

amount

be divided between them


than usual.

much

greater

And

there

is

a partnership in industries.

No

single large

industry can
;

be depressed without
still

injury to other industries

less

can any great

123

M'llV

LOMBARD STREET
industries.

IS

OFTEN DULL^
pros*

group of

Each industry when


many) other
is

perous buys and consumes the produce probably


of most (certainly of very
industries,

and
B,

if

industry

fail

and

in difficulty, industries

and C, and D, which used


sell

to sell to

it,

will

not be able to
in reliance

that which they had produced


in future

on A's demand, and


till

they will
in

stand

idle

Industry

recovers,

because

default of

there will be no one to

buy the comas industry

modities which they create.

Then

buys of C, D,

&:c.,

the adversity of

tells

on C,
in

D, &c., and as these buy of E, F, &c., the propagated through the whole alphabet.
a certain sense
it

effect is

And

rebounds.

Z
;

feels

the want

caused by the diminished custom of A, B, and C, and


so
It

does not earn so

much
as

in

consequence,

it

cannot lay out as

much on

the produce of A, B,

& C,
In
all

and so these do not earn


this

money

is

much either. but an instrument. The same


in

thing

would happen equally well


if

a trade of barter,

a state of barter on a very large scale were not

practically impossible,

on account of the time and


require.
is

trouble which

It

would necessarily
in

As
that

has been explained, the fundamental cause

under a system

which everyone
else,

is

dependent

on the labour of everyone

the loss of one


all,

spreads and multiplies through

and spreads

AND SOMETIMES EXCITED


and multiplies the
the

129

faster the higher the previous

perfection of the system

of divided labour, and

more

nice

and

effectual

the

mode

of inter-

change.
in

And

the entire effect of a depression

any single large trade requires a considerable It has to be time before it can be produced.
complete.

propagated, and to be returned through a variety


of industries, before
sions, in
it is

Short depres-

consequence, have scarcely any discernible


;

consequences
their effects.

they are over before


It is

we

think of

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
all

in

one trade causes


of depressed

depression
agriculture.
is
ill

others,

is

that

When
is

the agriculture of the world

off,

food

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,


tracted
things.

is

so

much

sub-

from what used to be spent on other


All the industries, A, B, C, D, up to Z,
affected by an augmentation in the and the most affected are the large

are

somewhat

price of corn,

ones, which produce the objects in ordinary times

most consumed

by the working

classes.

The

130

ir//y

LOMBARD STREET

IS

OFTEN DULL,
In

clothing trades feel the difference at once, and


this

country the liquor trade (a great source


it

of

English revenue) feels


Especially

almost equally soon.

when
is

for

two or three years harvests

have been bad, and corn has long been dear,


every industry
poorer too.
impoverished, and almost every
one, by becoming poorer,

makes
is

every other

All trades are slack from diminished

custom, and the consequence


capital,

a vast stagnant

much

idle labour,

and a greatly retarded


full

production.
It

takes two or three years to produce this

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
things

like besides.

The

producers of those

become prosperous, and have a greater purchasing power. They exercise it, and that creates
in the

class

they deal with another purchasing


all

power, and so

through society.
is

machine of industry
almost to
its

stimulated to

The whole its maximum

of energy, just as before

much

of

it

was slackened

minimum.
effect,

great calamity to any great industry will

tend to produce the same

but the fortunes

of the industries on which the wages of labour are

expended are much more important than those

of

AXD SOMETIMES EXCITED


all

131

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,
plain,

steadily,

and equably,

it

is

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


to trust

modem
tion of

industrial societies.

one man
In
is

Creditthe disposianother is singularly


as soon as

varying.

England, after a great calamity,


suspicious of everybody
is
;

everybody
fides in

that calamity

forgotten,

everybody again con-

everybody.

On

the Continent there has

stiff controversy as to whether credit should or should not be called capital -: in England,
'

been a

even the
economics

little
is

attention

once paid to abstract

and no one cares in the least for refined questions of this kind the material practical point is that, in M. Chevalier's language, credit is 'additive,' or additional that is, in times when credit is good productive
diverted,
:

now

power

is

more

efficient,

and

in

times

when

1^2

^^y LOMBARD STREET


is

IS

OFTEN DULL,
is

credit

bad productive power


is

less efficient

And

the state of credit

thus influential, because

of the
plained.

two

principles

which have just been exlie

In a good state of credit, goods


less
;

on
;

hand a much
sales

time than

when

credit

is

bad

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
prosperity.

variable causes are causes of real

They augment

trade and production,

and so are plainly


also

beneficial,

except where by

mistake the wrong things are produced, or where

by mistake misplaced

credit

is

given,
is

man who
false

cannot produce anything which

and a wanted

gets the produce of other people s labour


idea that he will produce
it.

upon a
is

But there

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

remember that interest idea, and not a universal


is
it

we do not enough on money is a refined


one.

So

far

indeed

from

being universal, that the majority


persons
in

of

saving
it.

most
in

countries

would

reject

Most

savings

most countries

AND SOMETIMES EXCITED


are held
111

I33

hoarded specie.

In Asia, In Africa, in
in

South America, largely even


thus held, and
to let
it

Europe, they are

would frighten most of the owners

them out of their keeping. An Englishman a modern Englishman at least assumes

as a
*

first

principle that
into

he ought

to

be able to
will yield

put his

money
;
'

something safe that


put their

5 per cent.

* but most saving persons in most


*

countries are afraid to


thing.

money
;

'

into any-

Nothing

is

safe to their
to a

minds

indeed, in

most countries, owing


really
is safe.

bad Government and a

backward industry, no investment, or hardly any,


In most countries most
;

men

are con-

tent to forego interest


tries, at

but in more advanced coun-

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 He says During the the periods of excess.
:

interval

between the Restoration and the Revolu-

tion the riches of the nation

had been rapidly

increasing.

Thousands of busy men found every


that, after the

Christmas

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

* Something safe that will yield 3 to 4 per cent, would better

represent the ideal now.

134

^^^^y

LOMBARD STREET

IS

OFTEN DULL,

difficulty.

In our time, to invest such a surplus,


cent,,

at

something more than three per


the

on the
in

best security that has ever been


world,
is

known
But

the

work of a few minutes.


century,

in the

seventeenth

a lawyer, a physician, a
thousands,

retired merchant,

who had saved some


to place

and who wished ably, was often


generations

them

safely

and

profit-

greatly

embarrassed.

Three

earlier,

man who had accumulated


But

wealth in a profession generally purchased real


property, or lent his savings on mortgage.

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 seekthe
;

ing for employment.


their

Many

too v/ished to put


it

money where they

could find
for

at

an hour s
of

notice,

and looked about


field.

some

species

property which could be more readily transferred than a house or a

capitalist

might lend
;

on bottomry or on personal security


principal.

but,

if

he

did so, he ran a great risk of losing interest and

There were a few

joint stock

com-

panies,

among which

the East India


;

held the foremost place


stock of such companies
supply.

but the

Company demand for the


than the
India

was
for

far greater

Indeed the cry

new East

AND SOMETIMES EXCITED


Company was
found
chiefly raised

13c

by persons who had


savings at interest

difficulty in placing their

on good

security.

that the practice of hoarding

So great was that difficulty was common. We

are told that the father of Pope, the poet,


retired

who
the

from business

in the City

about the time

of the

Revolution, carried

to

a retreat in

country a strong box containing

near

twenty

thousand pounds, and took out from time to time

what was required


it

for

household expenses

and

is

highly probable that this was not a solitary

case.

At
if

present the quantity of coin which


is

is
it

hoarded by private persons


would,
addition
part

so small,

that

brought
to

forth,

make no

perceptible

the circulation.

But, in the earlier


all

of the reign of William the Third,

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


projectors, ingenious

was

that a

crowd of

and absurd,

honest and knavish, employed themselves in devising

new schemes
capital.
It

for

the

employment of

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 confiredundant

136

^Vl^y

LOMBARD STREET

IS

OFTEN DULL,
immense

dently held out to subscribers the hope of


gains, sprang into existence

the Insurance ComComGlass

pany, the Paper Company, the Lutestring


pany,
Bottle

the

Pearl

Fishery Company, the

Company, the Alum Company, the Blythe Coal Company, the Swordblade Company. There was a' Tapestry Company, which would soon
furnish

pretty hangings for

all
all

the parlours of
the bedchambers

the middle class,


of the higher.

and

for

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


in

were delighted by seeing the divers


with old
iron

their

panoply descend into the river and return laden

and

ship's tackle.

There was a
fail

Greenland Fishing Company which could not

AND SOMETIMES EXCITED


to drive the

137

Dutch whalers and herring busses

out of the Northern Ocean.

There was a Tan-

ning Company, which promised to furnish leather


superior
to

the
Russia.

best

Turkey or

was brought from There was a society which


that

undertook the

office of

giving gentlemen a liberal

education on low terms, and which assumed the

sounding name of the Royal Academies Company.

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
In a
it

pompous advertisement

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, japanning,


fortification,

bookkeeping, and the art of playing

the theorbo.'

The

panic was forgotten

till

Lord Macaulay
fact, in

revived the

memory of

it.

But, in

the South

Sea Bubble, which has always been remembered,

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
the form
;
'


138

U^I^y

LOMBARD STREET

IS

OFTEN

DUIJL,

Insurance of Losses by Servants Water Fresh For building of Bastard Children For building of Hospitals Ships against Pirates For making of Oil from Sun-flower Seeds For improving of Malt Liquors For recovery of Seamen's Wages For ing of Silver from Lead For the transmuting of Metal For Quicksilver a malleable and
(two millions)

To make

Salt

for

extract-

into

fine

making of Iron with

Pit-coal

For

importing a

Number
trading in

of large Jack Asses from Spain

For

Human

Hair

For

fatting of

Hogs

For a Wheel of Perpetual Motion." But the most strange of all, perhaps, was For an Undertaking which shall in due time be revealed." Each subscriber was to pay down two guineas, and hereafter to receive a share of one hundred, with a disclosure of the object and so tempting was the offer, that i,ooo 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,
fact
is,

though not equally extravagant.

The
in-

that the owners of savings not finding,

in

adequate quantities, their usual kind of

vestments, rush into anything that promises speciously,

and when they

find

that these specious

AND SOMETIMES EXCITED


investments can be disposed of at a high
they rush into them more and more.
taste
is

139

profit,
first

The

for high interest, but that taste

soon be-

comes secondary.
large gains to be

There

is

a second appetite for

made by selHng 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
effect

are almost the whole

of an excess of accumulation over tested


Little
effect
is

investment.

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.


in the

But when these savmgs come to be lodged


Bankers are close to mercantile

hands of bankers, a much wider result is produced.


life
;

they are

always ready to lend on good mercantile securities


;

they wish to lend on such securities a large

money entrusted to them. When, therefore, the money so entrusted is unusually large, and when it long continues so, the general
part of the

trade of the country

is,

in

the course of time,

changed.

Bankers are

ready to lend

money

to

more and more more is mercantile men


daily
;

140

U^HV LOMBARD STREET

IS

OFTEN DULL,

more bargains are made in consequence commodities are more sought after and, in consequence, prices rise more and more.
lent to such

men

The
state

rise of prices is quickest in

an improving
are

of credit.

Prices

in

general

mostly
retail

determined by wholesale transactions.


not, of course,
still

The

dealer adds a percentage to the wholesale prices,

always the same percentage, but

Given the wholesale price of most articles, you can commonly tell their retail price. Now wholesale transactions are commonly
mostly the same.
not cash transactions, but
bill

transactions.

The

duration of the
trade
;

bill

varies with the custom* of the

it

may be
is

two, three months, or six weeks,


bill.

but there

always a
in
;

Times of good
bills

credit

mean times
bills

which the

of

many

people are

taken readily
of

times of bad credit, times

when

the

much fewer people

are taken, and even of

those suspiciously.
are a great

In times of good credit there

number of strong purchasers, and in times of bad credit only a smaller number of weak
;

ones
if

and

therefore,

years of improving credit,

there be no disturbing cause, are years of rising

price,
price.

and years of decaying


is

credit years of falling

This

the meaning of the saying

John Bull

can stand

many

things, but

he cannot stand two


AND SOMETIMES EXCITED
per cent.
:

141

'

it

means
Is

that the greatest effect of the

three great causes


here,

nearly peculiar to England

and here almost


is
It

alone, the excess of savings

over investments

deposited in banks

here,

and here

only.

Is
;

made use

of so as to affect
only, are prices

trade at large

here,

and here

gravely affected.

In these circumstances, a low


Is

rate of Interest, long protracted.

equivalent to a
In his

total depreciation of the precious metals.

book on the
was the
you
first

effect of the great

gold discoveries,
I

Professor Jevons showed, and so far as

know

to show, the necessity of eliminating

these temporary changes of value in gold before

could

judge

properly

of

the

permanent

depreciation.

He
;

proved, that In the years pre-

ceding both
ral

1847 and 1857 there was a gene-

rise

of prices

and

In the

years succeeding

these years, a great

fall.

The same might be


after
1

shown of the years before and


mutandis.

866, mutatis

And
more

at the present

moment we have
which

still

remarkable

analysed in
1 87 1, in an whole
:

was thus the Economist of the 30th December,


example,

article

which

venture to quote as a


142

IVNV LOMBARD SIREET IS OFTEN DULL,

THE GREAT RISE IN THE PRICE OF COMMODITIES.


'

?^Iost

persons are aware that the trade of the


Is

country

in

a state of great activity.

All the

usual tests indicate that

the state of the Revenue,


all plain,

the Banker's Clearing-house figures, the returns

of exports and imports are


the

and

all

speak

same language. But few have, we think, considered one most remarkable feature of the
or have sufficiently examined
its

present time,

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
It

foot of this

paper a

list

of articles, comprising most first-rate


will

articles of

commerce, and

be seen that the

rise of price,
is

though not universal and not uniform,


cases are
January.

nevertheless very striking and very general.

The most remarkable

December.

Wool

s.

d.

s.

d.

South DowTi hogs Cotton Upland ordinaryNo. 40 mule yam, &c.

per pack
per
lb.

13

21 15

j>
.

7i i^

81
I

2*

Iron Bars,
Pig, No.
I

British

per ton
jj

Clyde

2 7 2 13

6 3 6

8 17
3 16 19 2

6
6

Lead
Tin

18

Copper

Sheeting

>j
. . .

^Zl
75 10
2

157

per. qr.

95
2

Wheat (Gazette

average)

12

15


AND SOMETIMES EXCITED
143

and
*

in

other cases there

is

a tendency upwards
is

in price

much more

often than there

a tendency

downwards.
This general
rise of price

must be due
quoted

either

to a diminution in the supply of the

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 In 1871

home

stock of sheep was

29,538,000
27,133,000
2,405,000

...

Diminution

Equal

to S-i 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
it

plain test of the

quantities

imported,

has not diminished, but

augmented.
prove

The

returns of the Board of

this in the

most striking

Trade manner, and we

give below a table of some of the important


articles.

The
is

rise in prices

must, therefore, be
first

due to an increased demand, and the


is,

question

to
*

what

that

demand due
to

We

believe

it

be due to the combined

operation of three causes


corn,

cheap
As

money, cheap
first

and improved

credit.

to the

indeed,

144

IVHV LOMBARD STREET JS OFTEN DULL,


first

it

might be said at

sight that so general an

increase

must be due

to a

depreciation of the

precious metals.

Certainly in

many
is

controversies

facts far less striking


it.

have been alleged as proving


a diminution
in

And
is

indeed there plainly

\ki^

picrchasing power of money, though that dimi-

nution

not general and permanent, but local

and temporary.
metals
is

The

peculiarity of the precious

that their value depends for unusually


is

long periods on the quantity of them which


the market.

In

In the long run, their value, like


is

that of all others,

determined by the cost at


to market.
is

which they can be brought


all

But

for

temporary purposes,

it

the supply in the

market which governs the


commercial

price,

and that supply


After a
things
are

in this country is exceedingly variable.


crisis

1866
call

for
in

example

two

happen

first,

we

the debts which


;

owing

to us in foreign countries

and we require

those debts to be paid to us, not in commodities,

but in money.

From

this cause principally,

and
of

omitting minor causes, the bullion in the

Bank

England, which was 13,156,000/. in


increase of over

May

1866,

rose to 19,413,000/. in January 1867, being an


6,000,000/.

And

then there

comes

also a second cause, tending in the

same

direction.

During a depressed period the savings

AND SOMETIMES EXCITED

145

of the country increase considerably faster than

the outlet for them.

person
to

who

has

made
addi-

savings does not

know what
Till

do with them.
invested or
:

And
tional

this

new unemployed saving means


a saving
is
it

money.

employed
farmer
the

exists only in the

form of money

a
to

who

has sold his wheat


100/. in
till

and has

100/.

good/ holds that

money, or some
advan-

equivalent for money,

he sees some
it.

tageous use to be
it

made

of

Probably he places
it

in

a bank, and this enables

to

do more work.
in

If 3,000,000/. of coin
it

be deposited

a bank, and

need only keep 1,000,000/. as a reserve, that

sets 2,000,000/. free,

and

is

for the time equivalent


coin.
all

to an increase of so
it

may be

laid

much down that

As a principle new unemployed


of

savings require either an increased stock of the


precious metalsy or an increase in the efficiency
the banking expedients by which these metals are

economised.

In

other w^ords,

in

a saving and

uninvesting period of the national industry,

we

accumulate gold, and augment the efficiency of


our gold.
follows
credits
If

therefore

such a

saving

period
foreign

close

upon an occasion
augmentation
is

when
the

have been diminished and foreign debts


in,

called

the

in

effective

quantity of gold in the country

extremely great

146

IVHV LOMBARD STREET IS OFTEN DULL,


old

The

money

called in

from abroad and the new

money
is

representing the

new saving

co-operate

with one another.

And

their natural tendency


is

to cause a general rise in price, and, what

the

same thing, a diffused diminution ing power of money.


*

in the purchas-

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,
this

which
Is

is

peculiar to the present time

cause

the amount of the foreign money, and especially

of the

money

of foreign

Governments, now
as the

in

London.
nearly as

No Government
its

probably ever had

much at Government now


things happened
:

command

German

has.

Speaking broadly, two

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

war England became the most convenient paying place, and the most convenient resting place for money, and this
after the

again has

made money

cheaper.

The commercial

causes, for

which there are many precedents, have


political

been aided by a
which there
is

cause for the efficacy of

no precedent


AND SOMETIMES
*

EXCITED.
is

14?

But though
produce these

plentiful
it

money
it is

necessary to

high prices, and though


to

has a natural tendency


not of
itself suffi-

prices, yet

cient 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
is

of employing that additional money.


if

This
aug-

obvious

we remember whence
is

that

mented money
the

derived.

It is

derived from the

savings of the people, and will only be invested in

manner which the holders


in

for the time


It will

being
not be

consider suitable to such savings.

used

mere expenditure

it

would be contrary

to the very

channel of

nature of it so to use it. A new 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 trade

phenomenon
existing side
'

of

dull
side.

common and cheap money


most

by

The demand

in

this case arose in the

effective of all ways.

In 1867 and the

first half

of 1868 corn was dear, as the following figures

show


148

WIIV LOMBARD STREET IS OFTEN DULLy


Gazette Average Price of Wheat.
..

d.\
3

s.

a.

December, 1866
January,
1867

60
61

October, 1867
1

4 9 6
8

February

>j
.

60 10
59
61

November December
January, 1868

.66 .69
.

6
5

67

4
3

March
April

.
.

70
73

February

May
June
July

64
6$ 65
67

March
April

'

'73
. '

4
8 8

'

73

55

May
June
July
it
, .

August September

73 9 67 II
5

3>

62

.65

From

that time

it fell,

and

was very cheap during

the whole of 1869 and 1870.

The

effect of this
in-

cheapness
dustry.
food,

is

great in

every department of
classes,

The working

having cheaper

need to spend so much

less

on that food,
things.

and have more to spend on other


consequence, there
is

In

a gentle augmentation of
all

demand through almost

departments of trade.
great aug-

And
trades

this

almost

always causes a

mentation in what

may be
the

called the instrumental

that

is,

in

trades
in

which

deal

in

machines and instruments used


of

many branches
for

commerce, and

in

the

materials
tons

such.

Take, for instance, the iron trade


tOBS

In the year 1869

we exported

2,568,000
2,716,000
5,284,000
1,882,000
1,944,000

1870
1867 1868

3,826,000

Increase

1,458.000

AND SOMETIMES
that
IS

EXCITED.

149

to say,

cheap corn operating throughout

the world, created a

new demand

for

many

kinds

of articles

such
its

number of articles being aided by iron in some one of many forms, iron to that extent was exported.
;

the production of a large

And

the effect

is

cumulative.
all

The manufacture
off,

of iron being stimulated,

persons concerned in

that great manufacture are well


to spend,

have more

and by spending

it

encourage other

branches of manufacture, which again propagate


the

demand

they receive and so encourage

in-

dustries 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


ness had created.
**

it

is,

it

would not

all

at

once arrest the great trade which former cheap-

The

" ball," if

we may
in

so say,

was

set rolling" in

1869 and 1870, and a great


created
all

increase of
trades

demand was then

certain

and propagated through

trades.

A
in

continuance of very high prices would produce


the reverse effect
certain trades,
;

it

would slacken demand


effect

and the
all

would be gradually
But a
slight
rise
effect.

diffused through

trades.

such as that of this year has no perceptible


'

When

the stimulus of cheap corn

is

added

to

that of cheap

money, the

full

conditions of a great

ISO

WHY LOMBARD STREET


rise

/6 OFTElsl

DULL,
This

and diffused
can be

of prices
supplies a
Bills

are satisfied.

new employment

mode

in

which money

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
invested.

are

figures
*

show
rise

to

have occurred.

The

has also been aided by the revival of

credit.
is

This, as need not be at length explained,

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
as

it is

probably as good as
it

it is

reasonable or

proper that

should be.
as

We

are

now

trusting

many people
is

we ought

to trust,

and as yet
ought

there

no wild excess of misplaced confidence

which would make us trust those


not to
trust.'

whom we

The
process.
lies in

process thus

explained

is

the

common

The
any

surplus of loanable capital which


is

the hands of bankers


in

not employed by

them
to

original

way

it is

almost always lent

a trade already growing and already improving.

AND SOMETIMES EXCITED


The
this

151

use of

it

develops that trade yet further, and

again augments and stimulates, other trades.

Capital

may
;

long

lie idle

in

a stagnant condition

of industry

the mercantile securities which ex-

perienced bankers

know

to be

good do not aug-

ment, 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,
profits derived

good

credit,

and the increased

from better-used labour and better-used capital

have acted simultaneously

and though either


a permanent reason

may why

act

by

itself,

there
will

is

mostly they

act together.
if

They both
is

tend to grow together,


of depression.

yoM begin from a period


bad, and

In such periods credit


;

industry unemployed

very generally provisions


the times bad.

are high in price, and their dearness was one of

the causes which


there

made

Whether

was or was not too much loanable capital when that period begins, there soon comes to be
too much.
their

Quiet people continue to save part of


in

incomes

bad times as well as

in

good
in

indeed, of the two, people of slightly-varying and


fixed incomes

have better means of saving


securities in

bad

times because prices are lower.


affords

Quiescent trado

no new

which the new saving

tS2

WHY LOMBARD STREET

IS

OFTEN DULL,

can be Invested, and therefore there comes soon


to be an excess of loanable capital.

In a year or

two

after

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 develop trade, combine to de-

velop

It

simultaneously.
certain
;

The
magic.

result

is

bound of

national
if

prosperity

the country leaps forward as

by

But only a part of that prosperity has a

solid reason.

As

far as prosperity Is

based on a

greater quantity of production, and that of the


right articles

as

far as

It

is

based on the

in-

creased rapidity with which commodities of every

kind reach those


good.

who want them


is

Its

basis

Is

Human
is

industry

more

efficient,

and

therefore there
kind.

more

to be divided

among manbased on

But

In so far as that prosperity is


It is

a general

rise of prices,

only imaginary.
rise

A
;

general rise of prices

Is

only in

name

whatever anyone gains on the


has to
sell

article

which he

he loses on the
Is

articles

which he has to

buy, and so he

just

where he was.

The

only

AND SOMETIMES EXCITED


people of
incomes,

153

real effects of a general rise of prices are these


first,
it

straitens

fixed

who
profit

suffer as

purchasers, but
;

who have no
it

gain to

correspond

and secondly,

gives an extra

to fixed capital created before the rise happened.

Here the
loss

sellers gain,

but without any equivalent


this

as
is

buyers.
greatest
'

Thirdly,
in

gain

on
called

fixed

capital

what may be
coal

the
iron.

industrial

implements,' such as

and
in

These are wanted

in all industries,

and

any

general increase of prices they are sure to rise

much more than


them
;

other things.

Everybody wants
price
rises

the supply of them cannot be rapidly aug-

mented,
quickly.

and therefore
But
to

their

very
the
it

the country as a whole,


is

general rise of prices

no

benefit at

all

is

simply a change of nomenclature for an identical


relative value in the
theless,

same commodities.

Never;

they most people are happier for it think they are getting richer, though they are
not.

And

as the rise does not happen

on

all

articles at the

same moment, but


and as
gain

is

propagated
it

gradually through society, those to

whom
own

first

comes gain
lieves that
rising,

really

at first everyone behis


article is

he

will

when

a buoyant cheerfulness overflows the mer-

cantile world.

154

^J^y LOMBARD STREET IS OFTEN DULL,


This prosperity
is

precarious as far as
it

it is

real,

and

transitory in so far as

is

fictitious.

The

augmented production, which is the reason of the real prosperity, depends on the full working of
the whole industrial organisation

and labourers;
that
that
full

that
is

of

all capitalists

prosperity

working, and will

was caused by But cease with it.


be destroyed by the

full

working

liable to

occurrence of any great misfortune to any considerable industry.


to the industries

This would cause misfortune


through society and 3ac^
is

dependent on that one, and, as


all

has been explained,


again.

But every such industry

liable to

grave

and the most important the provision-industries to the gravest and the sudfluctuations,

denest.

They

are dependent on the casualties of


single

the seasons. the world,


harvests,

bad harvest diffused over

a succession of two or three


in

bad
high.

even

England

only,
will

will raise the

price of corn exceedingly,

and
all

keep

it

And

a great and protracted

rise

in the price of

corn will at once destroy

the real part of the

unusual prosperity of previous


will

good

times.

It

change the
into

full

working of the
;

industrial
will

machine
the

an imperfect working
less

it

make
usual

produce of that machine

than

instead of

more than usual

instead of there being

AND SOMETIMES EXCITED


more than the average of general dividend
distributed
to

155

be

between
less

the

producers,

there will

immediately be

than the average.

And
capital

in so

far as the

apparent prosperity

is

caused by an unusual plentifulness of loanable

and a consequent
is

rise

in

prices,

that

prosperity
certain
to

not only

liable

to

reaction,

but

be exposed

to reaction.

The same
will, after

causes which generate this prosperity

they have been acting a


equivalent adversity.

little

longer, generate
is

an
the

The

process

this

plentifulness of loanable capital causes a rise of

prices

that rise of prices

makes

it

necessary to

have more loanable


trade.

capital to carry

on the same

100,000/.

will
it

not
will

buy as much when


prices are low,
it

prices are high as


will not

when

be so
is

effectual for carrying

on business

more money

necessary in dear times than

in

cheap times to produce the same changes

in the

same commodities.
be required to carry
prices as has

Even supposing
it

trade

to

have remained stationary, a greater

capital

would

on

after

such a rise of

been described than was necessary

before that
not have

rise.

But
to
*

in this case the trade will


;

remained stationary

it

will

have

in-

creased

certainly

some

extent, probably to a
capital,'

great extent.

The

loanable

the lending

156

1VI/y

LOMBARD STREET
The

IS

OFTEN DULL,

of which caused the rise of prices, was lent to

enable

it

to

augment.

loanable capital lay


trade
in

idle in the

prosperity,

some and then was lent


banks
till

started

into

order to develop

that trade

that trade caused other secondary de;

velopments 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


Till the available trade is

in that rate.
lies
it is

found

It

idle,

and can scarcely be

lent at all

some

of

not

lent.

But the moment the available trade

is

discovered

the
part,

moment

that prices have risen

the
their

demand
regular

for loanable capital

becomes keen.

For the most

men
;

of business
it

must carry on

trade

if

cannot be carried on

without borrowing lo per cent, more capital, lo

per cent, more capital they must borrow.


often they have incurred obligations

Very which must

be met

and
is

if

that

is

so the rate of interest which

they pay

comparatively indifferent.
their

What

is

necessary to meet

acceptances they will


;

borrow, pay for

it

what they may


in less

they had better


to

pay any price than permit those acceptances


dishonoured.

be

And

extreme cases men of

AND SOMETIMES EXCITED


business have a
idle

157

fixed capital,
;

which cannot He
a steady con-

except at a great loss


be,
if

a set of labourers which


;

must

possible, kept together

nection 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 augment-

ation 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
and

borrowing soon follows upon the new and great


trade,

and the

rate of interest rises at once,

generally rises rapidly.

This
is,

is

the surer to happen that

Lombard
is

Street

as

has been shown before, a very delicate

market.

large

amount

of

money

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
It is

doing they cannot employ


vital

all

their

money.

to

them

to

employ

all

the

money on which

they pay interest.

little

excess therefore forces

down

the rate of interest very much. But if that low rate of interest should cause, or should aid in
is

causing, a great growth of trade, the rise

sure to

158

WHY LOMBARD STREET


is

IS

OFTEN DULL,
The
figures of

be quick, and

apt to be violent.

trade are reckoned

by

hundreds of millions, where

those of loanable capital count only

great increase in

by millions. the borrowing demands of

English commerce almost always changes an excess


of loanable capital above the
deficiency

below the demand.


in the

demand to a greater That deficiency


that the previous

causes adversity, or apparent adversity, in trade,


just as

and

same manner

excess caused prosperity, or apparent prosperity.


It

causes a
fall

fall

of price that runs through society

that

causes a decline of activity and a diminu-

tion of profits

a painful contraction instead of the


is

previous pleasant expansion.

The change

generally quicker because

some
it.

check to credit happens at an early stage of

The
it

mercantile community will have been unusuif

ally fortunate

during the period of rising prices


great mistakes.

has not

made
the
it

Such a period
;

naturally excites the sanguine

and the ardent they


they
see will
last

fancy

that

prosperity

always, that
prosperity.

is

only the beginning of a greater


altogether over-estimate the
in,

They
They

demand
they do.

for the article they deal


all in

or the work

their degree

and the cleverest the most


than

and the ablest work much more


far

they

should,

and trade

above

their

AND SOMETIMES EXCITED


means.

159

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


tions,
till

far those specula-

they were tempted by the daily rise of


fever.

price

and the surrounding


case
is

The

worse, because at most periods of


is

great commercial excitement there

some mixture
is

of the older and simpler kind of investing mania.

Though

the

money

of saving persons

in the

hands of banks, and though, by offering


banks retain the

interest,

do not

retain

command of much of it, yet they the command of the whole, or any;

thing near the whole

all

of

it

can be used, and

much
with

of
it

it is

used,

by

its

owners.

They speculate
in

in

bubble companies and

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
striking

of

1825

and the mania of 1866 were

examples

of this; in their case to a great extent, as in

most similar modern periods to a


the milder madness of

less

extent,

the delirium of ancient gambling co-operated with

modern overtrading.

At

the very beginning of adversity, the counters in


the gambling mania, the shares in the companies

i6o

IVBV LOMBARD STREET IS OFTEN DULL,

created to feed the mania, are discovered to be

worthless
of credit.

down they

all

go,

and with them much

The good
lous

times too of high prices almost always


All people are most credu;

engender much fraud.

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 ingeni-

ous mendacity. Almost everything will be believed


for a little while,

and long before discovery the


But
it

worst and most

adroit deceivers are geographically

or legally beyond the reach of punishment. the

harm they have done


still

diffuses

harm, for

v/eakens credit

further.
is

When we
we should
cycles.

understand that Lombard Street

subject to severe alternations of opposite causes,

cease to be surprised at

its

seeming

We

should cease too to be surprised at

the sudden panics.

During the period of reaction


at the
Is

and adversity, just even


prosperity, the

last

instant of

whole structure

delicate.

The
Is
;

peculiar

essence of our banking

system

an

unprecedented trust between

man and man

and

when
causes,

that

trust

is

much weakened by hidden

small

accident

may

greatly hurt

it,

AND ^SOMETIMES EXCITED


and a great accident
destroy
it.

i6i

for

a moment

may

almost

Now

too that

vicissitudes

of

we comprehend the inevitable Lombard Street, we can also


a
great

thoroughly comprehend the cardinal importance


of always
retaining

banking

reserve.

Whether the times of adversity are well met or ill met depends far more on this than on any
other single
large, its

circumstance.

If

the
;

reserve be

magnitude sustains

credit

and

if it

be

small,

its

diminution stimulates the gravest appre-

hensions.

And

the better

we comprehend

the

importance of the banking reserve, the higher


shall

estimate
it.

the responsibility of those

we who

keep

i62

THE BANK'S ADMINISTRATION

CHAPTER VIL
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
banking reserve.
the

is

bound

to

discharge as to
If

its

we

ask
this

how

Bank of England has

dis-

charged

great responsibility,
:

we

shall

be
act

struck by three things


before, the

first, as has been said

Bank has never by any corporate


its

or authorised utterance acknowledged the duty,

and some of
is

directors

deny

it

second (what

even more remarkable), no resolution of Par-

liament, no report of

any Committee of
has
;

Parlia-

ment
of

(as far as

know), no remembered speech


statesman,

responsible

assigned

or
is

enforced that duty on the Bank

third (what

OF THE RESERVE
more remarkable
still),

163

the distinct teaching of

our highest authorities has often been that no


public duty of any kind
is

imposed on the Banking


;

Department
purposes,
it
;

of
is

the

Bank

that,

for

banking

only a joint stock bank like any


its

other bank

that

managers should look only

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
to the interest of the proprietors
;

important a responsibility should be unimposed,

unacknowledged, and denied


is this.

but the explanation

We

are living

controversies,

amid the vestiges of old and we speak their language, though


fifty

we
ent

are dealing with different thoughts and differfacts.

For more than

down

to 1844

793 there w^as a keen controversy as


1

years

from
was

to the public duties of the

Bank.

It

said to

be the 'manager' of the paper currency, and on


that account

many expected much good from


did great

it

others said
it

it

harm

others again that

could do neither good nor harm.


Avas

But

for the
fierce

whole period there


discussion.

an incessant and

was terminated by By that Act the currency the Act of 1844. manages itself; the entire working is automatic. The Bank of England plainly does not manage

That

discussion

X64

THE BANK'S ADMINISTRATION

cannot even be said to


more.

manage the

currency any

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
land
the
is

complete uncertainty as to the degree of

responsibility

acknowledged by the Bank of Eng-

best illustrated

by what has been


it

said

by

Bank

directors themselves as to the panic of

1866.

The
and

panic of that year,

will

be remem-

bered, happened, contrary to


spring,
at the next

precedent, in the

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

was thus described

In the

'

all that is most material 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.

Parliamentary com-

mittee next year would, unless something strange

occur in the interval, be a great waste of time.

Men

of business have keen sensations but short


*

Sep Note D,

in

Appendix

I.

OP TH^ RESERVE
memories, and they
will care

165

no more next Feb-

ruary for the events of last


care for the events

May

than they

now
pro

of October 1864.

forma inquiry, on which no real mind is spent, and which everyone knov/s will lead to nothing,
is

far

worse than no inquiry at


the
official

all.

Under
of

these

circumstances

statements

the

Governor of the
expositions

Bank are the only

authentic

we

shall

have of the policy of the


the proceed-

Bank

directors,

whether as respects the past or

the future.

And when we examine


we
shall

ings with care,

find that they contain

matter of the gravest import.


*

This meeting may be considered to admit and


fact

recognise the

that

the

Bank of England
of the country.

keeps the sole banking reserve

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
Great

mass of cash
authorities

in the

country

but there has been no universal agreeit

ment about

have

been

i66

THE BANK'S ADMINISTRATION


it.

unwilling to admit

They have

not,

indeed,
it.

formally and explicitly contended against

If

they had, they must have pointed out some other


great store of unused

cash besides that


store.

at the

Bank, and they could not find such


they have attempted distinctions
the
doctrine that the
;

But

have

said that

Bank
it,"

of England keeps
"

the sole banking reserve of the country was

not

a good

way

of putting

was exaggerated, and


a complete admission
of the

was calculated
*

to mislead.

But the
is

late

meeting

is

that such
said :
*

the

fact.

The Governor

Bank

"

great strain has within the last few months


this house,

been put upon the resources of


think

and
;

of
I

the whole banking community of


I

London

and

am

entitled to say that not only this house,

but the entire banking body, acquitted themselves

most honourably and creditably throughout


very trying period.
business,

that

Banking

is

a very peculiar

and

it

depends so much upon credit that


is

the least blast of suspicion

sufficient to

sweep

away, as

it

were, the harvest of a whole year.


in

But the manner


ments

which the banking establishin

generally

London met

the

demands

made upon them during


pa.st half-3^ear

the greater portion of the

affords a

most satisfactory proof of

OF THE RESERVE
the soundness of the principles

i6y

on which

their
itsell

business

is

conducted.

This house exerted


itself

to the utmost
fully

and

exerted
crisis.

most successnot
flinch

^to

meet the
post.

We
it

did

from
us,

our

When

the storm

on the morning on which


in as

came upon became known


failed,

that the house of

Overend and Co. had

we

were

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,


It

the greatness of those advances.

was not un-

natural that in this state of things a certain degree

of alarm should
public mind,

have taken possession of the

and that those who required accommo-

dation from the

Bank should have gone

to the

Chancellor of the Exchequer and requested the

Government
the statutory

to

empower us to issue notes beyond amount, if we should think that such


But we had to act
receive

a measure was desirable.


before before

we
the

could

any such power, and

Chancellor

of the

Exchequer was
one-halt

perhaps out of his bed

we had advanced

of our reserves, which were certainly thus reduced


to

an amount which

we

could not witness without

i5S

THE BANK'S ADMINISTRATION


But we would not flinch from the duty which
us of supporting

regret.

we conceived was imposed upon


the banking community, and
I

am

not aware that

any legitimate application made


this

for assistance to

Every gentleman who came here with adequate security was liberally and if accommodation could not be dealt with afforded to the full extent which was demanded,
house was refused.
;

no one who offered proper security failed


relief
*

to obtain

from

this house."

Now

this is distinctly saying

that the other

banks of the country need


banking reserve
real sovereigns

not

keep any such

any such sum of actual cash of


and bank
notes, as will help
It

them
a
the

through a sudden
**

panic.

acknowledges

duty

"

on the part of the Bank of England to

*'

support the banking community," to

make

reserve of the
well as for
*

Bank

of England do for

them as
just,

itself.

In our judgment this language

is

most

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
If

keep the banking reserve. the joint stock banks and the private banks and
precisely
is

who

to

the country banks are to keep their share, let us

determine on that

Mr. Gladstone appeared not


OF TH& RESERVE
long Since to say in Parliament that
so.
it

ought to be

But

at

any rate there should be no doubt

whose duty

it is.

Upon grounds which we have


believe that the anomaly of one
sole

often stated,

we

bank keeping the


in

banking reserve

is

so fixed

our system that

we cannot change it if we would.


and that
is

The
*

great evil to be feared was an indistinct confact,

ception of the

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
it

person w^ho loves concise expressions said lately


in

"that Overends broke the Bank


went, and in 1857 because
it

1866 because

We

was not let go." need not too precisely examine such language
;

the element of truth in

it is

very plain

the great
principal

advances made to

Overends were a
;

event in the panic of 1857 the bill brokers were then very much what the bankers were lately
they were the borrowers
incalculable advances.

who wanted sudden and


bill

But the

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


to the

more

satisfactory

managers and shareholders of

joint stock
of

banks than the testimony which the Governor

S70

THE BANK'S ADMINISTRATION


Bank
of England had that day borne to the
in

the

sound and honourable manner


business

which

their

was manifestly desirable that the joint stock banks and the banking interest generally should work in harmony and he sincerely with the Bank of England
was
conducted.
It
;

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
of need,
*

crisis."

The Bank

of England agrees
in case
it.

to give other

banks the requisite assistance

and the other banks agree

to ask for
if

Secondly.

The Bank

agrees, in fact,

not in

name, to make unlimited


security to

advances on proper
for
it.

anyone who applies

On

the

present occasion 45,000,000/. was so advanced in


three months.

And

the

Bank do not say


helped you once.

to the
*'

mercantile community, or to the bankers,

Do
But
not

not

come

to us again.
it

We

do not look upon


help you again."

as a precedent.

We

will

On

the contrary, the evident

and intended implication is that under like circumstances the Bank would act again as it has

now

acted.'
article

was much disliked by many of the Bank directors, and especially by some whose
This
opinion
is

of

great authority.

They thought


OF THE RESERVE
that
171
'

the

from

drew speech which was


*

Economist

'

rash

deductions

in

itself

'open
all

to

some

objection

'

which
in

was,

Hke

such

speeches, defective

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.


article
facts.

However, the
brought out the

had

at least this use, that

it

All the directors would have felt a difficulty in


in differing from,

commenting- upon, or limiting, or

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


after,
'

Bank

directors, not
:

long

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
of

viz. that it is

the proper function of

the
all

Bank

times to supply the

England to keep money available at demands of bankers who have

rendered their
a doctrine
is

own

assets unavailable.

Until such

repudiated by the banking interest,

the difficulty of pursuing any sound principle of

banking But
I

in

London

will

be always very great.

do not believe that such a doctrine as that

172

THE BANK'S ADMINISTRATION

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.


*

consider

it

to

be the undoubted duty of the


its

Bank

of England to hold

banking deposits
in the

(reserving generally about one-third in cash) in

the most available securities

and

event of

a sudden pressure
ever circumstance

in the
it

Money Market, by whatmay be caused, to bear its full


resources.
I

share of a drain on

its

am

ready to

admit, however, that a general opinion has long


prevailed that the

prepared to do
confess

Bank of England ought to be much more than this, though I


for

my surprise at finding an advocate


in the
'*

such

an opinion

Economist." *

If

it

were prac-

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 w^ere 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
ticable for the
;

banking or commercial
acted in a

distress,

should ever have

way

to encourage such
affairs

an opinion.

more the conduct of the


to assimilate to the

of the

Bank

is

The made

conduct of every other well-

Vide Economist of September 22, 1866.

OF THE RESERVE
managed bank
for the
large.*
I

173

in

the United

Bank, and the better

Kingdom, the better for the community at


I

am

scarcely a judge, but


replies

do not think Mr.

Hankey
clusively.
First.

to

the

Economist' very con=

He
'

should have observed that the ques-

tion
is.

is

not as to what ought to be, but as to what


'

The Economist
it

did not say that the system

of a single
that

bank reserve was a good system, but 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


could be made.

in

time of panic

These advances are necessary, and must be made by some one. 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.
that

Mr. Hankey should have observed


the published figures that the

we know by

joint stock

banks of London do not keep one-third,


at the
in

or anything like one-third, of their liabilities in

cash'

even meaning by *cash' a deposit

Bank of England,

One-third of the deposits

174

THE BANICS ADMINISTRATION


to

Joint Stock banks, not

speak of the private


;

banks, would
deposits of the

be 30,000,000/.

Bank

of

and the private England are 18,000,000/

According to

his

spicuous contrast.

own statement, there is a conThe joint stock banks, and the


one sort of
different kind

private banks, no doubt, too, keep


reserve,

and the Bank of England a

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

Fourthly.
that, as

Bank of England. Mr. Hankey should have observed


'banking reserve'
;

has been explained, in most panics, the


is is

principal use of a

not to

advance to bankers

the largest amount

almost

always advanced to the mercantile public and to


bill

brokers. But the point


is

is,

that

by our system
crisis

all

extra pressure
land.

thrown upon the Bank of Engof


1866,

In the worst part of the


*

50,000/.

fresh

money

'

could

not be borrowed

even on the best security

even

on Consols

except at the Bank of England.

There was no

other lender to new borrowers. But my object now is not to revive a past controversy, but to show in what an unsatisfactory

OF THE RESERVE
and uncertain condition that controversy has
a most important subject.
last

175

left

Mr. Hankey 's


of the

is

the

explanation

we have had
is

policy of

the

Bank.

He

a
I

very

experienced

and

attentive director,
less,

and

think expresses,

the opinions of other directors.


find
?

more or And what


in

do we

Setting aside and saying nothing

about the remarkable speech of the Governor

1866, which at least (according to the interpretation

of the

Economist

')

was

clear

and

excellent,

Mr.

Hankey
will

leaves us in doubt altogether as to what


in the

be the policy of the Bank of England


then expect from

next panic, and as to what amount of aid the public

may
still

it.

His words are too


*

vague.
less

No one
can
it

can

tell

what a

fair

share means
*

we tell what other people at some future


means.

time will say

Theory

suggests,

and ex-

perience proves, that in a panic the holders of the

Bank reserve (whether one bank or many) should lend to all that bring good securities quickly, By that policy they allay a freely, and readily. panic by every other policy they intensify it. The public have a right to know whether the Bank of England the holders of our ultimate bank reserve
ultimate
;

acknowledge
it.

this duty,

and are ready


uncertain.

to perform

But
If

this is

now very

we

refer to history,

and examine what

in


176

THE BANICS ADMINISTRATION


has been the conduct of the Bank directors,
find that they

fact

we

have acted exactly as persons

of their type, character,

and position might have

been expected to
plain,

act.

They

are a board of

sensible,

prosperous

EngHsh merchants;

and they have both done and left undone what such a board might have been expected to do and not
board
could
to do.

Nobody
study
is

could expect great

attainments In economical science from such a


;

laborious

for

the

most

part

foreign to the habits of English merchants.

Nor

we
is

expect original views on banking, for


a special trade, and English merchants,
it.

banking
as a
*

body, have had no experience in

board' can scarcely ever

make improvements,
is

for the policy of

a board

determined by the
its

opinions of the most numerous class of


bers

mem-

its

average members
for

and
'

these are never

prepared

sudden improvements.
merchants
considers
will
'

board of

upright and sensible

always act
principles

according to what
that
is,

it

safe

according to the received maxims of the

mercantile

world then and there


directors of the

and

in

this

manner the

Bank

of

England have

acted nearly uniformly.

Their strength and their weakness were curiously


exemplified at the time

when they had

the most


OF THE RESERVE
power.
in
177

After the suspension of cash payments

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
1797, the directors of 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
fell

the

Bank

directors of that

day

at last

into errors, yet

on the whole they acted with

singular

judgment and moderation. But when, in 1 8 10, 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,

result-

ing from the applications

made

for discounts to

supply the necessary want of bank notes, by which


their issue in

amount

is

so controlled that
I

it

can
the

never amount to an excess,

cannot see

how

amount of bank notes issued can operate upon the


price of bullion, or the state of the exchanges

178

THE BANK'S ADMINISTRATION


I

and therefore

am

individually of opinion that the

price of bullion, or the state of the exchanges,

can never be a reason for lessening the amount


of bank notes to be issued, always understanding the control which
'

have already described.

Governor of the Bank of the same opinion which has now been expressed by the
Is

the

Deputy- Governor
*

Mr. Whitmore
I

am

so
it

much

of the

same

opinion, that

never think

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


to
it

a view to regulate the general amount of your

advances

do not advert

with a view to
it

our general advances, conceiving

not to bear

upon the

question.'

And

Mr.

Harman,

another

Bank
:

expressed his opinion in these terms

director,
*

I
I

must
can

very materially alter

my

opinions before
will

suppose that the exchanges

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


OF THE RESERVE
opinion of England.
179

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 pur-

sued the usual practice of their time.


'

It

was
*

this

routine

'

that

caused their moderation.


*

They
only

believed that so long as they issued


at 5 per cent,
bills,

notes

and only on the discount of good

those notes could not be depreciated.

And

as the

number of

good

'

merchants know to be
increase,

which sound good does not rapidly


bills

bills

and as the market


effective.

rate of interest

was

often less than 5 per cent, these checks on overissue

were very

They

failed in time,

and the theory upon which they were defended

was nonsense but for a time powerful and excellent


;

their operation

was

management of the matter before us the management of the Bank reserve the directors of the Bank of England were neither
Unluckily, in

the

acquainted with right principles, nor were they


protected by a judicious routine.

They
is

could not
principles.

be expected themselves to discover such

The

abstract thinking of the world

never to be
;

expected from persons in high places

the adis

ministration of first-rate current transactions


ISO

THE BANICS ADMINISTRATION

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


its

not getting an income for


it is

when it is members, and when


instincts
office.

only discharging a duty of

During the
to

suspension of cash payments


lasted

twenty-two years
reserve had
directors

a suspension which
traditions as

all

cash

died away.

After

1819 the

had to discharge the duty of keeping a banking reserve, and (as the law then
stood) a currency reserve also, without the guid-

Bank

ance either of keen


or wise traditions.

interests, or

good

principles,

Under such circumstances, the Bank directors 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
inevitably
:

On

Dec. 24, 1824, the coin and bullion in the

Bank
10,721,006
,
.

was

On
-

Dec. 25, 1825,

it

was reduced to

1,260,000

and the consequence was a panic so tremendous

i8i

OF THE RESERVE
that
fifty
its

results are well

remembered

after nearly
trial

years.

In the next period of extreme

in

1837-9

the
the

2,000,000/.
that aid

Bank was compelled to draw for on the Bank of France and even after
;

directors

permitted their bullion,

which was

still

the currency reserve as well as


:

the banking reserve, to be reduced to 2,404,000/.

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 and so intense was the alarm, that to 1,176,000/.
;

the

executive

Government issued a
the

letter

of
to

licence,

permitting

Bank,
if

if

necessary,

break the new law, and,

necessary, to borrow
full,

from the currency reserve, which was


of the banking reserve, which

in aid

was empty.
in the

Till

1857 there was an unusual calm


Market, but
in the

Money
Bank
in

autumn of

that year the

directors let the

banking reserve, which even


:

October was
Oct. 10

far too small, fall thus

4,024,000
3,217,000
.

17

24

3,485,000 2,258,000
2,155,000

,,31
Nov. 6

i3
.

9S7.00O

i82

THE BANK'S ADMINISTRATION


then a letter of licence like that of 1847

And

was not only Issued, but used. The Minrstry 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 thousand pounds
till

the

end of the

month of November.
to

A more miserable catalogue


in all the seasons
is

than that of the failures of the Bank of England

keep a good banking reserve


in history.

of trouble between 1825 and 1857

scarcely to

be found

But since 1857 there has been a great improvement. By painful events and Incessant discussions,

men

of business have

now been
Is

trained to see that

a large

banking reserve

necessary,

and

to

understand

that, In the curious constitution

of the
Is

English banking world, the Bank of England


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
I

of business, comprehended this like other

men
kept,

of business.

Since 1857 ^^ey have always


sufficient

do not say a

banking reserve,

but a

fair

and creditable banking reserve, and one

altogether different from any which they kept before.

OF THE RESERVE

183

At one period the Bank directors even went farther they made a distinct step in advance of the pubHc
intelHgence
raising;

they adopted a particular


is

mode
far

of

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
the rate of interest, which
:

difference can never

be very great

but

it

must

not be forgotten that


at a percentage

the

interest being taken

calculated per

annum, and the


operation
in

probable profit having,

when an

three-month

bills

is

contemplated, to be divided

by
to

four,

whereas the percentage of expense has

be wholly borne by the one transaction

very slight expense becomes a great impediment.


only \ per cent, there must be a profit of 2 per cent, in the rate of interest, or \ per cent, on three months, before any advantage
If the cost
is

commences
talists

and

thus,

supposing the Paris

capi-

calculate that

they

may send

their

gold

over to England for \ per cent, expense, and chance their being so favoured by the Exchanges
as to be able to
all,

draw

it

back without any cost at

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

i84

THE BANK'S ADMINISTRATION

gold over from France, merely for the sake of the


higher interest, will pay.' Accordingly, Mr. Goschen recommended that

Bank of England should, as a rule, raise their rate by steps of i per cent, at a time when the object of the rise was to affect the foreign Exchanges.* And the Bank of England, from i860 onward,
the
'

have acted upon that

principle.*

Before that time

they used to raise their rate almost always by


steps of ^ 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,
as far as

most unpopular.
I

On

this occasion, and,

know, on

this occasion alone, the

Bank

of England
policy,

made an

excellent alteration of their

which was not exacted by contemporary

opinion,

and which was

in

advance of

it.

The
of the

beneficial results of the

improved policy

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 1 862-1 865. 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
the rule that

* Occasionally the Bank now moves by steps of I per cent. but may be said to be broadly observed is that while
;

in lowering the rata


cent., in raising
it

it

may be

expedient to

move by

steps of ^ per
i

the advance should be by steps of

per cent

OF THE RESERVE
preserved the country from calamities which,

185

If

we had looked only


seemed
inevitable.

to

precedent, would have

All the causes v/hlch produced


in action

the panic of

1857 were

in

1864

the

drain of silver in

1864 and the preceding year


in

was beyond comparison greater than


the years before
it

1857 and

and

yet in 1864 there was

no panic.

The Bank

of

England was almost


its

immediately rewarded for


principles

adoption of right
principles,
at

by finding that those


preserved public

severe

crisis,

credit.
I

In 1866 undoubtedly a panic occurred, but


not think that the
for
it.

do

Bank

of

They had

In their

till

England can be blamed an exceedingly good

reserve according to the estimate of that time


sufficient reserve, in all probability, to

have coped

with the crises of 1847 ^.nd 1857.


of

The suspension

Overend and Gurney

the most trusted private


alarm, in suddenness

firm in

England caused an

and magnitude, without example.


effect of the

What was

the
is

Act of 1844 on the panic of 1866


it

question on which opinion will be long divided;

but

think

will

be generally agreed

that, acting

under the provisions of that law, the directors of


the

Bank of England had in their Banking Department in that year a fairly large reserve quite as large a reserve as anyone expected them to keep

to

meet unexpected and painful contingencies.

i86

THE BANK'S ADMINISTRATION


From 1866
to

1870 there was almost an un-

broken calm on the


of

Money
for

Market.

The Bank
;

England had no

difficulties to

cope with
discretion.

there

was no opportunity

much

The
1870

Money Market
the

took care of

itself.

But

in

Bank
this

of France suspended specie payments,

and from that time a new era begins.* The demands

on

market

for bullion

have been greater, and


were

have been more


before, for this

incessant, than they ever

is now the only bullion market. This 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 v/atchful than

has

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

do not think the Bank of Engaware of


this.

land

is

sufficiently

All the govern-

ing body of the

Bank

certainly are not

aware of

it

The same eminent


referred,

director to

whom
in

have before
*

Mr. Hankey, published


letter,

the

Times'

an elaborate
of the

saying again that one-third

liabilities

were, even in these altered times,

a sufficient reserve for the Banking Department


of the
*
1878,

Bank

of England, and that

it

was no part

of France resumed specie payments on January i, and there are now three bullion markets in Europe those of London, Paris, and Berlin. There is also the New York market.

The Bank

See note on page

33.

OF THE RESERVE
of the business of the
*

187

Bank

to

keep a supply of

bullion for exportation,'

which was exactly the

most mischievous doctrine that could be maintained of

when

the Banking Department of the

Bank

England had become the only great resposltory 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
there

besides
are

this defect of the

present time,
in

some chronic

faults

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
Firstly.
;

so

important
else

a functionary changes,
too.

naturally

much
this

changes

If the

Governor be weak,

kind of vacillation and hesitation continues


office.

throughout his term of


then
is,

The

usual defect

that the

Bank
it

of England does not raise


It
it

the rate of interest sufficiently quickly.


raise
it
;

does does

in the

end

takes the alarm, but

not take the alarm sufficiently soon.

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

conse-

quence they are very apt to temporise and delay.

i88

THE BANK'S ADMINISTRATION


in creating

But almost always the delay

a strin-

gency 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 mtcst 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
in part, or as

but

new Governors rarely see this. Secondly. Those defects are apt,

a whole, to be continued throughout the reign of


a

weak Governor.

The

objection to a decided
to a timely action,

policy,

and the indisposition

which are excusable in one


beginning, and whose reign

whose influence
is

is

new,

is

continued
those

through the whole reign of one to


defects are natural,
in all his affairs.

whom

and who exhibits those defects


enhanced, because, as has
is

Thirdly. This defect

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
so often been said, there
of
its

banking

liabilities

as a reserve.
if

But no one
Mr.
third*

now would
Hankey, as

ever be content

the banking reserve


its

were near to one-fourth of


I

liabilities.

have shown, considers *about a

OF THE RESERVE

189

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


or at others

may fluctuate, sometimes being greater,


less.

In a future chapter
that one-third of
its

shall

endeavour to show
present
for the

banking

liabilities Is at

by no means an adequate reserve


Department
far less

Banking

that

it is

not even a proper minimum,


;

fair

average

and

shall allege

what

to me good reasons for thinking that, unless Bank aim by a different method at a higher standard, its own position may hereafter be perilous,

seem
the

and the public may be exposed

to disaster.

II.

But, as has been explained, the


is

Bank

of

England

bound, according to our system, not only to keep

a good reserve against a time of panic, but to use


that reserve effectually

when
of

that time of panic

comes.

The

keepers

the

banking reserve,
If they permit all

whether one or many, are obliged then to use that


reserve for their

own

safety.

I90

THE BANK'S ADMINISTRATION


own
will

Other forms of credit to perish, their


perish immediately,

and

In

consequence.
is

As

to the
It Is

Bank

of England, however, this

denied.

alleged that the


;

Bank
it

of England
if It
It

can keep aloof In a panic


let
It

that
;

can,

will,

other banks and trades

fail

that, if

chooses.
all

can stand alone, and survive Intact while

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
the precise
Is.

during panics before


position of the

we know what
a panic really
Its

Bank

in

The
stay

holders of this opinion In


In a panic the
;

most extreme

form say that


its

Bank

of

England can

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


It

discounts
will

that the bills which


;

has discounted

become due that It can refill Its reserve by the payment of those bills; that It can sell
still

stock or other securities,

reserve

further.

and so replenish Its But in this form the notion

OF THE RESERVE
scarcely merits serious refutation.
If

191

the

Bank

reserve has once

become
it

low, there are, in a panic,

no means of
have taken

raising
is

again.

Money

parted with
;

at such a time
it

very hard to get back those who


not let
it

will

go

not, at least, unless


in its place.

they are sure of getting other

money

And

at such instant the recovery of

money

is

as

hard for the Bank of England as for anyone


probably even harder.
the
bills

else,
:

The

difficulty is

this

if

Bank

decline to discount, the holders of the

previously discounted cannot pay.


in

As

has

England is largely carried on If you propose greatly to with borrowed money. reduce that amount, you will cause many failures
been shown, trade
unless you can pour in from elsewhere

some

equi-

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
valent
;

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
bankers are

to
in

discharge those

liabilities.

And
;

even greater

terror.

In a panic
bills

they will not discount a host of


are engrossed with their

new

they

own

liabilities

and those

of their

own

customers, and do not care for those

192

THE BANK'S ADMINISTRATION


The
notion that the

of Others.

Bank of England

can stop discounting in a panic, and so obtain fresh

money,

is

a delusion.

It

can stop discounting, of


if
it

course, at pleasure.

But
bill

does,

it

will

get in

no new money

its

case will daily be


*

more

and more packed with

bills

returned unpaid.'

The
in

at
is

by the Bank of England the middle of a panic is impossible. The Bank such a time is the only lender on stock, and it only by loans from a bank that large purchases,
sale of stock, too,

at

such a moment, can be made.

Unless the

Bank of England lend, no stock wqll be bought. There is not in the country any large swm 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 were to attempt to It would sell stock, the failure would be ridiculous. 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


too absurd to be steadily maintained,

has once been allowed to become empty, or nearly

empty,

is
I

though

fear that

it is

not yet wholly abandoned.

The second and more

reasonable conception

of the independence of the

Bank of England

is,

OF THE RESERVE
hov/ever, this
that
if
:

193

it

It

may be

said,

and

it

is

said,

the

Bank of England
if it if

stop at the beginning

of a panic,

refuse to advance a shilling

more

than usual,

begin the

battle with a good


it

banking reserve, and do not diminish


loans, the

by extra

Bank

of

England

is

sure to be safe.

But

this

form of the opinion, though more reasonis

able and moderate,

not, therefore,

more true. The


it.

panic of 1866

is

the best instance to test

As
Bank

everyone knows, that panic began quite suddenly,

on the

fall

of

'

Overends.'

Just before, the


;

had 5,812,000/.
13,000,000/. of

in its reserve

in fact,

it

advanced

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
?
it

Certainly
its

could not.

It

could not have retained

own

deposits.

large part of these are the

deposits of bankers, and they would not consent


to help the
tion.

Bank

of England in a policy of isola-

They would
and get

not agree to suspend payments

themselves, and permit the


survive,
all

England to 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 o
of
their business.
;

Bank


194

THE BANICS ADMINISTRATION


keep their deposits
at the

willing to
it

Bank while

was not lending, they would soon


it.

find that they

could not do

those deposits at the

They Bank by
if

are only able to keep

the aid

of the

Clearing-house system, and

a panic were to pass

^ certain height, that system, which rests on confidence,


-

would be destroyed by

terror.
is

The common

course of business

this.

A
C

having to receive 50,000/. from

C D
it

takes

D's

cheque on a banker crossed, as


pays that cheque to his
banker,
is

is

called, and,

therefore, only payable to another banker.

He
own
it

own
to the

credit with his

who

presents
if

it

banker on

whom

draAvn,

and

good

it is

an item between them

in

the general clearing or settlement of the afternoon.

But

this

is

evidently a very refined machinery,


will

which a panic
stage

be apt to destroy.

At
D,
'

the
I

first

B may

say to his debtor


I

cannot
If
it

take your cheque,


is

must have bank

notes.'

a debt on securities, he will be very apt to say

this.
is

The
to

usual

practice

credit
in

being good

for the creditor to take

the debtors cheque,

and
*

give
'

up

the

securities.

But

if

the

securities
will

really secure

him

a time of

difficulty,

he

not like to give them up, and take a bit of

paper
paid.

a mere
He
will

cheque, which

may be
*

paid or not

say to his debtor,

can only give

OF THE RESERVE
you your
securities
If

195

you

will

give

me bank
he has
the
;

notes/

And
if
*

if

he does say

so,

the debtor must go to his


if
it.

bank, and draw out the 50,000/.


this

But
the

were done on a large


in

scale,

bank's
as

cash

house

would soon be gone


on
its

Clearing-house was gradually superseded

it

would
of

have

to trench
;

deposit at the

Bank

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.
The}/ would soon be obliged to
shilling.

draw out every

The
panic.

diminished use of the Clearing-house, in

consequence of the panic, would intensify that

By

far the greater part of the bargains of


is

ihe country in moneyed securities

settled

on the

Stock Exchange twice a month, and the number of


securities then given

up

for

mere cheques, and the


that system

number

of cheques then passing at the ClearingIf

house, are enormous.


collapse, the
lable,

were

to

number of
failure

failures

would be incalcuto the discredit

and each

would add

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
;

196

THE BANK'S ADMINISTRATJON


notes,

draw out bank not be enough

and the Bank reserve would


a great
obliga-

for a tithe of such payments.


:

The
tions to

matter would come shortly to this


of brokers

number

and dealers are under


in

pay Immense sums, and


as

common
No.
till

times

they obtain these sums by the transfer of certain


securities.
If,

we

said just now,


2

has
he,

borrowed 50,000/. of No.


for the

on Exchequer

bills,

most

part,

cannot pay No. 2

he has

sold or pledged those bills to


till

some one
till

else.
sell

But

he has the
if

bills

he cannot pledge or

them

and
pay

No.

2 will
i

not give them up

he gets his

money, No.
it.

will

be ruined, because he cannot

likely,

he

And if No. 2 has No. 3 to pay, as is very may be ruined because of No. is 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
failures

securities.

The

effect of these

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.
;

OF THE RESERVE
But, in the
first place, this

,9^

argument assumes that Banking Department would have enough n:oney 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
the
;

in

the second,

a great

the Clearing-house

panic which deranged would soon be diffused all

through the country.


turned to the

The money therefore

taken
re-

from the Bank of England could not be soon

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
;
;

Bank

through

the length and breadth of the country, wherever there were bankers, wherever there was trade,

wherever there were


terror.

liabilities,

wherever there was

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.
created
since.
In
It

was

only
times

1844,

and

it

has failed

three

The world would imagine

that
;

happened before will happen again 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

what has and when

we

are considering never arose.

198

THE BANK'S ADMINISTRATION


helping the pubh'c.
it

The Bank was


less confidently,

and,

more or

was believed that the GovernBut


if

ment would help the Bank.


alarm
will

the policy be

relinquished which formerly assuaged alarm, that

be protracted and enhanced,

till it

touch

the Banking Department of the


I

Bank

itself.

do not imagine that


I

it

would touch the

Is-

sue Department.

think that the public would

be quite

satisfied

if

they obtained bank notes.

Generally nothing

is

gained by holding the notes

of a bank instead of depositing

them

at a bank.
is

But

in

the
:

Bank

of

England there

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
east,

rush would be for bank notes

those that

could be obtained would be carried north, south,

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
it

in this respect

no peculiar
of a

privilege

that

is

simply

in the position

Bank keeping
that
it

the banking reserve of the country;


in

must

time of panic do what


;

all
it

other

similar banks

must do

that in time of panic

must

advance freely and vigorously


the reserve.

to the public out of

OF THE RESERVE

I99

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,
With the
to obtain the object for

And

which they are made.


;

The

end
if

Is

to stay the panic

and the advances should,

possible, stay the panic.

And

for this

purpose

there are two rules.


First.

That these loans should only be made


Interest.

at a

very high rate of

This

will

operate

as a

heavy

fine

on unreasonable
not require
In

timidity,

and

will

prevent the greatest number of applications by


persons

who do
;

It.

The

rate should

be raised early be paid early


precaution

the panic, so that the fine

may

that

no one may

borrow out of idle


It
;

without paying well for

that the
far

banking
possible.

reserve

may be
at
all

protected as

as

Secondly. That

this

rate

these

advances
securities,

should be

made on

good banking
Is

and as largely as the public ask


reason
is

for them.

The
and

plain.

The

object

to stay alarm,

nothing, therefore, should be done to cause alarm.

But the way


will

to cause

alarm

Is

to refuse

who has good


Market
exactly
carried
at

security to offer.

some one The news of this


all

spread In an Instant through a

the

Money
will

moment
carries
It,

of terror

no one can say


an hour
It

who
on

but

in half

be

all sides,

and

will

Intensify the terror

200

THE BANK'S ADMINISTRATION

everywhere.

No

advances indeed need be made


will ultimately lose. in

by which the Bank

The

amount of bad business


is

commercial countries
of the whole

an Infinltesimally small fraction

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
fear

the

unsound people are a feeble minority,


'

and they are


their

afraid

even to look frightened

for

unsoundness

may be

detected.

The

great majority, the majority to be protected, are the


*

sound people, the people who have good security


'

to offer.
is

If

It is

known

that the

Bank

of England

freely

advancing on what

in ordinary times is
Is

reckoned a good security

on what

then com-

monly pledged and


But
If

easily convertible

the alarm
will

of the solvent merchants and bankers will be stayed.


securities,

really

good and usually con-

vertible, are refused

by the Bank, the alarm

not abate, the other loans


taining their end,

made
will

will fail

in

ob-

and the panic

become worse
Banking

and worse.
It

may be
be

said that the reserve in the


will

Department
If that

not be enough for

all

such loans.
fail.

so,

the Banking Department must


Is,

But lending
This
is

nevertheless.

Its

best expedient.
its

the

method of making

money go

OF THE RESERVE
the farthest,

201

and of enabling
will so

It

to get
it.

through the

panic

if

anything

enable

Making no
making large
is

loans, as

we have

seen, will ruin

it

loans and stopping, as


it.

we have

also seen, will ruin

The

only safe plan for the

Bank

the brave

plan, to lend in a panic


security, or

on every kind of current

every sort on which


lent.

money

is

ordinarily

and usually
;

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


inconsistent
that,
still

that the policy has been

though the policy has much


remain important particulars
it is.

improved, there
in

which

it

might be better than


panic of which
:

The
speak
derive
;

first
is

it is

necessary here to

that of 1825

hardly think

we

should

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

8 19, the problems to be solved

were
In
first

altogether different from our present

ones.

the panic of 1825, the

acted as unwisely as

it

Bank of England at was possible to act.


its
it

every means
reserve

it

tried to restrict

advances.

By The
to

being

very small,

endeavoured


202

THE BANK'S ADMINISTRATION

protect that reserve

The

by lending as little as possible. was a period of frantic and almost scarcely anyone knew inconceivable violence
result
;

whom
within

to trust

credit

was almost suspended


Huskisson expressed
of a state

the country was, as Mr.

it,

twenty-four hours

of barter.
to

Applications for assistance


;

were made

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
there

of Wellington, of
Is

all

places in the world,

full

account of them.

The Duke was

then on a mission at St. Petersburg, and Sir R.


Peel wrote to
is

him a

letter of

which the following


a very unpleasant

a part
*

We

have been placed

In

predicament on the other question

the
The

issue of

Exchequer
the City, of

Bills

by Government.
of our
friends,

feeling of

many

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


tried

measure had been


18 IT.

and succeeded

in

793 and

Our

friends whispered about that


in

we were
that in

acting quite

a different

manner from

OF THE RESERVE
which Mr.
Pitt did act,

203

and would have acted had

he been aHve.
*

We

felt

satisfied that,

however plausible were

the reasons urged in favour of the issue of Exche-

quer
one,
*

Bills,

yet that the measure was a dangerous

and ought to be resisted by the Government.


thirty millions of

There are

Exchequer

Bills

outstanding.

The

purchases lately

made by

the

were a new
templated

Bank can hardly maintain them at par. issue to such an amount as

If there

that con-

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


revenue.
If the

into the

new Exchequer

Bills

were

to

be issued

at a different rate of interest

from the outstanding ones


of five per cent.

the

say bearing an interest


immewere
on
raised, the charge

old ones would be

diately at a great discount unless the interest


raised.
If the Interest

were

the revenue would be of course proportionate to

the increase of rate of interest.


the

We

found that
deposit

Bank had the power

to lend

money on

of goods.

As our

issue of

Exchequer

Bills

would
in

have been useless unless the Bank cashed them,


as therefore the intervention of the

Bank was

any event absolutely necessary, and as

its inter-

vention would be chiefly useful by the effect which

304

THE BANK'S ADMINISTRATION


in increasing the circulating

it

would have

medium,
into

we advised the Bank to take their own hands at once, to


Exchequer
on that
*

the whole

afifair

Issue their notes

on

the security of goods, Instead of issuing them on


Bills,

such

bills

being themselves issued

security.

They

reluctantly consented,

and rescued us
this

from a very embarrassing predicament.'

The

success of the

Bank of England on
Its

occasion was owing to


right principles.

complete adoption of
these princiit

The Bank adopted


when
it

ples very late

but

adopted them

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,

only

we made advances on Exchequer Bills, we not discounted outright, but we made advances
bills

on deposits of

of

Exchange

to

an Immense
consisfor the

amount

in short,

by every possible means

tent with the safety of the Bank.'

And

complete and courageous adoption of


at the last

this policy

moment

the directors of the

Bank
It

of

England
subject

at that time
less

deserve great praise, for the

was then

understood even than

is

now

but the directors of the Bank deserve also

OF THE RESERVE

205

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
in

not again a real panic


till

the

Money Market
:

1847.

Both of the

crises of

1S37 and 1839 were severe, but neither


both were arrested before
intensity
;

terminated in a panic
the alarm reached
therefore,

its final

in neither,

could the policy of the

Bank
In

at the

last stage of fear

be

tested.

In the three panics since 1844

and 1866

the policy
it

1847, 1857,

of the

Bank has been more


I

or less affected by the Act of 1844, and


therefore discuss
I

cannot

fully within the limits

which

have prescribed
:

for

myself

can only state

two things
above
all

First, that the directors of the

Bank

things maintain that they have not been

in the earlier stage of panic

prevented by the Act

of 1844 from

making any advances which they


Secondly, that

would otherwise have then made.


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


it

yet occurred in which

has not been suspended

and

that, rightly or

wrongly, the world confidently

ao6

THE BANK'S ADMINISTRATION


all

expects and relies that In

similar cases

It

will

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 in the early as they would manage one without it
be suspended again.

stage of the panic


fettered,

because then they are not because then the fetter

and

In the latter

has been removed.

We
Bank

can therefore estimate the policy of the


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


that In

large advances indeed.


all

It is certain, too,

was

them the Bank has been quicker than It 1825 that in all of them it has less hesU tated to use Its banking reserve In making the
of
In
;

advances

which

It

Is

one principal object

of

maintaining that reserve to make, and to


at once.

make

But there
will at

Is

still

a considerable evIL

No
of

one knows on what kind of securities the Bank


such periods

England
it Is

make the

advances^

which

necessary to make.
seea. principle requires that sucb

As we have

OF THE RESERVE
advances,
panic,
if

207

made at all for the purpose of curing should be made in the manner most likely

to cure that panic.

And

for this purpose, they

made on everything which in common The evil is that, times is good banking security.' owing to terror, what is commonly good security
should be
*

has ceased to be so

and the true policy


if

is

so to

use the banking reserve that

possible the tem-

porary

evil

may be

stayed,

and the common

course of business be restored.

And
all

this

can only

be effected by advancing on
securities.

good banking

England do not take The Discount Office is open for the this course. discount of good bills, and makes immense advances
Unfortunately, the
of
accordingly.

Bank

The Bank

also

advances on Consols
in the crisis

and India

securities,

though there was,

of 1866, believed to be for a


in so doing.

moment
in

a hesitation
of

But these are only a small part

the securities on which

money

ordinary times
its

can be readily obtained, and by which

repay-

ment is fully secured. Railway debenture stock is as good a security as a commercial bill, and many
people, of

whom
;

own

am

one, think

it

safer
is,

than India stock


I

on the whole, a great railway


India.

think, less liable to unforeseen accidents than

the strange

Empire of

But

doubt

if

the

208

THE BANK'S ADMINISTRATION


of England in a panic would advance on
;

Bank

railway debenture stock

at

any

rate

no one has
It

any authorised reason

for saying that

would.

And

there are

many

other such securities.


Is

The

amoicnt of the advance

the main con-

sideration for the

Bank

of England, and not the


is

nature of the security on which the advance

made, always assuming the security to be good.

An

idea prevails (as

believe) at the

Bank

of

England
not

that they ought not to

advance during
bankers for the

a panic on any kind of security on which they do

commonly advance.
and
if

But

if

most part do advance on such security in


times,

common

that security

is

indisputably good,

the ordinary practice of the


is

Bank

of England

immaterial.

In

ordinary times the

Bank

is
it

only one of
is

many
;

lenders, whereas in a panic

the sole lender

and we want, as

far as

we

can,

to bring
to

back the unusual state of a time of panic

the common state of ordinary times. In common opinion there Is always great uncer:

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
tainty as to the conduct of the

adopted at the most important moment

it is

not

OF THE RESERVE
sure what

2og

amount
it

of advance will be made, or on

what security

will
is

be made.

Thf* best pallia-

tive to a panic

a confidence in the adequate


reserve,

amount of the Bank


use of that reserve.
point

and

in the efficient

And

until

we have on
the

this

a clear understanding with


liability to crises

Bank of

England, both our

and our terror

at crises will always

be greater than they would

otherwise be.

THE GOVERNMENT OF THE BANK

CHAPTER

VIII.

THE GOVERNMENT OF THE BANK OF ENGLAND.

The Bank
directors, a

of

England

Is

governed by a board of
;

Governor, and a Deputy-Governor and

the
for

mode

in

which these are chosen, and the time


office, affect

which they hold

the whole of
is

its

business.
electing.

The board

of directors

in fact self-

In theory a certain portion go out an-

nually,

remain out for a year, and are subject to

re-election

by the

proprietors.
if

But

in fact

they

are nearly always, and always


tors

the other direc-

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
the

a vacancy occurs by death

or resignation,

whole board chooses the new member, and they

do

it,

as

am

told,

with great care.

Fora

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 pro

THE GOVERNMENT OF THE BANK


mising young

211

men

In the old-established firms of

London, and

select the

one who, they think,


director.

will
is

be most
which
fills it

suitable for a

Bank
fill

There

considerable ambition to
is

the

office.

The

status

given by

it,

both to the individual

who

and
is

to the firm of

merchants to which he

belongs,
little

considerable.

There
;

is

surprisingly
is

favour shown

in the selection

there

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
nearly

few selections
equal purity.

in

the world are


is

made with

There

a sincere desire to do the

best for the Bank, and to appoint a well-conducted

young man who has begun


and who seems
fairly efficient
'

to attend to business,

likely to

be

fairly sensible

and

twenty years

later.

The age

is

a primary matter.

The

offices of

Governor and
rotation.

Deputy-Governor are given in The Deputy- Governor always succeeds

the Governor, and usually the oldest director

who

has not been in office becomes Deputy-Governor.

Sometimes, from personal reasons, such as


a director becomes Deputy-Governor
little

ill-health

or special temporary occupation, the time at which

may be

deferred, and, in

some few

cases,

merchants

in the greatest

business have been permitted to

tt2

THE GOVERNMENT OF THE BANK


But
for
all

decline entirely.

general purposes,

the rule

may be

taken as absolute.

cases, a director

must serve

his

Save in rare time as Governor

and Deputy- Governor nearly when his turn comes,


and he
turn.
will not

be asked to serve much before his


about twenty years from the
election that he arrives, as

It is usually

time of a man's
it

first

is

called, at the chair.

And

as the offices of

Governor and
portant, a

Deputy-Governor are very imfills

them should be still in Accordingly, Bank directors, the vigour of life. when first chosen by the board, are always young
men.

man who

At

first

this

has rather a singular

effect

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
stranger hardly

imagined such directors to be

men of tried

sagacity

and long experience, and


cheerful

I was amazed that a 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

THE GOVERNMENT OF THE BANK


that they

213

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 deNaturally,

had not the power.

priving

them of
I
it is

it

if

they get

it.

Some

of the

directors, as

have

said,

retire annually,

but by

courtesy

always the young ones.


is,

Those who

have passed the chair


the
office

of

Governor

that who have served 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
is,

it,

the

elder

members

of the board

that
is

those

who have
Committee
I

passed the chair

form
which
*

a standing committee of
called the

indefinite powers,

of Treasury.

say

indefinite powers,' for

am

not aware that any precise description has ever

been given of them, and


precisely described.

doubt

if

they can be

They

are sometimes said to

exercise a particular control over the relations and

negotiations between the

Bank and
I

the Governthat this

ment.

But

confess

that

believe

214

THE GOVERNMENT OF THE BANK


very much with
the
character

varies

of

the

Governor
does

for the time being.

A strong Governor

much mainly upon his own responsibility, and a weak Governor does little. Still the influence
of the Committee of Treasury
able,
is

always consider-

though not always the same.


declining,
;

They form a
euil

cabinet of mature,

and old men, just

close to the executive

and

for

good or

such

a cabinet must have

much power.
Bank
of

By
This

old usage,

the directors of the

England cannot be themselves by trade bankers.


is

relic

of old times.

Every bank was


less, in
in

supposed to be necessarily, more or


sitlon to

oppo*

every other bank

banks

the

same

place to be especially in opposition.

In conse-

quence, 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
that

in the

English sense, and in the sense


foreigner.

would surprise a
is

One

of

the

Rothschilds

on

the

Bank
But

direction,

and

foreigner would be apt to think that they were

bankers
the

if

anyone was.
difference

this

only illustrates

essential

between

our

English

notions

of banking

and the
fuller

continental.

Ours

have attained a
theirs.

much

development than

Messrs. Rothschild are immense capitalists,

THE GOVERNMENT OF THE BANK


having, doubtless,

215

much borrowed money


100/.
it

in their

hands.

But they do not take


back
in

payable on
5/.

demand, and pay


and that
for
is

cheques of

each,

our English banking.


is in

The borrowed
English bankers
all

money which they have


terms more or
less

large sums, borrowed

long.

deal with an aggregate of small sums,

of whicli

are repayable

on short
the

notice,

or

on demand.

And

the

way

two employ

their
*

money
bills

is

different also.

A
is,

foreigner thinks

an Exchange

business

that

the buying and selling

on

foreign countries
I

main part of banking.


is

As

have explained, remittance

one of the subBut the mass


bills

sidiary conveniences

which early banks subserve


ot

before deposit banking begins.

English country bankers only give


in

on places

England or on London, and

in

London the

principal remittance business has escaped out of

the hands of the bankers.

not

know how

to
*

Most of them would carry through a great Exchange


'

operation,' or to

bring

home

the returns.*
silk

They

would as soon think of turning

merchants.

The Exchange
special

trade

is

carried on
bill

by a small and
of

body of foreign

brokers,

whom
of that

Messrs. Rothschild are the greatest.


firm may, therefore, well be

One

on the Bank

direction,

notwithstanding the rule forbidding bankers to be

2i6

THE GOVERNMENT OF THE BANK


he and his family are not English bankers,

there, for

by the terms on which they borrow money, But as to or the mode in which they employ it.
either

bankers in the English sense of the word, the rule


is
is

rigid

and

absolute.

a director of the

Not only no private banker Bank of England, but no

director of to

any

joint stock

become

such.

bank would be allowed The two situations would be

taken to be incompatible.

The mass
in trades

of the

Bank

directors are merchants

of experience, employing a considerable capital


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


anxious opinion on

kind ot

business in which they are engaged, and give an


it.

Most
only his

of

them have a
of a

good deal of
business

leisure

for the life

man

of

who employs
it

own

capital,

and

employs no means

nearly always in the

fully

employed.

same way, is by Hardly any capital is


it

enough
and,
if

to

employ the

principal partner's time,


is

such a

man

is

very busy,

a sign of

THE GOVERNMENT OF THE BANK


something wrong.
Either he
is

217

working

at detail,

which subordinates would do


he had better leave alone, or he

better,
Is

and which

many

speculations,

Is

Incurring

engaged In too more liabilities

than his capital

will bear,

and so may be ruined.

In consequence, every commercial city abounds

men who have perience, who are


in

great business ability and ex-

not fully occupied,

who wish

to

be occupied, and who are very glad to become


directors of public companies In order to
pied.

be occu-

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 That very bad If that nature be not attended to. 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
are engaged.

particular business In

which they

Ordinarily, in joint stock banks

and

companies
of a

this deficiency is cured by the selection manager of the company, who has been speci-

ally trained to that particular trade,

and who enall

gages to devote

all

his experience

and

his ability

to the affairs of the

company.

The

directors,

and

often a select committee of

them more

especially,

21

THE GOVERNMENT OF THE BANK


what of the company.

consult with the manager, and, after hearing

he has to

say, decide
in all

on the

affairs

There

is

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
years.

executive.

The Governor and Deputy-Governor,


that executive, change every

who form
I

two

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
But
this

the head of the ministry, and ordinarily did not

change unless the opposition came


of
the

in.

idea has no present relation to the constitution

Bank
at the

of

England.

At
;

present,

the

Governor and Deputy-Governor almost always


change
that

end of two years

the case of any


is

longer occupation of the chair


it

so very rare,
of.

need not be taken account

And

the

Governor and Deputy-Governor of the Bank


cannot well be shadows.

They

are expected to
applicants for

be constantly present

to see

all

THE GOVERNMENT OF THE PANK


advances out of the ordinary routine
the the
;

219

to carry

on

almost continuous correspondence between

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
of th2

valuable heads of departments.

The head

Discount Department
a

Is

especially required to be

man
is

of

ability

and

experience.

But these
;

officers

are essentially
like the general

subordinate

no one of
perpetually

them

manager of an ordinary
action.

bank the
present

head of

all

The

executive the Governor and

Deputy-

Governor

make
In

it

Impossible that any subordiposition.

nate should

have that

really able to

and active-minded Governor, being required


sit
aJl

day

the Bank, in fact


its

does,

and can
this
;

hardly help doing,


In theory,

principal business.

nothing can
for a

be

worse than

government

bank

shifting executive
It

a
to

board of directors chosen too young for

be known whether they are able

a committee of
the necessary
result

management,
qualification,

in

which seniority

is

and old age the common

and no trained bankers anywhere.

220

THE GOVERNMENT OF THE BANK


if

Even
but
of
its

the

Bank
is

of England were an ordlnar}'

bank, such a constitution would be insufficient

inadequacy

greater,
far

and the consequences


because of
its

that

inadequacy

worse,

greater functions.

The Bank
all

of England has to
;

keep the sole banking reserve of the country


has to keep
it

through

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


for

anriounts,

and

what dates

and

yet

it

has a constitution

So far from the government Bank of England being better than that of any other bank as it ought to be, considering that its functions are much harder and graver
plainly defective.

of the

anyone 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.


natural, the effects

As was
its

good and
It

evil

of

constitution are to be seen in every part of the

Bank's history.

On
bad
In

one

vital point

the Bank's

management has been


perhaps less
'

excellent.

has

done

business,'

certainly less very


size

bad business, than any bank of the same


the

and

same

age.

all

its

history

do not kngw

'

THE GOVERNMENT OE THE BANK


that
Its

221

name has ever been connected with a


and discreditable bad debt.
it

single large

has never been a suspicion that


for the benefit of

was

There worked

any one man, or any combination

of men.

and the

The great respectability of the directors, steady attention many of them have
and
In

always given the business of the Bank, have kept


it

entirely free from anything dishonourable

discreditable.

Steady
an

merchants

collected

council

are

admirable judge
the

of

bills

and

securities.

They always know


;

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
Bank

could not have


of England
'

made

the directors of the


'

do

the sort of business which

Overends

at last did,

except by a moral miracle


their nature.

except by
impossible.

changing

And
been

the fatal career of the

Bank
the

of the United States would, under their manage-

ment,

have

equally

Of

ultimate solvency of the

Bank

of England, or of

the eventual safety of

Its

vast capital, even at the


there has not been

worst periods of
the least doubt.

Its history,

But nevertheless, as we have


of the

seen, the policy

Bank has

frequently been deplorable, and

222

THE GOVERNMENT OF THE BANK


government have

at such times the defects of its

aggravated

if

not caused

its

calamities.

In truth, the executive of the


is

Bank

of England

now much such


would be
in

as the executive of a public

department of the Foreign Office or the


Office
sible

Home

which there was no responIn these departments of


chief
actual
as

permanent head.
quite,

Government, the
though not
the

changes nearly,

often as the

Governor of

Bank of England.

The

Parliamentary Under-

Secretary

that office

the Deputy- Governor, so to speak, of changes nearly as And the


often.
if

administration solely, or in

its

details,

depended
could not

on these two,
carry
it

it

would
on at

stop.

New men
;

on with vigour and


it

efficiency

indeed they

could not carry


assisted

all

But, in fact, they are

by a permanent Under-Secretary, who


all

manages

the routine business,

positary of the secrets of the office,


its traditions,

who is the dewho embodies

who

is
I

the hyphen between changing

administrations.

n consequence of this assistance,


is,

the continuous business of the department


the most part,

for

managed
it is

sufficiently well, notwith-

standing frequent changes in the heads of administration.

And

only by such assistance that

such business could be so managed.


administration of the

The

present

Bank

is

an attempt to mail-

THE G0VERNMEN7' OF THE BANK

223

age a great, a growing, and a permanently continuous business without an adequate permanent

element, and a competent connecting In answer,


it

link.

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


official

which press upon the heads of

departments.

And

perhaps, in point of mere labour, the Gover-

nor 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
as high as

functions of the head of the

Bank rank

those of any department.

The

cash reserve of the

country

is

as precious a deposit as any set of


of.

men

can have the care

And
it) is

the difficulty of deal-

ing with a panic (as the administration of the


is

Bank

forced to deal with

perhaps a more formid-

able 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 vis^our needful to deal with it
;

are plainly rare and great.

remedy would be to appoint permanent Governor of the Bank. Nor, as I


natural

The

224

THE GOVERNMENT OF THE SANK


said,

have

can there be
Its

much doubt

the Intention of

founders.

was All the old comthat such

panies which have their beginning in the seventeenth

century had the same constitution,

and

those of them which have lingered down to our o 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


in

mode
have

of forming a

company

the minds of those to

whom

companies are new.

Such persons

will

always seen business transacted a good deal despotically


;

they will have learnt the value of prompt

decision

and of consistent policy


is
it

they

will

have

often seen that business

best

managed when
argument

those

who

are conducting

could scarcely justify

the course they are pursuing

by

distinct

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

Parliamentary committee, to state those reasons.

They have become used


distinctly analysing them,

to act

on them without
test of their

and, in a monarchical

way, with continued success only as a


goodness.
Naturally such persons,

when proceed-

THE GOVERNMENT OF THE BANK


ing to form a company,
that

225

make

it

upon the model of


to see successful.

which they have been used

They provide
things.

for the executive first


this

and above

all

How much

was

in the

minds of the

Bank of England may be judged name which they gave it. Its corporate name is the Governor and Company of the Bank of England.' So important did the founders think
founders of the
of by the
*

the executive that they mentioned

it

distincdy,

and mentioned

it first.

And

not only

is

this constitution of a

company

the most natural in the early days

when companies
that companies

were new,

it

is

also

that which experience has


efficient

shown
are

to

be the most
tried.

now

have long been

Great railway companies


Scarcely any instance

managed upon no other.

of great success in a railway can be mentioned in

which the chairman has not been an active and


judicious

man

of business, constantly attending to

the affairs of the company.

A thousand

instances

of railway disaster can be easily found in which


the chairman

was only a nominal head


*

man, or something of that sort


*

chosen
it,

noble-

for show.

Railway chairmanship

has become a profession,

so

much

is

efficiency valued in

and so

indis-

pensable has ability been found to be.

The

plan

of appointing a permanent 'chairman' at the

Bank

i22~6

THE GOVERNMENT OF THE BANK


is

of England
experience.

strongly supported by

much modern

Nevertheless,

hesitate as to

its

expediency; at

any

rate, there

are other plans which, for several


I

reasons, should,
ence.
First.

think, first

be

tried in prefer*^

This plan would be exceedingly unpopular.


England.

permanent Governor of the Bank of England


in

would be one of the greatest men

He

would be a
be

little

'monarch'
'

in the City;

he would

Lord Mayor.' He would be the personal embodiment of the Bank of England he would be constantly clothed with an almost xviAo.'VivixX.Q. 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
far greater

than the

if

Governor,

he understood

his business,

might

THE GOVERNMENT OF THE BANK


make
the fortunes of
fifty

227

men where

the Prime

Minister can

make

that of one.

Scarcely anything

could be more unpopular in the City than the

appointment of a
Secondly.
I

little

king to reign over them.

do not believe that we should

always get the best


fear that

man

for the

post

often

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
dangerous.
of prestige
It
is

almost

always

very

causes the post to be desired by

vain men, by lazy men, by

men

of rank

and

when
ness,

that post

is

one of

real
it

and technical busirequires

much previous training, much continuous labour, and much patient and quick judgment, all such men are
and when,
therefore,

dangerous.

But they are sure

to covet

all

posts

of splendid dignity, and can only be kept out of

them with the greatest


every Cabinet there are

difficulty.
still

Probably, in
(in

some members
to

the days of the old close boroughs there were

many) whose posts have come

them not from


but from their

personal ability or inherent merit,

rank, their wealth, or even their imposing exterior^^

The

highest political offices are, indeed, kept cle^^

of such people, for in

them
Q
2

serious

and importaof

i28

THE GOVERNMENT OF THE BANK

duties

must constantly be performed in the face A Prime Minister, or a Chancellor of the world. of the Exchequer, or a Secretary of State must
explain his policy and

defend

his

actions

in

Parliament, and the discriminating tact of a critical

assembly

by

tradition

abounding experience, and guided soon discover what he But


in
will
is.

the Governor of the

Bank would only perform


is

quiet functions, which look like routine, though

they are not, in which there


of success or failure
;

no immediate

risk

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


often are,

men
time,

may do
is

infinite

evil

in

no long
is

and before he

detected.

If

he

lucky

enough
he
is

to begin at a time of expansion in trade,


till

nearly sure not to be found out

the time

of contraction has arrived, and then very large


figures will

be required to reckon the

evil

he has

done.

And
gift it

thirdly.

fear that the possession of such

patronage would ruin any set of persons in whose


was.

The

election of the

Chairman must be

placed either in the court of proprietors or that

THE GOVERNMENT OF THE BANK


of the directors.
will

229

If the proprietors choose, there


like the evils of

be something

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,
most active

when

elected,

may

well find that his

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
chose him.
Probably,
if

he be a cautious

who man
;

of average ability, he will combine both evils


will

he
for,

not lend so
will

and so
lend

much money as he is asked offend his own supporters but


;

will

some which will be lost, and so the profits of A large body of Bank the Bank will be reduced. proprietors would make but a bad elective body
for

an

office

of great prestige

they would not

commonly choose a good


would make him
less

person, and the person

they did choose would be bound by promises that


good.
;

sf The

court of directors would choose better

small body of

men

of business would not easily


unfit

be persuaded to choose an extremely

man.

But they would not often choose an extremely

good man.
nor of so

The
much

really best

man would

probably

not be so rich as the majority of the directors,


standing,

and not unnaturally

230

THE GOVERNMENT OF THE BANK


much
dislike to elevate to the

they would

head

ship of the City one

who was much


in

less in the

estimation of the City than themselves.

And they

would be canvassed
side to appoint a

every

way and on every

mercantile influence.
prestige

man of mercantile dignity or Many people of the greatest


City would covet so great

and rank
if

in the

a dignity,
friend,

not for themselves, at least for


relative,

some

or

some

and so the directors


side.

would be

set

upon from every

An
ful

election go liable to

be disturbed by powerin

vitiating causes

would rarely end


fear,

a good

choice.

The
;

best candidate would almost never


I

be chosen

often,

one would be chosen

altogether unfit for a post so important.

And

the

excitem:^ntof so keen an election would altogether


disturb the quiet of the Bank.
efficient working"

The good and


Bank
directors

of a board of

depends on
sayings,

its

internal

harmony, and that harmony

would be broken
and the

for ever

by the excitement, the

acts of a great election.

The
be^

board of directors would


there

almost

certainly

demoralised by having to choose a sovereign, and


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

THE GOVERNMENT OF THE BANK


met
cliaracteristlcalh'.

231

The Bank

of

France
gener-

keeps the money of the State, and the State


appoints
ally
its

Governor.

The French have


all

a logical reason to give for

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
is,

Sub-Governor,
as

whom
it

the State also appoints,

we might

expect, usually better.

But

for

our

English purposes
minutely into
this.

would be useless

to inquire

No

English statesman would

consent to be responsible for the choice of the

Governor of the Bank of England.


panic, the

After every

Opposition would say in


*

Parliament

that the calamity


if

had been grievously aggravated,*


Or,

not wholly caused, by the 'gross misconduct' of

the

Governor appointed by the ministry.

possibly, offices

may have changed


power
at the panic

occupants and

the ministry

in

would be the
case
*

opponents of the ministry which at a former time


appointed
the

Governor.
to feel,

In

that

they

would be apt

and

to intimate, a

grave
their

regret' at the course which the

nominee of

adversaries had

thought

it

desirable to pursue.*

They would
ings,

not

much mind

hurting his feel-

and

if

he resigned they WQyld have them-

232

THE GOVERNMENT OF THE BANK

selves 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
else.

in this,

even
I

if

they agreed in almost nothing


therefore afraid that

am

plan of improving the

we must abandon 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
I

the most part, of choosing a bad one.

think,
little

however, that much of the advantage,


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 suborwith
dinate.

Though
w^ith

the Parliamentary Secretary of

State and the Parliamentary Under-Secretary go in

and out

each administration, another Underall

Secretary remains through


is

such changes, and

on that account called

permanent.'

Now

this

system seems to

me in Its principle perfectly applicBank of England.

able to the administration of the

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

THE GOVERNMENT OF THE BANK


before
given,
is

233

some most

influential

permanent

functionary

essential in the proper conduct of

the business of the


these are the very
ages,

Bank

and, mictatis mtttandis,

difficulties,

and the very advant-

which have led us to frame our principal


present fashion.

offices of state in the

Such a Deputy-Governor would not be at all a *king' in the City, There would be no mischievous
prestige about the office
tion in
it
;

there would be no attrac;

for

a vain
It

man

and there would be

nothing to

make

an object of a violent canvass or

of unscrupulous electioneering.

The

office

would

be

essentially subordinate in

its

character, just like


office.

the permanent secretary in a political

The

pay should be high, no pay would


people.

for

attract

good ability is wanted but the most dangerous class of

City

The very influential, but not very wise. dignitary who would be so very dangerous is
;

usually very opulent


influence
is

he would hardly have such


:

if

he were not opulent


*

what he wants
Governorship of

not money, but

position/

the

Bank

of
;

out salary

England he would take almost withperhaps he would even pay to get it


office of essential
all.

but a minor

subordination would
the pay

not attract him at

We may augment

enough

to get

a good man, without fearing that

by such pay we may tempt

as by

social privilege

334

THE GOVERNMENT OF THE BANK

we should tempt
not want.

exactly the
There
is

sort of

man we do
should

Undoubtedly such a permanent


be a trained banker.
can afford to run

official

a cardinal difference
;

between banking and other kinds of commerce you

much

less risk in

banking than

in

commerce, and you must take much greater precautions.

Incommonbusiness, the trader can add

to the

cost price of the


profit,

goods he

sells
;

a large mercantile

say lo to 15 per cent.


not so

but the banker has

to
in

be content with the interest of money, which

England

is

average.

The 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
not bear so

as 5 per cent, upon the business of a banker therefore can-

much

one deceit which


on a banker.
with the

is

attempted on a manufacturer

or a merchant, twenty and

more are attempted


banker,
dealing

And

besides, a

money

of others, and

money payable
it

on demand, must be always, as

were, looking

behind him and seeing that he has reserve enough


in store if payment should be asked merchant dealing mostly with his own
for,

which a

not think

of.
I

but caution,

need Adventure is the life of commerce, had almost said timidity, is the life
capital

THE GOVERNMENT OF THE BANK


of banking
;

235

and

cannot imagine that the long

series of great errors


in the

made by the Bank of England


of
its

management

reserve
if

till

after

1857,

would have been possible

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
is

to intro-

duce into the Bank court

a wise apprehensiveiiess^
is

and

this

every trained banker

taught by the
his

habits of his trade,


life.

and the atmosphere of


to

The permanent Governor ought


whole time
to

give his

to the business of the Bank.


in

He ought

be forbidden to engage

any other concern.


in their
it

All the present directors, including the Governor

and Deputy-Governor, are engaged


business,

own
must
busi-

and

it

is

very possible, indeed

perpetually have happened, that their

own

ness as merchants most occupied the minds of

most of them just when


that the business of the
It
is

it

was most important

Bank should occupy them.

at a panic

business of the
engrossing.

Bank

and just before a panic that the is most exactlncr and most
at that time the business of

But just

236

THE GOVERNMENT OF THE BANK

most merchants must be unusually occupying and

may be
is

exceedingly

critical.

By

the present conits

stitution of the

Bank, the attention of

sole rulers
affairs

most apt to be diverted from the Bank's

just

when

those affairs require that attention the


the only

most.

And

remedy

is

the appointment
will

of a permanent

and

influential

man, who

have

no business save that of the Bank, and who therefore

presumably
instant
at

will

attend most to
attention
is

it

at the

critical

when

most required.
if

His mind,

any

rate, will in

a panic be free from


not
all,

pecuniary anxiety, whereas many,

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.
inferior

There

is

no

fair

argument between an

who

has to

exhibit respect
respect.

and a superior who has


his inferior

to receive

The superior can always, and does mostly,


bad arguments of
his superior.
;

refute the

but the

inferior rarely ventures to try to refute the

bad

arguments of

And
;

he

still

more
hesi-

rarely states his case effectually


tates,

he pauses,

does not use the best word or the most apt

illustration,

perhaps he uses a faulty

illustration or

THE GOVERNMENT OF THE BANK


a wrong word, and so
fails

237

because the superior

immediately exposes him.


can only be

Important business

sufficiently discussed

by persons who

much what they like very much as The thought of the they like to one another. speaker should come out as it was in his mind, and
can say very
not be hidden in respectful expressions or enfeebled

by affected doubt.
is

What

is

wanted

at the

Bank
have
a

not a

new

clerk to the directors

they
now
shall

excellent clerks of great experience

but

permanent equal
to discuss

to the directors,

who

be able

on equal terms with them the business


he has no other business than
of.

of the Bank, and have this advantage over them,


in discussion, that

that of the

Bank

to think

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.

23J5

THE GOVERNMENT OF THE BANK


a pecuhar power of guidance
the nature of the

And he would have


at such

moments from

men

with

whom
the

he has most to deal. Most Governors of Bank of England are cautious merchants, not be prosperous

profoundly skilled in banking, but most anxious


that their period of office should

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
standing
'unsafe'
*

safe

'

to follow the advice of the great


' ;

authority

it

would always be most


it.

not
act

to

follow

If

the

changing

Governor

on the advice of the permanent


in case of

Deputy-Governor, most of the blame


mischance would
said
that
fall

on the

latter

it

would be
done,
to

a shifting officer like the Governor


likely not

might very

know what should be


official
it.

but that the permanent

was put there


If,

know

it

and paid

to

know

But

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 with-

out experience, he had taken upon him to overrule

men who had much


constitution of the
skilled counsel,

experience that when the Bank had provided them with


;

he had taken on himself to act of his

THE GOVERNMENT OF THE BANK


own
head, and to disregard that counsel
infiiiiiiun.
:
'

239

and so

on ad

And
would

there could be no sort of

conversation more injurious to a


the world there
'

man

In the City

say,

rightly or wrongly,

We

must never be too severe on errors of judg;

ment
more.

we
But

are

all

making them every day

if

responsible persons do their best

we can expect no
:

this case is different


;

the Governor

acted on a wrong system

he took upon himself


: '

an unnecessary responsibility

and so a Governor
his skilled

who
ever.

incurred disaster

by disregarding

counsellor would be thought a fool in the City for

In consequence, the one skilled counsellor


in fact rule the

would
I

Bank.

believe that the appointment of the


skilled authority at the

manent and
which
is

new perBank Is the


and that

greatest reform which can be

made

there,

most wanted.

believe that such a

person would give to the decisions of the Bank


that foresight, that quickness,
in

and that consistency


defi-

which those decisions are undeniably now

cient.

As
and

far as

can judge, this change in the

constitution of the
sary,
all
is

Bank

is

by

far the

most neces-

perhaps more Important even than

other changes.

But nevertheless we should

reform the other points which


J3e

we have

seen to

defective.

240

THE GOVERNMENT OF THE BANK


The London bankers
I

First.

should not be

altogether excluded from the court of directors.

The

old idea, as

have explained, was that the


they could.

London bankers were the competitors of the Bank


of England,

and would hurt

it if

But

now

London bankers have another relation to the Bank which did not then exist, and was not
the

then imagined.

Among

private people they are

the principal depositors in

the

Bank
in

they are
stability
;

therefore particularly interested

its

they are especially interested in the maintenance


of a

good banking

reserve, for their

own

credit
it.

and the safety of

their large deposits

depend on

And

they can bring to the court of directors an


itself,

experience of banking
of England, which
possess, for they

got outside the Bank

none of the present directors


all

have learned
itself.

they

know

of

banking at the Bank

old notion that the secrets of the

There was also an Bank would be But divulged If they were imparted to bankers. probably bankers are better trained to silence and
secrecy than most people.
thin partition

And

there

is

only a

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 GOVERNMENT OF THE BANK

241

the confidential communications of such persons

under such circumstances

As

observed before, the line drawn at present


is

against bankers

very technical and exclusively


ideas, Messrs.
is

English.

According to continental
if

Rothschild are bankers,

anyone
is

a banker.

But the house of Rothschild

represented on the
it

Bank

direction.

And

it is

most desirable that

should be represented, for members of that firm

can give

if

they choose confidential information


But, nevertheless, the

of great value to the Bank.


objection which
is
is

urged against English bankers


have, or

at

least

equally applicable to these foreign

bankers.

They

may

have, at certain

periods an interest opposite to the policy of the

Bank. As the greatest Exchange may wish to export gold just when

dealers, they

the

Bank

of

England

is

raising

its

rate of interest to prevent

anyone from exporting gold.


reasons of contrary interest,

The vote

of a great

Exchange dealer might be objected to for plausible if any such reasons


were worth regarding.
almost
directors

But
is

in fact the particular

interest of single directors


all

not to be regarded

who

bring special information


;

labour under a suspicion of interest


only have acquired that information
business,

they can
in

present

and such business may very possibly be

242

THE GOVERNMENT OF THE BANK


good or
evil

by the policy of the Banlc 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 And if will disappear and be lost in the whole.
affected for
;

this is to

be the guiding

principle,

it is

not consis-

tent to exclude English bankers from the court.

Objection

is

often also taken to the constitution

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
of the Committee of Treasury.
;

giving, not only a preponderance to age, but a

monopoly
monopoly

to
I

age.

In some cases, indeed, this

believe has already been infringed.

When

directors

have on account of the magnitude


the chair,

of their transactions, and the consequent engrossing

nature of their business, declined to


in

fill

some
it

cases they have been asked to be

members

of the Couimittee of Treasury notwithstanding.

would certainly upon principle seem wiser to choose a committee which for some purposes
approximates to a committee of management by

And

competence rather than by

seniority^-

THE GOVERNMENT OF THE BANK

243

An
ber of

objection

is

also taken to the large

num-

Bank
a

directors.

There are twenty-four


a deputy-Governor,

directors,

Governor and

making a
is

total court of twenty-six persons,

which
worse

obviously too large for the real discussion of


difficult

any

business.

And
It

the case

is

because the court only meets once a week, and only


sits

a very short time.

has been said, with exif

iaggeration, but not without a basis of truth, that

the

Bank

directors
*

were

to sit for four hours, there


that.'
*

would be
says

a panic solely from


*

The

court,'

Mr. Tooke,
;

meets at half-past eleven or

twelve

and,

if

the sitting be prolonged

half-past one, the Stock

beyond Exchange and the Money


change

Market become
of importance

excited, under the idea that a


is

under discussion

and persons

congregate about the doors of the Bank parlour to


obtain the earliest intimation of the decision.'

And
if

he proceeds to conjecture that the knowledge of


the impatience without must cause haste,

not

impatience, within.
court should

That

the decisions of such a

be of incalculable

importance

is

plainly very strange.

There should be no delicacy


the constitution of the
existing constitution

as

to

altering

Bank

of England.

The

was framed in times that have passed away, and was intended to be used

'

244

^^^ GOVERNMENT OF THE BANK


purposes very different from the present.

for

The

founders

may have

considered that
it

It

would lend would issue

money money
the
'

to the

Government, that

would keep the


it
It

of the Government, that

notes payable to bearer, but that


'

would keep

banking reserve of a great nation no one

in the seventeenth century imagined.

And when

the use to which

new use,
the
are
is

we are putting an old thing is a common sense we should think whether old thing is quite fit for the use to which we setting it. Putting new wine into old bottles
in
*

safe only

when you watch


its

the condition of the

bottle,

and adapt

structure

most

carefully.

THE JOINT STOCK BANKS

24S

CHAPTER
The
Joint Stock

IX,

THE JOINT STOCK BANKS,


Banks of
this

country are a

most remarkable success.


career of Joint Stock

Generally speaking the


In this

Companies

country
years
diffi-

has been chequered.


since,

Adam

Smith,

many

threw out many pregnant hints on the


of such

culty

undertakings

hints

which even

after so

many

years will well repay perusal.

But
this

joint stock
rule.

banking has been an exception to

Four years ago I threw together the facts on the subject and the reasons for them and I
;

venture to quote the


experience suggests,
'

article,

because subsequent
to

think,

little

be added to

It.

The main

classes of joint stock

companies

which have answered are three:

ist.

Those

In

which the
business

capital

Is

used not to work the business

but to gita7'antee the business.

Thus a banker s

his
Is

proper business

does
:

not begin

while he

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

246

THE JOINT STOCK BANKS


premiums which are received ought
to assure the to

the

exceed

the claims which accrue.


is

In both cases, the capital

wanted

pubHc and

to Induce

it

to

trust the concern.

2ndly. Those companies have

answered which ha"ve an exchisive privilege which


they have used with judgment, or which possibly

them to thrive Those which have undertaken a business both large and simple employlng more money than most Individuals of private firms have at command, and yet such that,
was so very
little

profitable as to enable
3rdly.

with

judgment.

jn

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

rule,

the most profitable of these com.-

panies are banks.


ditions just

Indeed, all xhe favouring conin

mentioned concur

many
"

banks.

An

old-established

bank has
is

''prestige,''
;

which

amounts

to a

*'

privileged opportunity

though no

exclusive right

given to
it

It

by

law, a peculiar

power
wroftg.

is

given to

by opinion.
;

The
if it
is

business of

banking ought to be simple


using

hard
a

it

is

The only securities which money that he may be asked at


ought
to

banker,

short notice

to repay,

touch, are those which are


If there is

easily saleable

and

easily intelligible.

a difficulty or a doubt, the


declined.

security should

be

No

business can of course be quite

THE JOINT STOCK BANKS


reduced to fixed
rules.

2A1

There must be occasional


to fixed rules certainly

cases which no preconceived theory can define.

But banking comes as near


business.

as any existing business, perhaps as any possible

The

business of an old-established bank

has the

full

advantage of being a simple business,


advantage of being a monopoly
it Is

and

in part the

business.

Competition with

only open In the

sense in which competition with "the

London
do with

Tavern
*

"

is

open

anyone that has


for
it.

to

either will

pay dear

But the main source of the profitableness of


Is

established banking
capital.
it

the smallness of the requisite


"

Being only wanted as a


is

moral influence,"

need not be more than


influence.

necessary to secure

that

Although, therefore, a banker

deals only with the rhost sure securities, and with

those which yield the least interest, he can nevertheless gain


his
is

and divide a very large

profit
In his

upon
hands

own capital, because the money so much larger than that capital.
*

Experience, as shown

by plain

figures, con-

firms these conclusions.

We

print at the

end of
in
In

this article the respective profits of

no

banks
all

England, and Scotland, and Ireland, being


those countries of which
tion

we h^ve sufiiclent InformaThere are

the Bank of England excepted.

no doubt others, but they are not quoted even on


248

THE JOINT STOCK BANKS


Stock Exchange
lists,

local

and

in

most cases

publish no reports.

The

result of these banks, as


is

regards the dividends they pay,

No. of Companies

Capital

Above 20 per
Between

1

cent. cent. cent.

15

and 20 per 10 and 15 per 5 and 10 per


5

20 36
3

cent.

Under

per cent.

;^5,302,767 5j439,439 14,056,950 14,182,379 1,350,000

no

40,331,535

that

is

to say,
in

employed

above 25 per cent, of the capital these banks pays over 15 per cent.,
cent, of the capital

and 62^ per


10 per cent.*

pays more than


is

So

striking a result
joint stock trade.

not to be

shown
'

in

any other

The

period to which these accounts refer was

certainly not a particularly profitable one

on the
The

contrary,

it

has been specially unprofitable.

rate of interest has

been very low, and the amount


in

of

good

security

the

market

small.

Many
The

banks
*

to

some extent most banks

probably had

in their

books painful reminiscences of 1866.


and
loss accounts

The

profits of all the joint stock

banks of the United Kingdom

amounted for the year 1905 about 10,400,000/., and of these profits about 9,100,000/. were distributed in dividends. On an aggregate capital of 62,200,000/. the average dividend was 147 per cent. The dividends of the
that publish profit
to

English joint stock banks, exclusive of the Bank of England, averaged 15-2 per cent, of the paid-up capital, those of the Scotch banks 147 per cent., and those of the Irish banks 11 -6 per cent.

THE JOINT STOCK BANKS

249

fever of excitement which passed over the nation

was strongest
careful

In the classes to

whom

banks

lent

most, and consequently the losses of even the most

banks (save of those

in rural

and sheltered
usual.

situations)

were probably greater than

But

even

tried

by
Is

this

very unfavourable

test

banking Is

a trade profitable far beyond the average of trades.

There whole and


*

no attempt

in these

banks on the

as a rule to divide too

much

on the con-

trary,

they have accumulated about 13,000,000/.,

or nearly ^rd of their capital, principally out of

undivided

profits.

The

directors of

some of them

have been anxious


sible
'

to put

away

as

much

as pos-

and

to divide as little as possible.*


Is

The

reason

plain

out of the banks which

pay more than 20 per


established banks, and

cent., all
all

but one were old-

those paying between 15


too.

and 20 per
larly

cent,

were old banks


"

The
Is

'*

privi-

leged opportunity

of which

we spoke
;

singu-

to

it enables banks pay much, which without it would not have paid much. The amount of the profit Is clearly pro-

conspicuous In such figures

portional to the value of the " privileged opportunity."


cent.,

All the banks which pay above 20 per


;

save one, are banks more than 25 years old

* At the end of 1905 the accumulated reserves of all the joint stock banks of the United Kingdom (exclusive of the Bank of

England) amounted
being 65,000,000/.

to about 46,000,000/., their paid-up

capital

250

THE JOINT STOCK HANKS


those which pay between
1

all

and 20 are so

too>.

make these profits, or even by its competition much reduce these profits in attempting to do so, it would simply rum itself. Not possessing the accumulated credit of years, it
new bank
could not
;

would have to wind up before


*

it

attained that credit.


is

The

value of the opportunity too


it.

propor^.

tioned to what has to be paid for

Some

old
;

banks have

to

pay

interest for
Vv/hich

all

their

money

some have much for Those who give much


course less
left

they pay nothing.

to their

customers have of

for

their
is

shareholders.

Thus
interest,

Scotland, where there

always a daily

has no bank

The

profits

paying over 15 per cent. of Scotch banks run thus


in

the

lists

Capital

Dividend

Bank

of Scotland

/l, 500,000
1
.

12
13

British Linen

Company
.
.
.

,000,000

Caledonian
Clydesdale National

....
of Scotland
.
.

125,000

10 10
13
12

900,000
1

Commercial Bank of Scotland

,000,000

Bank

1,000,000
,

North of Scotland Union Bank of Scotland City of Glasgow Royal Bank

280,000
1,000,000

10

10 8

870,000
2,000,000

^9,675,000*
* In 1905, upon a paid-up capital of 9,316,000/., the Scotch banks distributed dividends to the amount of 1,371,000/. The rates of distribution ranged from 20 per cent, to 4 per cent., the latter rate being paid by a comparatively new and relatively very

unimportant bank.

THE JOINT STOCK BANKS


Good
of the
profits

251

enough, but not at

all

like the profits

London and Westminster,


banks of the South.

or the other most

lucrative

'The Bank of Encrland, it Is true, does not seem to pay so much aj other English banks in this way of reckoning. It makes an immense profit, In fact, the but then its capital Is immense too. 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
on

founded,
their

banks looked rather to the


capital,

profit

own

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 bank, as we now think of 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

company than
banking.

of a

If the

than other banks

if

they do not keep

It,

either

our whole system must be changed or

break up

in

utter

bankruptcy.

we should The earning

25

THE JOINT STOCK BANKS


Bank
of England
is

faculty of the

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
fears of
it

facts of joint
felt.

stock banking with the


In
1832,

Lord Overstone

observed:

which were
''I

think

that joint stock banks are deficient in everything


requisite for the conduct of the

banking business
the banking busiall

except extended responsibility

ness requires peculiarly persons attentive to


its

details,

constantly, daily,

and hourly watchIt

ful

of every transaction, or

much more than meralso

cantile

trading

business.

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 refer-

ence to the special circumstances of each case.


Joint

stock

banks being

of course obliged to
principal,

act through agents,

and not by a

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 tem-

porary embarrassment by so accurate a reference

THE JOINT STOCK BANKS

253

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 priv^ate banks in former times used to lend

much

to private individuals

the banker, as Lord

Overstone on another occasion explained, could

have no
to

security, but

he formed his judgment of

the discretion, the sense, and the solvency of those

whom

he

lent.

And when London was by


city,

comparison a small

and when by comparison


proper
safe.

everyone
practice

stuck

to

his

business,

this

might have been


is

But now that


at

London
anyone,
present,

enormous and that no one can watch


;

such a trade would be disastrous


it

would hardly be safe

in

a country town.

The

joint

business

stock banks were quite unfit for the Lord Overstone meant, but then that
quite unfit for the present time/

business

is

This success of Joint Stock Banking


trary
to

is

very conorigin.

the general expectation at


private bankers, such as

its

Not only
feared

Lord Overstone
would
fast

then was, but a great number of thinking persons


that

the joint

stock banks

ruin themselves,

panic

in

the country,

and then cause a collapse and The whole of English

2^\

THE JOINT STOCK BANKS


is

commercial literature between 1830 and 1840


filled

with that idea.

Nor

did

it

cease in 1840.

So

late as

1845, Sir R. Peel thought the founda-

tion of joint stock

banks so dangerous that he


difficulty.

subjected

it

to

grave and exceptional

1845, which he proposed, no such companies could be founded except with

Under the Act of

shares of 100/. with 50/. paid up on each


effectually

which

checked the progress of such banks,

for

few new ones were established for


till

many years^
But
in this,

or

that

Act had been repealed.

as in

many
to

other cases, perhaps Sir R. Peel will

be found

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


rivals.

from new

No one now

founds or can found

a new private bank, and Sir R. Peel by law pre-

vented new joint stock banks from being established.

Though he was exceedingly


was

distrustful of

the joint stock banks founded between 1826 and


1845,

yet in fact he

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

THE JOINT STOCK BANKS

255

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


in

have seen that they succeed


reserve against their
that they should,

England.

1st.

These great banks have not had


liabilities

to

keep so large a
it

as

was

natural

being of
first,

first-rate

magnitude,

keep.

They

were, at

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

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
the group.

many

years questions of the currency,' particularly


*

questions as to the Act of 1844, engrossed the


attention of
jects.

who were occupied with these subEven those who were most anxious to
all

speak
this

evil of joint stock

banks did not mention


first

particular evil.
it

The

time, as far as

know, that

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

256

THE JOINT STOCK BANKS

and the Directors of the Bank of England had


been asked by Sir George Lewis severally to give
on the Act of 1844, and all their replies were published. In his, Mr. Weguelln
their opinions

says
*

amount of the reserve kept by the Bank of

If the

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


of London, judging

Itself

The joint

stock banks

by their published accounts, have deposits to the amount of 30,000,000/. Their capital is not more than 3,000,000/., and they have
on an average 31,000,000/, invested
another,
In

one way or

leaving

only

2,000,000/
liabilities/

as a reserve

against

all this

mass of

But these remarkable words were


In the discussions of that time.

little

observed

The

scured by other matters.


said so

But

in this

was obwork I have


air

now.
part

much on the subject that I need say little The joint stock banks now keep a main
on deposit with the
convertible
bill

of their reserve or
in

brokers,

good and

interest-

bearing

securities.

From

these

they obtain a

large Income,
If

and that income swells their profits. they had to keep a much larger part than now
reserve
in

of that

barren cash,

their

dividends

THE JOINT STOCK BANKS

lyj

would be reduced, and their present success would

become

less conspicuous.

The second

misgiving,

which

many calm
their govern-

observers more and more feel as to our largest


joint stock banks,

fastens Itself

on

ment.

Is that

government
so

sufficient to lend well

and keep
directors,

safe

many

millions?

They

are

governed, as everyone
assisted

knows, by a board of

by a general manager, and there are in London unrivalled materials for comThere are very posing good boards of directors. many men of good means, of great sagacity, and great experience in business, who are obliged to be in the City every day, and to remain there
during the day, but
their hands.
cipally his
leisure.

who have very much

time on

A merchant employing solely or princapital has often a great deal of


is is

own

He
what

obliged to be on the market, and


doing.

to hear

Everj^ day he has

some

business to transact, but his transactions can oe but


few.

His
;

capital can bear only a limited


if

purchases

he bought as much as
Accordingly,

number of would fill his

time from day to day he would soon be ruined, for

he could not pay for it.

men

of business are quite

many excellent ready to become memfor the

bers of boards of directors, and to attend to the

business of companies, a

good deal

employ-

25?

THE JOINT STOCK BANKS


sake.

ment s

To

have an interesting occupation


it

which brings dignity and power with

pleases

them very much.


in great
cities

As the aggregation

of

commerce

grows, the number of such


cotmcil of grave, careful,
can, without difficulty,
in

men

augments.
perienced
for a great

A
men

and ex-

be collected

bank

London, such as never could


before,

have been collected

and such as cannot


engaging a good
persons

now be

collected elsewhere.
facilities,

There are

too, for

banker to be a manager such as there never were


before in the world.
is is

The number of such

much on
easily
in

the increase.
in figures,

Any careful
and has
real

person

who

experienced

sound sense,

may

make

himself a good banker.

The
quiet,
is

modes

which money can be safely lent by a


person

banker are not many, and a clear-headed,


industrious

necessary about

may soon learn all them. Our intricate law


in

that

of real

property
it

is

an impediment

country banking, for

requires

some

special study

even to comprehend
is

the elements of a law which

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.


all

And

the rest of the knowledge requisite for a

banker can easily be obtained by anyone

who

has

THE JOINT STOCK BANKS


the sort of

259

mind which takes to it. No doubt there is a vast roiUine 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
they learn

in
it

the

very

midst

of

that routine

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
be

very good manager and


provided
a bank at

very good
sonable

board of directors can, without unreafor

difficulty,

present In London.
It will
I

be asked,

What more
All

can be required

reply,

a great deal.

that

the best board


Is

of directors can really accomplish

to

form

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.

meeting of

fifteen

or eighteen

persons

is

wholly

unequal to the
;

transaction of
fortunate,

and

It

more business than this must be well guided. If

it
It

will

be

should

be found to be equal to so much.


s 2

The

discussion

even of simple practical points by such a number of

26o

THE JOINT STOCK BANKS


Is

persons

a somewhat tedious

affair.

Many

of

them moment, and some of


will

wash to speak on every decision of

them some
several

of the best of

them perhaps Very slowly.

will

only speak with difficulty and


points will
is

generally,

be

started at once,

unless the discussion


;

strictly

watched by a rigid chairman


single point the

and even on a
grave

arguments

will often raise

questions which cannot be answered, and suggest

many more
many

issues

than can be advantageously

decided by the meeting.


persons

alone prevent

The time required by for discussing many questions would an assembly of many persons from
only
difficulty.

overlooking a large and complicated business.

Nor

is

this the

Not only would


the
it

a real supervision of a large business by a board


of directors require

much more time than


in meeting,

board would consent to occupy

would

also require

much more time and much

consent to give.

more thought than the Individual directors would These directors are only employing on the business of the bank the vacant moments of their time, and the spare energies
of their

minds.
Is

They cannot

give

the bank

more
their

the rest

required for the safe conduct of

own

affairs,

these affairs

and if they diverted it from they would be ruined. A few of

THE JOINT STOCK BANKS


them may have
industry
little

261

other business, or they


in

may

have other partners


they
;

the

business,

on whose
from

can

rely,

and whose judgment

they can trust


business.

one or two
for the

may have

retired

But

most

part, directors of a

company cannot attend principally and anxiously to the affairs of a company without so far neglecting
their

own
if

business as to run great risk of ruin


their

and

they are ruined,

trustworthiness

ceases,

and they are no longer permitted by


directors.
if it

custom to be
Nor, even
vise

were possible

really to super-

a business by the

effectual

and constant
and capable
easily
rich,

inspection of fifteen or sixteen rich


persons,

would even the largest business


I

bear the expense of such a supervision.

say

because the members of a board governing a


large

besides, or they

bank must be men of standing and note would discredit the bank they
;

need not be rich


millions,
fair

in the

sense

of being worth
to possess a

but they must be


capital

known

amount of
fair

and be seen

to

be transactpowers,

ing a

quantity of business.
I

But the labour of

such persons,

do not say

their spare

but their principal energies, fetches a high price.

Business
its

is

really a profession often requiring for

practice quite as

much knowledge, and

quite ns

262

THE JOINT STOCK BANKS


and medicine and requiring K thorough man the possession of money.
skill,

much
also

as law

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 re;

venue from

talent as well as

from money

and

to

induce sixteen

or eighteen persons to abandon


in

such a position and such an income

order to
of a

devote their entire attention to the


joint stock

affairs

company, a salary must be given too

large for the


to propose.

bank

to

pay or

for

anyone

to wish

And an

effectual supervision
is

by the whole board


manager.

being impossible, there

a great risk that the

whole business may

fall

to the general

Many unhappy
dangerous.

cases have proved this to be very

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.
but, as

Actual crime will always be rare

an unin-

spected manager of a great bank has the control


of untold millions, sometimes

we must

expect to
will

see

it

the

magnitude of the temptation

occasionally prevail over the feebleness of

human

THE JOINT STOCK DANKS


nature.

263

But error
to

Is

far

more formidable than


than the theft
of
is

fraud
far

the mistakes of a sanoruine manai^er are

more

be dreaded

a
far

dishonest manager.

Easy misconception
long-sighted
deceit.

more common than


manager,

And

the losses to which an adventurous

and plausible

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
tually

easily

glide

into

dangerous and
effec-

insecure transactions,

nor can the board

check him.
is

The remedy

this

a certain number of the

directors, either those

than others, or those

who have more spare time who are more ready to sell a
to

large part of their time

the bank,

must be

formed into a
transaction,

real

working committee, which must

meet constantly,

must

investigate

every large

must be acquainted with the means

264

THE JOINT STOCK' BANKS

and standing of every large borrower, and must


be
In

such

Incessant

communication with the

manager that It gage In hazardous enterprises of dangerous magnitude without their knowing it and having an
opportunity of forbidding
It.

will be Impossible for him to en-

In almost

all

cases

they would forbid

It

all

committees are cautious,

and a committee of
picked from a large
side of caution
If It

careful
city, will
all.

men
The

of

business,

usually err on the


daily attention

err at

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 engage-

ments of a despotic and active general manager.


Fraud, in the face of such a committee, would

probably never be attempted, and even


a rare and minor
evil.

now

it is

Some
But

such committees are vaguely known to


all,

exist In most. If not

our large joint stock banks.


Is

their

real

constitution

not known.

No

customer and no shareholder knows the names


of the
these

managing committee, perhaps,


laro^e

in

any of

banks.

And

this Is

a erave error.

large depositor ought to be able to ascertain


really are the persons that

who

dispose of his

THE JOINT STOCK BANKS


money
;

265

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
and
still

reasons for the confidence which

now

is

given

without such reasons.

A
by

certain

number of
it

directors attending dally

rotation

is,

should be said, no substitute for


It

a permanent committee.
responsibility.

has

no

sufficient

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.
most
the
It
is

essential to the decisions of


least

business,

and not

of

the banking
constantly by

business, that they should

be made

same persons

the chain of transactions must

same minds. A large business may be managed tolerably by a quiet group of second-rate men If those men be always the same
pass through the

but

it

cannot be managed at

all

by a

fluctuating

266

THE JOINT STOCK BANKS


You
might

body, even of the very cleverest men.

as well attempt to guide the affairs of the nation

by means of a cabinet

similarly changing.
in

Our

great joint stock banks are imprudent

so carefully concealing the details of their govern-

ment, and in secluding those details from the risk


of discussion.
well alone
;

The

answer, no doubt, will be,

'

Let

as you have admitted, there hardly


Q^reat

ever before was so


of ours
;

a success as these banks


?
'

what more do you or can you want


I

can only say that

want further

to confirm thia

great success and to

make

it

secure for the future.

At
in

present there

is

at least the possibility of a


that,

great reaction.
its

Supposing
one

owing
of

to defects

government,
joint stock

even
failed,

the

greater

London

banks

there would be

an instant suspicion of the whole system.


terra incognita would be suspected.

One

terra incognita being seen to be faulty, every other


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
fallen,

which had ruined the bank that had


ruin of that

then the

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

; ;

THE JOINT STOCK BANKS


ruin of one of these great

267

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


also.

be taken to show that the others might as easily


be misgoverned

And
:

a tardy disclosure

even of an admirable constitution would not much


help the surviving banks
necessity, sceptical
it

as

it

was extracted by
suspicion.

would be received with


*

A
for

world would say,


all

Of

course they say

they are

perfect

now

it

would not do

them

to say anything else.*

And
holders

not only the depositors and the shareof these large banks have a grave in-

terest in their
also.

We

good government, but the public have seen that our banking reserve is,
liabilities,

as

compared with our

singularly small

we have seen
liabilities

that the rise of these great banks

has lessened the proportion of that reserve to those


;

we have

seen that the greatest strain


is

on the banking reserve


cause
is

panic'

Now, no

more capable of producing a


bank
in

panic, perhaps

none
Joint

is

so capable, as the failure of a first-rate

stock

London.

Such an event

would have somethino-

like the effect of the failure

268

THE JOINT

STOCtC PAXILS
;

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.

269

CHAPTER

X.

THE PRIVATE BANKS.


Perhaps some readers of the
last part of
I

the last

chapter have been Inclined to say that

must be

a latent enemy to Joint Stock Banking.


rate, I

At any
may,

have pointed out what

think grave defects

in

it.

But

fear that a reader of this chapter

on

like grounds,

suppose that

am

an enemy to

Private Banking.

two impressions

And I can only hope that the may counteract one another, and
do not Intend
to
In

may show
I

that

be

unfair.

can Imagine nothing better

theory or more

successful In practice than private

banks as they

were

In the beginning.

known

Integrity,

trusted with the

man of known wealth, and known ability is largely enmoney of his neighbours. The
His neighbours

confidence

is

strictly personal.

know They
it

him, and trust him because they


see dally his

know
In

him.

manner of
is

life,

and judge from


rural

that their

confidence

deserved.

270

THE PRIVATE BANKS


and
in

districts,

former times,

it

was

difficult for

man
lie

to ruin himself except at the place in


;

which

lived

for the

most part he spent


if

his

money
at
if

there,

and speculated there


also
to

he speculated

all.

Those who lived there was acting in a manner

would soon see


then were,

he

shake their confidence.


it

Even

in large cities, as

cities

was

possible for

most persons

to ascertain with fair

certainty the real position of conspicuous persons,

and

to learn all that

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


especially a

very powerful.

The name
charmed

'

London Banker' had

value.

He

was supposed

to represent,

and often did represent, a


scarcely to be found in

certain union of pecu-

niary sagacity and educated refinement which

was

any other part of

society.

In a time

when

the trading classes were

much

ruder than they

now

are,

many

private bankers

possessed a 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
a

descends from father to son

this inherited

wealth
is

soon brings inherited refinement.

Banking

watchful, but not a laborious trade.

banker.

THE PRIVATE BANKS


even
mind.
in large business,

271

can

feel pretty sure that all

his transactions are sound,

and yet have much spare and a consider-

certain part of his time,

able part of his thoughts, he can readily devote to

other pursuits.

And

a London banker can also

have the most


he chooses
it.

intellectual society in the

world

if

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
1

it.

The

evidence of figures

is

against
in
:

it.

In

8 10 there

were 40 private banks

Street admitted to the clearing-house

Lombard there now

Though the business of banking has increased so much since 18 10, 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
are only 13.*
business, but

everybody admits
private bank.'

'

that

you cannot
in the

found a

new
in

No

such has been


I

founded

London,

or, as far as

know,

country, for

merge or but no new die, and so the number is lessened ones begin so as to increase that number again.
years.

many

The

old ones
;

Mr. Bagehot,

* The number is now reduced to i. Of the 13 referred to by 1 1 have been absorbed by, or converted into, joint stock banks, -md one lias been extinguished.

272

THE PRIVATE BANKS


truth
Is

The

that

the

cuxumstances which

originally favoured the establishment of private

banks have

now

almost passed away.

The world
It

has become so large and complicated that


not easy to ascertain
poor.

Is

who

Is

rich

and who

is

No
men
of,

doubt there are some enormously


In

wealthy

has heard
not the

England whose means everybody and has no doubt of. But these are
they were bred In

men
If

to Incur the vast liabilities of private


It

banking.
in
It
;

they might stay


for themselves.

but they would never begin


if

It

And
*

they did,

expect people would begin to


It

doubt even of their wealth.

would be

said,

What

does

be as rich as
great banking
are

B go Into banking for ? he cannot we thought.' A millionaire comliability,

monly shrinks from


is

and the essence of

great

liability.

No

doubt there

many 'second-rate' rich men, as we now count riches, who would be quite ready to add to their
income the
could
profit of a private

bank

If

only they

manage It. But manage It. Their wealth


liar to

unluckily they cannot


Is

not sufficiently fami-

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.

THE PRIVATE BANKS


In the present day, also, private banking
is

273

ex-

posed to a competition against which


it

in its origin

had not
I

to struggle.

Owing

to the

changes of

which

have before spoken,

joint stock
It.

banking

has begun to compete with


this
;

In old times

was impossible the Bank of England had a monopoly in banking of the principle of association.

But now large joint stock banks of deposit


the most conspicuous banks in

are

among

Lom-

bard Street.

They have a
published

large paid-up capital

and

intelligible

accounts

they use

these as an incessant advertisement, in a


in

manner
wealth.

which no individual can use

his

own

By

their Increasing progress they effectually pre-

vent the foundation of any

new

private bank.

The amount
banks
is

of the present business of private

perfectly

unknown.

Their balance sheets

are effective secrets

rigidly guarded.*

But none
repute of

of them, except a few of the largest, are believed


at all to gain business.

The common

Lombard
case, but

sure to

Street might be wrong in a particular upon the general doctrine it is almost be right. There are a few well-known

exceptions, but according to universal belief the


deposits of most private bankers in
rather to diminish than to Increase.
*

London tend
between

In accordance with an understanding arrived at


all

themselves in 1891, nearly

the

more important

private banks

now ppblish

their accounts.

iJ74

THE PRIVATE BANKS


to the smaller banks, this naturally

As
so.

large

bank always tends


to

to

would be become larger,


People

and a small one tends


has most present

become

smaller.

naturally choose for their banker the banker


credit,
Is

who
such

and the one who has most

money
credit.

in

hand
is

the one
is

who

possesses

meant by saying that a long-established and rich bank has a 'privileged


This

what
In

opportunity

'; it

is

a better position to do
is
;

its

business than any one else

it

has a great ad

vantage over old competitors and an overwhelming superiority over

coming

into

they give to

new comers. New people Lombard Street judge by results those who have they take their
;

money to
I

the biggest bank because


I

it Is

the biggest.

confess

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 prin-

ciple suggests, that the business of


will

Lombard

Street
ane.

be divided between the joint stock banks

a few large private banks. ask ourselves the question.


*

And then we have to Can those large private


and a considerable nuin-

They have

not done

so.

Many of the more important have con-

stituted themselves joint stock companies,

per of the less important have been absorbed by joint stock banks.

THE PRIVATE BANKS


banks be permanent
?
I

27s

am

sure

should be very

sorry to say that they certainly cannot, but at the

same time
ties

cannot be blind to the grave

difficul-

which they must surmount.


first
Is

In the

place,

an hereditary business of great

magnitude

dangerous.

such a business

and more than


security at
in
all

The management of needs more than common industry common ability. But there is no

that these will be regularly continued

each generation.
Co., the

The

case of Overend, Gurney,


all evil in

and
is

model instance of

business,

a most alarming example of this

evil.
I

No
mean

cleverer

men

of business probably (cleverer

for the purposes of their particular calling) could

well be found than the founders

and

first

managers
surpassed

of that house.
it

But

in

a very few years the rule In


folly

passed to a generation whose

the usual limit of imaginable incapacity.


short time

In a

they substituted ruin for prosperity,


into insolvency.

and changed opulence


folly is

Such great
is

happily rare

and the business of a bank


folly is

not nearly as

difficult

as the business of a discount

company.

Still

much

common, and the

business of a great bank requires a great deal of


ability,

and an even rarer degree of trained and That which happened so marsober judgment. vellously in the green tree may happen also in
the
dry.

great

private
T
2

bank

might

easily

276

THE PRIVATE BANKS


rotten

become very

by a change from

discretion

to foolishness in

those

who conduct
in

it.

We

have had as yet


this
;

London, happily, no

example of
been small

indeed,

had the opportunity.


;

small as

we have hardly as yet Till now private banks have we now reckon banks. For
ability
if

their exigencies a

moderate degree of
will suffice.

and

an anxious caution
of the banks
is

But

the size
ability is

augmented and greater


begin to be
felt.

required, the constant difficulty of an hereditary

government
son had
is

will

'

The
:

father

had great brains and created the business


less brains
all

but the

and

lost or lessened

it.*

This
it

the history of
history

great monarchies, and great


private

be the
Co.

of

banks.

may The
was
least

peculiarity in the case of

Overend, Gurney, and

at least,

one peculiarity

is

that the evil

soon discovered.

The
losses

richest partners
;

had

concern in the management


that
incredible

and when they found


into a

were ruining them, they


it

stopped the concern and turned

company.
they had

But they had done nothing


prevented further
losses,

iftat least

the

firm

might have
now.

been
It

in existence

and

in the highest credit

them.

was the publicity of their losses which ruined But if they had continued to be a private partnership they need not have disclosed those

THE PRIVATE BANKS


losses
;

1^

they might have written them off quietly

out of the Immense profits they could have accu-

They had some ten millions of other money In their hands which no one thought of disturbing. The perturbation through
mulated.
people's

the country which their failure caused In the end

shows how diffused and how unimpaired


popular reputation was.
districts (as
I

their

No

one

In

the rural

know by

experience) would ever

word against them, say what you might. The catastrophe came because at the change the partners in the old private firm the Gurney had guaranteed the new comfamily especially
believe a

pany 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


estates,

no such guarantee, and no sale of


great losses
ledger,
credit

if

the

had

slept a quiet sleep in a hidden

no one would have been alarmed, and the


*

and the business of


till

Overends might have


'

existed

now, and their name


first

still

continued tc

be one of our
generations

names.

The

difficulty of profor

pagating a good management by inheritance


is

greatest in private banks

and

dis-

count firms because of their essential secrecy.

27^

THE PRIVATE BANKS


Indeed be surmounted by the

The danger may

continual infusion of

new and

able partners.

The
But
value

deterioration of the old blood

may be compensated
little

by

the excellent quality of the fresh blood.


is

to this again there

an objection, of

perhaps
practice.

in

seeming, but of

The

infusion of

much real influence in new partners requires


sacrifice of

from the old partners a considerable

income
receive,

the old must give up that which the

new

and the old

will

not

like
I

this.

The
often

effectual

remedy

Is

so painful that
too long.

fear

it

may be postponed
I

cannot; therefore, expect with

certainty the
I

continuance of our system of private banking.

am

sure that the days of small banks will before

many
In the

years

come

to

an end, and that the

diffi-

culties of large private

banks are very Important.


very important that large

meantime

it

Is

private banks should be well managed.

And

the

present state of banking makes this peculiarly


difficult.

The

detail of the business Is

augmenting
are

with an overwhelming rapidity.


;

More cheques

drawn year by year not only more absolutely, but more by each person, and more In proportion to his The payments in, and payments out of income.
a

common

account are very

much more numerous

than they formerly were.

And

this

causes

an

THE PRIVATE BANKS


fiAormous growth of
detail.

279

And

besides, bankers

have of

late

begun almost a new business.

They

aow
their

not only keep people s money, but also collect

incomes for them.

Many

persons live en-

tirely

on the income of shares, or debentures, or


is

foreign bonds, which

paid in coupons, and these


collect.

are handed

in

for

the bank to

Often
or

enough the debenture, or the

certificate,

the
is

bond
cut

is

in

the custody of the banker, and he


is

expected to see when the coupon


it

due,

and

to

off

and transmit
all

it

for

payment.

And

the

detail of

this

is

incredible,
it.

and

it

needs a

special

machinery to cope with


if

A
tive

large joint stock bank,


It

well worked, has

that machinery.

has at the head of the execu-

a general manager

who was
it.

tried in the detail

of banking,

who

is

devoted to

it,

and who

is

conlittle

tent to live almost wholly in


else,
first

He

thinks of

and ought
duties
is

to think of little else.

One

of his
offi-

to

form a hierarchy of inferior

cers,

that

whose respective duties are defined, and to see they can perform and do perform those duties.
in

But a private bank of the type usual


has no such
officer.

London

It is

managed by the partners


and are

now

these are generally rich men, are seldom able

to grapple with great business of detail,

not disposed to spend their whole lives and devote

2o

THE PRIVATE BANKS


minds
to
it If

their entire

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.


suitable

He
for

would

sacrifice

and a pleasant
life.

life

an unpleasant and
specially chosen

an unsuitable
well done
to
;

But

still

the detail must be

and some one must be

watch

it

and

to preside over

It,

or

it

will not

be

well done.

Until now, or until lately, this difficulty


felt.

has not been fully

The

detail of the business

of a small private bank was moderate enough to

be superintended effectually by the partners.


as has been said, the detail of banking

But,

portion

of

detail

to

the size of the bank

the pro

Is

everywhere increasing.

The

size of the private

banks

will

have
;

to

augment
Is

if

private banks are

not to cease
organisation

and therefore the necessity of a good


for
detail

urgent.

If the

bank
in
is

grows, and simultaneously the detail grows


proportion to the bank, a frightful confusion

near unless care be taken.

The
be

only organisation which


is

can imagine to

effectual

that

which

exists In the antagonistic

establishments.

The

great private

banks

will

have,

believe, to appoint In

and under some name or

other,

some form or other, some species of

THE PRIVATE BANKS


general

281

manager who
is

will

watchj contrive, and

arrange the detail for them.


of the organisation

The
;

precise shape

immaterial

each bank

may

have

its

own
is

shape, but the

man must be

there.

The
stock

true business of the private partners in such

a bank

much that of the directors in a joint bank. They should form a permanent
to large loans

committee to consult with their general manager,


to

watch him, and to attend

and

points of principle.

They
;

should not themselves


they do, there will be

be responsible for

detail
:

if

two

evils at

once

the detail will be done badly,


to decide prin-

and the minds of those who ought


cipal things will

be distracted from those principal


will

things.

There
is

be a continual worry

in the

bank, and in a worry bad loans are apt to be

made
is

and money

apt to be

lost.

A
that

subsidiary advantage of this organisation


it

would render the

transition

from private
if

banking to joint stock


transition should

banking

easier,

that

be necessary.

The one

mighi,

merge

in the

other as convenience suggested and

as events required.

There

is

nothing intrusive in
organisation of the

discussing this subject.


private
all
is

The

just like that of the joint stock


it

banks

the public are interested that

should be good.

?.82

THE PRIVATE BAMKS


of a

The want
failure of
failure of
if it

good organisation may cause the


;

one or more of these banks


such banks

and such
even

may

intensify a panic,

should not cause one.

CHAPTER XL
THE BILL BROKERS.
Under every system
which the reserve
in
is

of banking, whether that in

kept

in

many

banks, or one

which

it

is

kept in a single bank only, there

will

always be a class of persons


carefully than

who examine

more
CO

busy bankers can the nature


;

of different securities

and who, by attending only


be particularly well ac-

one

class,

come

to

quainted with that

class.

And

as these specially

qualified dealers can for the


iTLore

most part lend much


they will always be

than their

own

capital,

ready to borrow largely from bankers and others,

and

to deposit the securities

which thoy 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.

284

THE BILL BROKERS

Many stock brokers


a great scale.

transact such business

upon

They

lend large sums on foreign


securities,

bonds or railway shares or other such


the securities with

and borrow those sums from bankers, depositing


the bankers, and generally,

though not always, giving their guarantee.

But

by

far the greatest of these intermediate dealers


bill

are the

brokers.

Mercantile

bills

are an ex-

ceedingly

difficult

kind of security to understand.

The
great

relative credit of different


*

merchants

is

tradition

'

it is

a large mass of most valu-

able knowledge which has never been described


in

books and

is

probably incapable of being so


subject

described.
shifting

The

matter of
;

it,

too,

is

and changing daily

an accurate reprefatal

sentation of the trustworthiness of houses at the

beginning of a year might easily be a most


representation at the end of
it.

In

all

years there

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
are great changes
;

of the year they are worthy of altogether greater


credit than
to

anyone would have dreamed of giving

them

at the beginning.

On
firms

the other hand, in

years like 1866 a contagious ruin destroys the trust-

worthiness of very

many

and persons, and

THE niLL BROKERS


often, especially, of

285

many who stood

highest imme-

diately before.

Such years
brokers,
'

alter altogether
:

an imfinal

portant part of the mercantile world

the

question of

bill

which

bills will

be paid

and which
and which
end.

will

not

which

bills

are second-rate
dif-

first-rate?'

would be answered very

ferently at the beginning of the year

and

at the

No
'

one can be a good

bill

broker

who

has
is

not learnt the great mercantile tradition of what


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

The credit of a person that Is, reliance which may be placed on his pecuniary
*

fidelity

Is

a different thing from his property.

No

doubt, other things being equal, a rich


likely to

man

Is

more

pay than a poor man.

But on the

olher hand, there are

many men

not of
'

much

wealth

who

are trusted in the market,

as a matter

of business,' for sums


of those

much exceeding the wealth who are many times richer. A firm or a person who have been long known to meet
*

their

engagements
Persons

'

inspire a degree of confidence

not dependent on the quantity of his or their property.

who buy to

sell

again soon are often

liable for

amounts altogether much greater than


capital
;

their

own

and the power of obtaining those

886

THE BILL BROKEES


their
*

sums depends upon


*

respectability,'

tHeit

standing,'

and

their
it,

'credit,'

as

the technical

upon the opinion which those who deal with them have
terms express

and more

simply

formed of them.

The

principal
is

mode

in

which
'

money is

raised

by traders
fall

by

'

bills

of exchange

the estimated certainty of their paying those

bills

on the day they


credit
;

due

is

the measure of their


liability best,
it

and those who estimate that

the only persons indeed

who
bill

can estimate

ex-

ceedingly well, are the


dealers, taking

brokers.

And

these

advantage of their peculiar knowdeposit


as a

ledge,

borrow immense sums from bankers and


;

others

they generally
;

the

bills

security

and

they

generally

give
bill
:

their

own

guarantee of the goodness of the


of such practices indeed
are the ordinary rule.
is

but neither

essential,

though both
failed, as I

When Overends

have said before, they had borrowed

in this

way

There are others now who have borrowed quite as much.


very largely.

in the trade

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,


business to the
*

thus

described

his

Bullion Committee':


THE
*

BILL

BROKERS

287

What
?

Is

the nature of the agency for country

banks
cure

It Is

twofold

In the first place, to pro-

money

for country

bankers on

bills

when

they have occasion to borrow on discount, which


i-s

not often the case

and, In the next place, to

lend the

money for the country bankers on bills on The sums of money which I lend for discount.
country bankers on discount are
fifty

times more

than the sums borrowed for country bankers.


*

Do
Do

you send London


?

bills into

the country for

discount
*

Yes.
bills

you receive

from the country upon


i^

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


to another part for

of the country are sent


discount.

down

'And they are not discounted In London ? In some parts of the country there is but
circulation of bills
folk, Suffolk,

No.
little

drawn upon London, as


;

In
Is

Northere

Essex, Sussex, &c.


in

but there

a considerable circulation
principally optional notes.
little

country bank notes,


is

In Lancashire there
;

or no circulation of country bank notes


is

but

there

'a great circulation of bills


at

drawn upon
I

London

two or three months'

date.

receive


288

THE BILL BROKERS


a considerable amount from Lancashire
in

bills to

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
asked
* :

for bills

and

bills for

money.

He

is

further

Do you
is

guarantee the

bills

you discount, and


?

what
cent,

your charge per


;

cent.

No,

we do

not

guarantee them

our charge
bill

is

one-eighth per

brokerage upon the

discounted

but we

make no charge
'

to the lender of the

money.
in selecting
?

Do you
bills

consider that brokerage as a compensa-

tion for the skill

which you exercise

the

w^hich

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
*

prob^bl^

safety

of

the

bills

PYes

if

bill

THE BILL BROKERS


comes
return
*

289
safe,

to us
it.

which we conceive not to be

we

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 m.uch


well,

so.

If

we

manage our business


if

we

retain our friends

we do
It

not,

we

lose them.'

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


less

been a seeker more or

anxious

he has
will find

always been ready to pay for those

who
of.

him the money he


possessor of

is

in

search

But the
to

money has

rarely

been willing

pay

anything

he has usually and rightly believed

that the borrower

would discover him soon.


bill

Notwithstanding other changes, the distribution


of the customers of the
parts of the country
still
it

brokers in different

remains much as Mr.

Richardson described

most

part, agricultural

For the counties do not employ as


sixty years ago.
;

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.
U

290

THE BILL BROKERS


old practice of
bill

The

broking, which
exists.

Mr.

Richardson describes, also

still

There are
Street

many brokers
with
bills

to

be seen about Lombard

which they wish to discount but which

they do not guarantee.


discounted these
If

bills

They have sometimes with their own capital, and


which
at first

they can re-discount them at a slightly lower

rate they gain a difference

seems

but

trifling,

but with which they are quite content,

because
again

this

system of lending

first

and borrowing

immediately

enables them to turn their

capital very frequently,

and on a few thousand


hundreds of thou-

pounds of
sands of

capital to discount
;

bills

as the transactions are so

many,

they can be content with a smaller profit on


each.

In

other cases,

these non-guaranteeing

brokers are only agents


for bills

who

are seeking

money
banke Jl

which they have undertaken But

to get dis-

counted.
oi"

in either case, as far as the


is

other ultimate capitalist


is

concerned, the trans-

action

essentially that

which Mr. Richardson


is

describes.

The

loan
bill
;

by such banker

a re-

discount of the

that banker cannot obtain

repayment of that
the
bill

loan, except

at maturity.

He
its

by the payment of has no claim upon the


bill.

agent who brought him this which we may call

the

Bill

broking, in
is

archaic form,

simply

THE BILL BROKERS


one of the modes
discount.
In

291

which bankers obtain

bills

which are acceptable to them and which they

re>

No
'

reference
;

is

made
good

in

it

to the credit
*

of the

bill

broker
to

the

bills

being discounted withif

out recourse

him are

as

taken from a

pauper as

if

taken from a millionaire.

The

lender

exercises his
bill.

own judgment on
bill

the goodness of the

But
broker

in
is

modern
a

broking the credit of the

bill

vital element.

The

lender considers

that the bill broker


vidual,

no

matter whether an indi-

a company, or a firm

has

considerable

wealth,

and he takes the

'bills,'

relying that the

broker would not venture that wealth by guaranteeing

them unless he thought them good.


bill

The

lender thinks, too, that the

broker being daily

conversant with
all

bills

and bills and


the

only,

knows probably
on the
reliance
in

about

bills

he lends partly

in reliance

wealth of

the broker

partly

on

his skill.

He

does not exercise much judgbills

ment of him he
:

his

own on

deposited with
closely.

often does not watch

them very

Probably not one-thousandth part of the creditors

on security of Overend, Gurney and Co.


or

had
to

ever expected to have to rely on that security,

had ever given much


indeed,

real

attention
in

it>

Sometimes,

the

confidence
2

the

bill

292

THE BILL BROKERS


number of them, not only without much
considerable
is

brokers goes farther.

persons

lend

to

looking at the security but even without taking

any

security.

This

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
in

on the

bill

any shape. more inevitable


bill

and does not take a bill Nothing can be more natural or than this change. It was certain
broker,
to evince

that the

broker, being supposed to understand

bills well,

would be asked by the lenders


on the
bills

his reliance

he offered by giving a

guarantee for them.


that

It

was

also

most natural
the constant

the

bill

brokers,

having by
trade

practice

of

this

lucrative

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
described
affect the
bills to

effects of the

change have been very


likely to

remarkable.
it,

In the practice as Mr. Richardson


there
is

no peculiarity very
Tlie
bill

Money
all

Market.

broker brought
;

the banker, just as others brought them

nothing at

could be said as to
bills,

it

except that the

bank must not discount bad


too

must not discount

many

bills^

and

iriust

keep a good reserve.

THE BILL BROKERS

i|33

But the modern practice introduces more complex


considerations.

In the trade of

bill

broking, as
:

it

now

exists, there is

one great
this arose
bill

difficulty

the

bill

broker has to pay interest for

all

the

money which
just seen.

he receives.

How

we have
as

The

present lender to the


bill,

broker at first always


is

used to discount a
that he

which

much

as saying

was always a lender


bills

at interest.

When

he

came

to take the guarantee of the

broker,

and
less

only to look at the

as a collateral security,
:

naturally he did not forego his interest

still

did he forego
at to
all.

it

when he ceased

to take security

The

bill

broker has, in one shape or other,

pay

interest

on every sixpence

left

with him,

and that constant habit of giving


grave consequence
to
:

interest has this

the

bill

broker cannot afford

keep much money unemployed.


large

He has become

a banker owing
called

sums which he may be

on

to repay, but

he cannot hold as much as

an ordinary banker, or nearly as much, of such

sums
bill

in cash,

because the loss of interest would

ruin him.

Competition reduces the rate which the

broker can charge, and raises the rate which


bill

the

broker must give, so that he has to live

on a difference exceedingly narrow.


constantly kept a large hoard of

And

if

he

barren money he

would soon be found

in the

Gazette.*

294

THE BILL BROKERS The


difficulty is

aggravated by the terms upon


bill

which a great part of the money at the


is

brokers
it

deposited with them.

Very much
very

of

is

re^

payable at demand,

or at

short

notice.

The demands on
often are so.

a broker in periods of alarm

may

consequently be very great, and in practice they


In times of panic there
call, if
is
;

always

a very heavy
in

not a run upon them

and as
a large

consequence of the essential nature of their


they cannot
constantly keep
their

business,

unemployed reserve of
possesses that cash.

own

in actual cash,

they are obliged to ask help of some one

who

By the

conditions of his trade,

the
*

bill

broker

is

forced to belong to a class of


dealers,' as

dependent money
is,

that

of

dealers

we may term them, who do not keep their own


at every crisis of great

reserve,

and must therefore

difficulty revert to others.

In a natural state of banking, that in which


the principal banks kept their

all

own

reserve, this

demand
dealers
reserve.

of the

bill

brokers and other dependent


principal calls

would be one of the

on that

At every
it

period of incipient panic the


it

holders of

would perceive that


If the

was of great

importance to themselves to support these de-

pendent dealers.
dealers
it

panic destroyed those


it

would grow by what

fed upon (as

is

THE BILL BROKERS


Its

295

nature),

and might probably destroy


is

also the

bankers, the holders of the reserve.


terror at such times

The

public

indiscriminate.

When

one

house of good credit has perished, other houses


of equal credit though of different nature are in

danger of perishing.

The many

holders of the

banking reserve would under the natural system of


banking be obliged to advance out of that reserve
to

uphold

bill

brokers and similar dealers.

It

would be
dealers

essential to their
fail,

own

preservation not

to let such dealers

and the protection of such

would therefore be reckoned among the necessary purposes for which they retained that
reserve.

Nor probably would


ingly formidable.

the

demands on the

bill

brokers in such a system of banking be exceed-

Considerable sums would no

doubt be drawn from them, but there would be


reason why money should be demanded from them more than from any other money dealers. They would share the panic with

no special

the bankers

who kept

the reserve, but they would

In each more than the bankers. crisis the set of the storm would be determined by the cause which had excited it, but there would
not feel
it

not be anything in the nature of


attract the

bill

broking to

advance of the alarm peculiarly to them

296

THE BILL BROKERS


not be more
;

They would
other persons

likely to suffer than

the only difference would be that

when they
of others.

did suffer, having no adequate reserve

of their own, they would be obliged to ask the aid

But under a
position of the

^/^^-reserve
bill

system of banking, the


is

brokers

much more
In
fact, in

singular

and much more precarious.

Lombard

Street, the principal depositors of the bill brokers

are the bankers, whether of London, or of provincial

England, or of Scotland, or Ireland.


they

Such

deposits are, in fact, a portion of the reserve of

these bankers

make an

essential part of the


laid

sums which they have provided and


a panic.
are sure to be called in from the
bill

by against
they time

Accordingly, in every panic these sums


brokers
in
;

were wanted to be used by


*

their

owners

of panic, and in time of panic they ask for them.

Perhaps

it

may be

interesting,' said

Salomons, speaking on behalf of

Alderman the London and


11,

Westminster Bank,
committee, 'to
held discounted
of 5,623,000/.

after the panic of 1857, to the


that,

know

on November

we

bills for

brokers to the amount

tured between

Out of these bills 2,800,000/. maNovember 11 and December 4; 2,000,000/. more between December 11 and December 31 consequently we were prepared
;

THE BILL BROKERS


merely by the maturing of our
for
is

29^

bills

of exchange
us.*

any demand that might come upon


not indeed a direct withdrawal of

This

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/. more to the
bill

brokers than they had at the end of

it

and

that 5,000,000/. the

bank had added

to

its

reserve

against a time of difficulty.

demand on the bill broker is aggravated therefore by our peculiar system of banking. Just at the moment when, by the
intensity of the

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.
strain
is

great

additional

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
it.

on the

bill

brokers, but relieve

And

the profits

of

bill

broking are proporof the bankers

tionably raised.

The
the

reserves
bill

so deposited with

broker form a most


;

profitable part of his business

they are on the


at all times, ex-

whole of very large amount, and


cept those of panic,

may

well be

depended upon.

298

THE BILL BROKERS


are pretty sure to keep them there,

The bankers
just

because they must keep a reserve, and they


it

consider

one of the best places in which to


natural system, no part

keep

it.

Under a more

of the banking reserve would ever be lodged at the brokers'.

Bankers would deposit with the

brokers only their extra money, the

money which
In the

they considered they could safely lend, and which

they would not require during a panic.

eye of the banker, money at the brokers' would


then be one of
the

investments
cash.
bill

of

cash,

it

would not be a part of such


of
bill

The

deposits
in-

brokers and the profits of

broking are

creased by our present system, just in proportion


as the dangers of bill brokers during a panic are

increased

by

it.

The
is

strain, too,

on our banking reserve which


bill

caused by the demands of the

brokers,

is

also

more dangerous than

it

would be under a
is

natural system, because that reserve


less.

in itself

The system

of keeping the entire ultimate

reserve at a single bank, undoubtedly diminishes


the

amount of reserve which


that reserve
is

is

kept.

And

exactly

on that very account the danger of any particular

demand on

augmented, because the

magnitude of

the

fund upon

which that de-

mand

falls is

diminished.

So

that our one-reserve

THE BILL BROKERS


system of banking combines two
reserve greater, because under
so
evils
:

299
first,
it

makes the demand of the brokers upon the


it

final

many bankers
;

remove so much money from the brokers


under
it

and
its

also the final reserve

is

reduced to

minimum point, and the entire system of credit made more delicate, and more sensitive. The peculiarity, indeed, of the effects of the one reserve is even greater in this respect. Under
is

the natural system,


in

the

bill

brokers would be
the bankers which
rather

no

respect the rivals of

kept the ultimate reserve.

They would be

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.

tem

all this

is

reversed.

But under our present sysThe Bank of England


bill

never deposits any money with the


in ordinary

brokers

times

it

never derives any advantage

from them.
carries

On
itself
it is

the other hand, as the

Bank
it

on

a large discount business, as


itself
bill

considers that

competent to lend on
brokers are
its

all

kinds of

bills,

the

most

formidable
rates for

rivals.
it

As
is

they constantly give high

money

necessary that they should

;;

Sao

THE mLL BROKERS


and
in ordinary times

undersell the Bank,

they do

undersell

it.

But as the Bank of England alone


banking reserve, the
bill

keeps the

final

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,

any
It

time, but

who never in return help the Bank at who are in ordinary times its closest
its

competitors and

keenest

rivals.

might be expected that such a state of things


at

would cause much discontent

the

Bank

of

England, and in matter of fact there has been

much

discussion
it.

about

it,

and much objection


panic,

taken to

After the panic of 1857, this was so

especially.

During
though

that

England advanced
9,000,000/.,

to the bill
their

Bank of brokers more than


the

advances to bankers,

whether London or country, were only 8,000,000/.


and, not unnaturally, the

Bank thought

it

un-

reasonable that so large an inroad upon their


resources

should be

consequence, in 1858 they

made by made
bill

their rivals.

In

a rule that they

would only advance to the


seasons of the year,
particularly

brokers at certain

when
the

the public

money
that

is

large

at

Bank,

and

at

other times any application for an advance should

THE BILL BROKERS

301

be considered exceptional, and dealt with accordingly.

And
reserve,

the object of that regulation was

officially stated to

be *to make them keep their


to

own

and not

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
that

abolishing

it.

They thought
it,

they could frighten

the Bank

of England, and could


it

show
also

if

they were dependent on dent on them.

was

depen-

They

accordingly accumulated

a large deposit at the Bank to the amount of


3,000,000/.,

and then withdrew


had no
*

it

all

at

once.

But
the

this policy

effect,

except that of ex:


'

citing

a distrust of
of

Overends

the

credit of

Bank

England

was

not
in

diminished
a few days,

Overends had
and had the had
for
in vain

to return the

money

dissatisfaction

of feeling that they

attempted to

assail the solid basis of

everyone's credit, and that everyone disliked them

doing

so.

But
it

though

this

ill-conceived
itself

attempt failed as

deserved, the rule

could

not be maintained.

The Bank

does, in fact, at
bill

every
brokers
tional,'

period of pressure,
;

advance to the
considered
'

the

case

may be
is

excepif

but the advance

always

made

the

302

THE BILL BROKERS


is

security offered

really good.

However much
feel

the

Bank may

dislike to aid their rivals, yet they


;

must aid them

at a crisis they

that

they

would only be aggravating incipient demand, and


be augmenting the probable pressure on themselves,
I

if

they refused to do

so.

shall
I

be asked
afraid

if

this

anomaly
be
so.

is

inevitable,

and

am
;

that
it

for to

practical
It

purposes

we must
lessened

consider

may be
should,

the

bill

brokers
as they

may,

and

discourage as

much

can the deposit of


the

money with them on demand, and encourage


deposit of
it

at distant fixed dates or long notice.


it

This
cure

will
it.

diminish the anomaly, but

will not

Practically, bill brokers

cannot refuse to

receive

money

at call.
his

In every market a dealer

must

conduct

business

according
will

to

the

custom of the market, or he


conduct
it

not be able to

at

all.

All the

to offer better rates for

bill brokers can do is more permanent money,

and

this

(though possibly not so

much
In
its

as might be
essence, this

wished) they do at present.

anomaly

is,

believe,

an inevitable part of the


history has given us,
to

system of banking which

and which we have only

make

the best

of,

since

we cannot

alter

it.

303

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


It
is

of their weekly balance sheet.


that

Imagined

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
against

of reserve which the

Bank should keep


this

those

liabilities.

But to
arising

there

are several

objections,

some

from the general nature


special

of the banking trade,


position of the

and others from the

That the
IS

Bank of England. amount of the liabilities of a bank


reserve
is

a principal element in determining the proper


its

amount of
is

plainly true

but that

it

the only element

by which that amount

is

304

THE PRINCIPLES WHICH SHOULD REGULATE


Is

determined
of these

plainly false.

The

intrinsic

nature

liabilities

must be considered, as well as

For example, no one would say that the same amount of reserve ought
their numerical

quantity.

to be kept against acceptances

which cannot be
at

paid except at a certain day, and against deposits


at call,
If

which

may be demanded
liabilities
tell

any moment.
re*

a bank groups these

together in the

balance sheet, you cannot


serve
is
it

the

amount of

ought to keep.

The

necessary information

not given you.

Nor can you


unless

certainly determine the


to

amount of

reserve necessary

be kept against deposits


to the nature of

you know something as

these deposits.

If out of 3,000,000/.

of money,

one depositor has 1,000,000/. 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/. than against the remaining 2,000,000/

The

intensity of the liability, so to say,

is

much
store

greater;

and therefore

the provision

In

must be much greater


culable habits

also.

On
It

the other hand,


is

supposing that this single depositor

one of

cal-

suppose

that

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

THE AMOUNT OF THE BANK'S RESERVE


equal amount of ordinary
that
it

305

liabilities.

The danger
;

will

be called

for

is

much
it

less

and therefore
less too.

the security taken against

may be much

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
application
to

they have a very particular

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.


facts relative to

All the material


revenue, and the

the

English

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


is all

war, no doubt, this

reversed

the account of

a Government at war

is

probably the most un-

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
certain of all accounts, especially of a

^.o6

THE PRINCIPLES WHICH SHOULD REGULATE


so
incalculable.

therefore

Ordinarily, however,

there

Is

no

account

of which
;

the

course can

be so
reserve.

easily

predicted
in

and therefore no ac
little

count which needs

ordinary times so

The

principal
also
;

payments,
the

when they
satisfactory

are

made, are

of

most
his

kind to a banker

they are, to a great extent,


at

made

to another account

bank.

These

largest ordinary payments of the Government are

the dividends on the debt, and these are mostly

made

to

bankers
the

who

act

as

agents

for

the

creditors of

nation.

The payment
is,

of the

dividends for the Government

therefore, in great

part a transfer from the account of the

Government

to the accounts of the various bankers.

certain

amount no doubt goes almost


banking classes
in house,
;

at

once to the non-

to those

who keep

and have no account at even this amount is calculable,


nearly the same.

and notes any bank. But


coin
it

for

is

always
is,

And
it,

the entire operation

to

those

who
it is

can watch

singularly invariable time

after time.

But

important to observe, that the published

accounts of the
the public as
calculations.

Bank give no such information to will enable them to make their own

The

account of which

we have been

speaking

is

the yearly account of the English

THE AMOUNT OF THE BANK'S RESERVE


Government

307

what

we may

call

the

Budget

account, that of revenue

and expenditure.
*

And
'

the laws of this are, as

we have shown,

already
in

known.
accounts,

But under the head

Public Deposits

the accounts of the Bank, are contained also other

and

particularly that of the Secretary for

India in Council,
different
for India

the laws

of which

must be
Secretary
If any-

and are quite unknown.


is

The
account.

a large lender on
to

its

one

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
proposed
give

such

'

other side should do.


inherits this

The

present India Office

independence from the old Board of


busi-

the

Company, which, being mercantile and


used
to

ness-like,

lend
it

its

own money on
;

the

Stock Exchange as
India,
its

pleased

the

Council of

successor, retains the power.


it

Nothing

can be better than that


to

should be allowed

do as

it

likes

but the mixing up the account

of a

body which has such a power, and which


India, with that of the

draws money from

Home
public

Government

clearly prevents the

general

o8

THE PRINCIPLES WHICH SHOULD REGULATE

from being able to draw inferences as to the


course of the combined account from
of
its

knowledge
*

home

finance only.
in

The

account of
includes

public

deposits'

the

Bank

return

other

accounts too, as the Savings

Bank

balance, the

Chancery Funds account, and others;


consequence,
till

lately the public

and in had but little


But Mr.

knov/ledge of the real changes of the account of

our Government, properly so

called.

Lowe
from
able to

has lately given us a weekly account, and

this,

and not from the Bank account, we are form a judgment. This account and the

return of the

Bank

of England,
;

it

is

true, un-

happily appear on different days


that accident our

but except for

knowledge would be perfect

and as
is

it is,

for almost all purposes


sufficient.

what we know
as well

reasonably

We can now calculate the


it.

course of the
as
it is

Government account nearly

possible to calculate

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 most of what

and we know

that at such changes

THE AMOUNT OF THE BANK'S RESERVE


Is

309

paid

away by the Government


the

is

only paid to
that
it

other depositors at the


really stay at

Bank, and

will

Bank, though

under another
think that

name.

If

we

look to the private deposits of the


first

Bank

of England, at
is

sight

we may
'
;

the result

the same.
*

By far

the most important


and, for the

of these are the

Bankers' deposits

most

part, these deposits as


little.

a whole are likely to


will suppose,

vary very

Each banker, we
all

keeps as
actions

little

as he can, but in

domestic trans-

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
at the

from the account of one banker


of England.
balances,
in.

to another

Bank

Payments out of the


correspond
with

bankers'

therefore,

payments
at first
stable.

As a
seem
to

whole, the deposit of the

bankers' balances at the


sight

Bank
be a

of England would

deposit

singularly

Indeed, they

would seem, so

to

say, to

be

better than stable.

thing else tends to diminish.


all

They augment when everyAt a panic, when


;

other deposits are likely to be taken away, the

bankers' deposits

augment

in

fact

they did so

3IO

THE PRINCIPLES WHICH SHOULD REGULATE


though we do not know the particulars
is
;

in 1866,

and

it

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
it is

power

they try to have as

much

money as

possible at

command

they augment

their reserve as

that reserve at

much as they can, and they place the Bank of England. A deposit

which which

is
is

not likely to vary in ordinary times, and


likely to

augment in times of danger, It seems, in some sort, the model of a deposit. 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
liability
;

are a

singularly

treacherous form

of

that the utmost caution ought to be used

in dealing

with them

that, as

a rule, a less propor-

tion of

them ought
easiest

to

be lent than of ordinary

deposits.

The

mode

of explaining anything
it

is,

usually, to

exemplify

by a

single actual case.


is

And

in this

subject, fortunately, there

a most

conspicuous case near at hand.

The German
the

Government has
from
this

lately
in

taken large sums in bullion


part from

country,
in

Bank
it

of

England, and

part not, according as

chose.

THE AMOUNT OF THE BANICS RESERVE


It

311

was
its

in the

main well advised, and considerate


;

in

action

and did not take nearly as much


it

from the Bank as

might, or as would have


it

been dangerous.
the

Still
it

took large sums from

Bank

and

might easily have taken more.

How
that

then did the

this vast
it

German Government obtain power over the Bank ? The answer is,
it
it

obtained

by means of the bankers'


did so in two ways.

balances,
First,

and that
the

balance

Bank.

German Government had a large of its own lying at a particular Joint Stock That bank lent this balance, at its own
and
it

discretion, to bill brokers or others,

formed
ex-

a single item in the general funds of the London


market.
cept that
that
its

There was nothing


it

special about

it,

belonged to a foreign Government, and


likely to call
it

owner was always


so.

it in,

and

sometimes did
the

As

long as

stayed unlent in
it

London

Joint Stock Bank,

increased the
of England
bill

balances of that bank at the

Bank
a
;

but so soon as
increased the
it

it

was

lent, say, to

broker,

it

bill

broker s balance
bill

and as soon as
to their

was employed by the


bills,

broker in the discount


bills

of

the owners of those

paid
it

it

credit at their separate banks,

and

augmented the
of England.

balances of those bankers at the

Bank

Of

course

if it

were employed

in the discount, of

312

THE PRINCIPLES WHICH SHOULD REGULATE


belonging to foreigners, the money might be
it

bills

taken abroad, and by similar operations


also

might

be transferred

to the English provinces or to

Scotland.

But, as a rule, such

money when
so, it swells

de-

posited in London, for a considerable time remains


in

London and
;

so long as

it

does

the

aggregate balances of the body of bankers at the

Bank

of England.

It is

now

in the
it

balance of

one bank, now of another, but


evident consequence
that

is

always

dis-

persed about those balances somewhere.


is

The
of the

this

part

banker s balances

is

at the
it

mercy of the German


it.

Government when
millions

chooses to apply for

Supposing, then, the

sum

to

be three or four

and

believe that

on more than one


it

occasion in the last year or two

has been quite as


at

much,

if

not more

that

sum might
is

once be
In this

withdrawn from the Bank of England.


case the

Bank

of
is

England

in the position of

a banker

who

liable for a large

amount

to a
it

single customer, but with this addition, that


liable

is

for

an unknown amount.
is

The German
its

Government, as

well known, keeps

account
at

(and a very valuable

one

it
;

must be)
but the

the of

London

Joint Stock

Bank

Bank

* The German Government, it is understood, still keeps an dccount with the London Joint Stock Bank, but its main account is with the Imperial Bank of Germany.

THE AMOUNT OF THE BANK'S RESERVE


England has no access
to

313

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.
to
It

might

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
enable the
in the

an inspection of that bank's balance would not

Bank of England to determine even vaguest manner what the entire sum was
it

for

which

might be asked at any moment.


to

Nor would
as a

the inspection of the bankers' balances

whole lead

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 during the time that the

and very possibly


out.

German money was

coming

in

some other might be going

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.
in

This

is

the

first,

and the plainest way

which

314

THE PRINCIPLES WHICH SHOULD REGULATE

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
the
;

took

it

away, which

is

very easy to understand.

But the Government


power,
of a

also possessed a far greater

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
bill

arrived at
if it

command over the market. As each maturity, the German Government


;

could,

chose, take the proceeds abroad

and

it it

could do so in bullion, as for coinage purposes

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.
nent.
afford

But

this reduction

A
to

banker who has to


reduce his

would not be permapay 100,000/. cannot


at

balance

the

Bank

of

THE AMOUNT OF THE BANICS RESERVE


England 100,000/.
are 2,000,000/.,
;

315

suppose that
rule

his

liabilities
it

and that as a

he finds

necessary to keep at the


liabilities,

Bank one-tenth
100,000/

of these

or 200,000/, the
his

payment of 100,000/
;

would reduce
liabilities

reserve to
still

but his

would be
his

to

keep up

1,900,000/, and therefore tenth he would have 90,000/ to find.


it is
;

His process
loan to the

for finding

this
if

he

calls in, say,

bill

brokers

and

no equal additional
to

money

is

contemporaneously carried

these

brokers (which in the case of a large withdrawal


of foreign

money
to

is

not

probable),

they must

reduce their business and discount


effect of this is

less.

But the

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
collapse.

there would be

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 twopanic

and

fold

first,

the banking reserve

is

reduced by ex-

portation 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.
;

3i6

THE PRtNClPLES WHtCH SHOULD REGULATE


result

more easily. Supposing any foreign Government or person to have any sort of securities which he can
arrived
at

The same

may be

pledge in the market, that operation


or him, a credit on

gives

it,
it,

or him, to

some banker, and enables take money from the banking reserve
of England,

at

the

Bank
;

and from the bankers'

balances

and

to replace the bankers balances at

their inevitable

must lend.
causes,
in

minimum, the Bank of England Every sudden demand on the country


to
its

proportion

magnitude,
reason

this

peculiar effect.

And

this is the
I

why

the

Bank

of England ought,

think, to deal

most cau-

tiously

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
as

the

Bank

of

England lends money


that usual

to

keep up

the bankers balances at their usual amount, and

by means of

amount whatever sum

foreigners can get credit for


us, it is

may be

taken from

not possible to assign a superior limit (to


scientific

use the

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

THE AMOUNT OF THE BANK'S RESERVE


which
this

317

book

is

a commentary

the

Bank

ol

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


Bankers'
it,

to

pay

it.

And it is as the

of England has to pay


it

for

Bank that the Bank it is by being so that


cash reserve.

becomes the keeper of the

final

Some persons have been

so

much impressed with

such considerations as these, that they have con-

tended that the Bank of England ought never to


lend the
to
*

bankers balances at
'

all

that they ought


deposit.
I

keep them

intact,

and as an unused
I

am

not sure, indeed, that

have seen that extreme


but
I

form of the opinion


heard
it

in print,

have often
very
in

in

Lombard

Street from

persons
;

influential

and very

qualified to

judge

even
it.
*

print
I

have seen close approximations to


rule

But
very

am

satisfied that the laying


'

down such a hard


;

and

fast

would be very dangerous

in

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


filled.

money

by which they are


I

The banker

calls in his

money from

the

bill

broker, ceases to re-discount

^i5i8

THE PRINCIPLES WHICH SHOULD REGULATE


;

securities

causes a
at

and in one or other of these ways he new demand for money which can only such times be met from the Bank of England.
else
is

Everyone

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


;

by them into the 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
is

at such

moments

often poured

Bank

of England.

And

non-lending or niggardly lending which aggravates

them.

At
laid

other times, particularly at the quarterly


rule which

payment of the dividends, an absolute

down
lent,

that the bankers' balances

were never

to

be

would be productive of great inconvenilarge

ence.

sum

is

just then paid from the

if

Government balance to the bankers' balances, and you permitted the Bank to lend it while it was
in the

still

hands of the Government, but forbad


it

tliem to lend

when
tilt

it

bankers, a great

upwards

came into the hands of the in the value of money

THE AMOUNT OF THE BANK'S RESERVE


would be the consequence,
for a

319

most Important
ineffec-

amount of
tive.

it

would suddenly have become

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
peculiarly great

that

as they entail

a a

liability

and singularly
to

difficult to foresee,

they ought never


deposit.
It follows

be used

like

common

from what has been said that there are


are not

always possible and very heavy demands on the

Bank of England which

shown
all

in
:

the

account of the Banking Department at

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
this market, obtains

bills

or other good securities to

money with them, and removes that money from the market in bullion, that money may, if the German Government choose, be taken If the wants wholly from the Bank of England. of the German Government be urgent, and if the

that the gold coming here from the mining countries be but small, that
amount of gold
*

arrivals

is,

gold will be taken from the


there
is

Bank

of England, for

no other large store

in the country.

The

320

THE PRINCIPLES WHICH SHOULD REGULATE


is

German Government

only a conspicuous exlately to

ample of a foreign power which happens


have had an unusual command of good
England.

securities,

and an unusually continuous wish to use them In

Any foreign State hereafter which wants


it
;

cash will be likely to come here for


the

so long as

Bank

of France should continue not to pay in

specie,* a foreign State


cessity

which wants
for
it.

it

must of ne-

come

to

London

And no indication

of the likelihood or unlikelihood of that want can

be found in the books of the Bank of England.

What
Bank

is

almost a revolution

in the policy
:

of the

of England necessarily follows


its

no certain
can in the

or fixed proportion of
present times be laid

liabilities

down

as that which the

Bank

ought to keep
one-third, or

in reserve.

The

old notion that

any other such

fraction, is in all cases

enough, must be abandoned.

The

probable de-

mands upon the Bank


and so
little

are so various in amount,

by the figures of the account, that no simple and easy calculation is a


disclosed
sufficient
liabilities

guide.

definite

proportion of the
for the reserve,

might often be too small


great.

and sometimes too

The

forces

of the

enemy being
The Bank

variable, those of the defence cannot

always be the same.


of France resumed specie payments on Jan,
i,

1S7S

THE AMOUNT OF THE BANK'S RESERVE


I

321

admit that this conclusion


it

is

very inconvenient.

In past times

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

way the Bank knew easily what to do and the public knew easily what to foreits

account.

In that

see.
is

But, unhappily, the rule which


is

is

most simple
relied

not always the rule which

most to be

upon.

The

practical difficulties of life often can;

not 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
Another simple
rule often laid

killing the patient

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 The first duty of was, indeed, always erroneous.
the

England was to protect the ultimate cash of the country, and to raise the rate of interest But this rule was never so so as to protect it. erroneous as now, because the number of sudden

Bank

of

demands upon
so great

that reserve

was never formerly

The market

rate of

Lombard

Street
rate

is

not influenced by those demands.

That

is

322

THE PRINCIPLES WHICH SHOULD REGULATE


in

determined by the amount of deposits

the

hands of
of good

bill

brokers and bankers, and the amount

bills

and acceptable

securities offered at the

moment.
the

The
it

probable efflux of bullion from


it

Bank

scarcely affects

at

all

even the

real

efflux affects

but

little

if

the open market did


rate

not believe that the


in

Bank

would be altered
to let
its

consequence of such effluxes the market rate


rise.

would not
bullion

If the

Bank choose
is

go unheeded, and

seen to be going so

to choose, the value of


will

remain unaltered.

money in Lombard Street The more numerous the


for bullion,

demands on the Bank


variable their

and the more magnitude, the more dangerous is

the rule that the

Bank

rate of discount should


rate.

conform to the market

In former quiet
of

times the influence, or the partial influence,


that rule has often produced grave disasters.

In
is

the present
recipe for

difficult

times an adherence to

it

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 Why should a bank keep any reserve keep. 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
.'*

THE AMOUNT OF THE BANK'S RESERVE


satisfy the public that
it

323

possesses cash

able securities

enough

or

avail-

to

meet

its liabilities.

The

object of publishing the account of the

Banking
to let the

Department of the Bank of England


nation see

is

how

the national reserve of cash stands,


is

to assure the public that there

enough and more


all

than enough to meet not only

probable

calls,

but

all

calls

of which there can be a chance of

reasonable apprehension.

And

there

is

no doubt
gives

that the publication of the

Bank account
would
give.

more
other

stability to

the

Money Market

than any

kind

of precaution

Some
constant

persons, indeed, feared that the opposite results

would happen
would
terrify

they feared that the

publication of the incessant changes in the reserve

and harass the public mind.

An

old banker once told

me

Sir,

was on Lord
voted against

Althorp^s committee which decided on the publication of the


it.

Bank
it

account,

and

thought

would frighten people.

But

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
is

through

Lombard

Street and the world

the object of the publi-

V 2

324

THE PRINCIPLES WHICH SHOULD REGULATE


Bank accounts and
is

cation of the
reserve.

of the

Bank

But that object


the reserve

not attained

if

the

amount of
if

when
is,

so pubHshed

is

not enough to

tranquillise people.

A panic

is

sure to be caused

that reserve

from whatever cause, exceedingly


there
is

low. At every moment mum, which I will call

a certain mini-

the

apprehension minifall

mum,' below which the reserve cannot


great risk of diffused fear
;

without

and by

this I

do not

mean
and

absolute panic,

but only a vague fright


itself instantly,

and timorousness which spreads


as
if

by magic, over the

public

mind.

Such seasons of
dread.

incipient alarm are exceedingly

dangerous, because they beget the calamities they

What

is

most feared

at such

moments
;

of
if

susceptibility

is

the destruction of credit

and

any grave failure or bad event happens at such moments, the public fancy seizes on it, there is a The Bank general run, and credit is suspended.
reserve then never ought to be diminished below
the 'apprehension point'
to say, that
it

And
if it
it

this is as

much

as

never ought very closely to ap;

proach that point


accident

since,

gets very near,

some

may
is

easily bring

down

to that point

and cause the

evil that is feared.


*

There

no

royal road

'

to the

amount of the

THE AMOUNT OF THE BANK'S RESERVE


'

325

apprehension

minimum

'

no abstract argument,
will

and no mathematical computation


us.

teach

it

to

And we
is

cannot expect that

they should.

Credit

an opinion generated by circumstances

and varying with those circumstances.


of credit at any particular time
is

The

state

a matter of fact

only to be ascertained like other matters of fact


it

can only be

known by
*

trial

and

inquiry.

And

same way, nothing but experience can tell us what amount of reserve will create a diffused
in the
'

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


is,

be observed

that errors of excess are innocuous,

but errors of defect are destructive.


reserve only means a small loss of
small a reserve

Too much
but too

profit,

may mean
if

'

ruin.'

Credit

may be at
happen

once shaken, and

some

terrifying accident

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
assistance

way without

as
On

it

was

in

those years.

And

the observance of this


*

necessary because the not always the same.

maxim is the more apprehension minimum is


*

the contrary, in times

326

THE PRINCIPLES WHICH SHOULD REGULATE


the public has recently seen the

when

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


that
little will

of late often been demanded, and

been

so.

be so, when in general but little has bank like the Bank of England must
rise, if I

always, therefore, be on the watch for a

may
it

so express

it,

in the

apprehension

minimum
to allay

must provide an adequate fund not only


the

the misgivings of to-day, but also to allay what

may be

still

greater misgivings of to-morrow.

And

the only practical


is

mode
*

of obtaining this
in

object

to

keep the actual reserve always


'

advance of the minimum apprehension reserve.

And
if
*

this involves
is

something much more.


less,

As

the actual reserve


possible, to
'

never to be

and

is

always,

exceed by a reasonable amount the

minimum apprehension reserve, it must when the Bank is quiet and taking no precautions very conminimum. All the precauBank take time to operate. The
is

siderably exceed that


tions of the

principal precaution

rise in the rate of discount,

and such a

rise certainly

does attract money from


the world

the Continent and from

all

much
it

faster

than could have been anticipated.

But

does not

THE AMOUNT OF THE BANK'S RESERVE


act instantaneously
;

327

even the right

rate, the ultiits

mately attractive
action,

rate, requires

an interval for

and before the money can come here.


is

And

the right rate

often not discovered for


*

some time.
by

It requires several

moves,* as the phrase goes,

several augmentations of the rate of discount

the Bank, before the really effectual rate

is

reached,

and
*

in the

meantime
'

bullion

is

ebbing away and

the reserve

is

diminishing.

Unless, therefore, in

times

when

the

Bank

is

taking no precautions the


*

actual reserve exceed the

apprehension

minimum

by

at least the

amount which may be taken away


and before the available
be

in the inevitable interval,

precautions begin to operate, the rule prescribed


will

be infringed, and the actual reserve

will

less

that the 'apprehension'

minhnum.

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

may arise, and then any unlucky accident may cause many calamities. What does all this reasoning I may be asked, At the present moment how in practice come to
devised, diffused apprehension
*
.f*

much

reserve do you say the


?

Bank
to

of

England
(I

should keep

state

your recommendation clearly


if

know
to/
in

it

will
I

be said)

you wish

have

it

attended

And

will

answer the question


is

plainly,

though

so doing there

a great risk that the principles

328

THE PRINCIPLES WHICH SHOULD REGULATE

may be in some degree injured through some mistake I may make in applying them.
I

advocate

should say that at the present time the mind

become feverish and fearful if the reserve in the Banking Department of the Bank of England went below 10,000,000/. Estimated by the idea of old times, by the idea
of the monetary world would

even of ten years ago, that sum,


extremely large.

know, sounds
times

My

own nerves were educated


I

to smaller figures, because

was trained

in

when the demands on us were less, when neither was so much reserve wanted nor did the public
expect so much.
tions as
I

But

judge from such observajustifiably or not,

can

make
fact,

of the present state of men's

minds, that in

and whether

the important and intelligent part of the public

which watches the Bank reserve becomes anxious

and

dissatisfied

if

that

reserve
therefore,

falls
I

below
call

That sum, 'apprehension minimum'


10,000,000/.

the

for the present times.


it

Circumstances

may change and may make


is

less

or more, but, according to the most careful estimate


I

can make, that


*
*

what

I
'

should

call

it

now.*

The apprehension minimum must now be placed at a much higher figure. The Bank's own Habilities have increased and the
demands
years the reserve has never been suffered to

exposed have also become greater. Of late fall lower than from 18,000,000/. to 19,000,000/., and it has seldom been so low. It may be said, therefore, that the Bank is now expected to take precautions
to
it is

which

before the reserve gets below 20,000,000/.

THE AMOUNT OF THE BANK'S RESERVE


It

329

will

be said that

this estimate
I

is

arbitrary
I

and these

figures are conjectures.

reply that

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


are conversant with and
facts.
I

is

to those

who

who

closely

watch the

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
to
it.

body must have a


mates
Bank,
is

plain rule

and keep

say
esti-

in reply, that if the correct

framing of such

necessary for the good guidance of the a governing body which can

we must make

correctly frame
suffer

such estimates.

We

must not

from a dangerous policy because

we have
I

inherited an imperfect form of administration.

have before explained

in

what manner the govern-

ment 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

should say, putting the foregoing rea-

330

THE AMOUNT OF THE BANK'S RESERVE


Bank ought never
to

soning Into figures, that the

keep
a

less

than 11,000,000/. or 11,500,000/., since

experience shows that a million, or a million and


half,

may be

taken from us at any time.

should regard this as the practical


which, roughly of course, the

minimum

at

Bank should

aim,

and which

it

should try never to be below.

And

in order not to

be below 11,500,000/.,

the Bank

must begin
is

to take precautions

when

the reserve
;

between 14,000,000/. and 15,000,000/

for ex-

perience

shows that

between

2,000,000/

and

3,000,000/ may, probably enough, be withdrawn

from the Bank store before the right rate of


interest
is

found which

will

attract

money from
14,000,000/

abroad, and before that rate has had time to attract


it.

When

the reserve

is

between

and 15,000,000/, 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.

oo

CHAPTER

XII1>

CONCLUSION.
I

KNOW

it

Will

be said that

in this

work

have

pointed out a deep malady, and only suggested a


superficial

remedy.

have tediously insisted that


is

the natural system of banking

that of

many
it.

banks keeping their own cash reserve, with the


penalty of failure before them
I

if is

they neglect

have shown that our system

that of a single
effectual

bank keeping the whole reserve under no


penalty of
that
failure.

And

yet

propose to retain
to

system,
it,

and only attempt

mend and
this

palliate
I

can only reply that


I

propose to retain
it

system because

am

quite sure that


to alter
it.

is

of no

manner of use proposing


credit

system of

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

332

CONCLUSION
it,

not be altered because theorists disapprove of


or because

books are written against

it.

You

might as

well, or better, try to alter the

English

monaichy and

substitute a republic, as to alter

the present constitution of the English

Money
shall

Market, founded on the Bank of England, and


substitute for
it

a system

in

which each bank


is

keep

its

own

reserve.

There

no force to be
useless pro-

found adequate to so vast a reconstruction, and so


vast a destruction,

and therefore

it is

posing them.

No
ject

one who has not long considered the sub-

can have a notion

how much
is

this

dependence

on the Bank of England


habits.
this

fixed in our national

I have given so many illustrations in book that I fear I must have exhausted my I

reader's patience, but


I

will risk giving another.

suppose almost everyone thinks that our system


is

of savings' banks

sound and good.

Almost
w^hat

everyone would be surprised to hear that there


is

any possible objection to


to.

it.

Yet see

it

amounts

By the

last return the savings'

banks

the

old

and the Post

Office together

contain

about 60,000,000/. of deposits, and against this


they hold in the funds securities of the best kind.

But they hold no cash whatever.* They have of


* The deposits in the savings' banks have now (end of 1905) increased to upwards of 206,000,000/., but the fact remains that

practically

no cash

is

held against them.


CONCLUSION
333

course the petty cash about the various branches


necessary for daily work.

But of cash

in

ulti-

mate reserve

cash

in reserve against

a panic

the savings' banks have not a sixpence.

These

banks depend on being able


their securities.

in

a panic to realise

But
in

it

has been shown over and

over again that

a panic such securities can only

be realised by the help of the Bank of England

Bank with the ultimate cash reserve which has at such moments any new money, or any power to lend and act. If in a
that
it

is

only the

general panic there were a run on the savings'

banks, those banks could not

sell

100,000/. 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


This
is

that reserve.

only a single additional instance beyond

the innumerable ones given, which shows

how
ways

deeply our system of banking


of thinking.

is

fixed in our

The Government keeps


it,

the

money

of the poor upon of their doing so.


jection.

and the nation

fully

approves

No

one hears a

syllable of ob-

And

every practical

man

who knows
in the

the scene of action

every

man

will

agree that

our system of banking, based on a single reserve

Bank

of England, cannot be altered, or a

system of

many

banks, each keeping

its

own

334

CONCLUSION
be substituted
for
it,
it.

reserve,

Nothing but a
is

revolution would effect

and there

nothing to

cause a revolution.

This being

so,

there

is

nothing for

it

but to

make
it

the best of our banking system, and to

work

in the best

way

that

it

is

capable

of.
is

We can

only use palliatives, and the point


best palliative

to get the

we

can.

have endeavoured to
that the palliatives
at

show why
which
I

it

seems to

me

have suggested are the best that are

our disposal.
I

have explained why the French plan


our English world.

will

not

suit

The

direct

appointment

of the Governor and

Deputy-Governor of the
our
difficulties.

Bank
I

of

England by the executive Government


evils or help

would not lessen our


fear
it it

would rather make both worse.

But

possibly
plain
tion,

may be

suggested that

ought to exmodificato us.

why

the American system, or

some

would not or might not be suitable


have a
fixed

The American law


shall
liabilities

says that each national bank

proportion

of

cash to

its

(there are

two
;

classes of banks,

and two

different

proportions

but
it

that

is

not to the

present purpose),
tors,

and

ascertains

who

inspect at their

own
is

times,

by inspecwhether the
not.

required

amount of cash

in the

bank or

CONCLUSION
It

335

may be

asked,

could
?

nothing like this be


it,

attempted in England
dification,

could not

or

some mo?

help us out of our difficulties


is

as the

American banking system


I

As far one of many


is

reserves,

have said why

think

it

of no use

considering whether

We cannot adopt
system
is

it if

fixed

we should adopt it or not. we would. The one-reserve upon us. The only practical
Bank
But,

imitation

of the American system would be to

enact that the Banking Department of the

of England should always keep a fixed proportion

say one-third of
as

its liabilities

in reserve.

we have

seen before, a fixed proportion of the


is

liabilities,

even when that proportion

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


It will

defect.

waste

profits

by over-provision against
it

ordinary danger, and yet


the bank
;

may
is

not always save

for this provision

often likely

enough

to be insufficient against rare and unusual dangers.

But bad as
chosen,
it

is

this

system

becomes

far

when worse when

voluntarily
legally

and

compulsorily imposed.

In a sensitive state of the


the near approach to the

English

Money Market

336

CONCLUSION
would be a sure incentive to one-third were fixed by law, the moment
like magic.
it

legal limit of reserve

panic

if

the banks were close to one-third, alarm would


begin,

and would run

And

the fear

would be worse because


founded
the
ties

would not be unIf

at least, not wholly.

you say that


its liabili-

Bank

shall

always hold one-third of

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


help, cannot

extra

do what we have seen the holders


for us in the

of the ultimate reserve ought to do and must do.

There
its

is

no help

American system
faulty.

very essence and principle are

We
feeble

must

therefore,

think,

have recourse to
I

and humble
care,

palliatives such as

have sug-

gested.

With good
I

sense,

good judgment, and

good
to say

enough.

But
is

have no doubt that they may be I have written in vain if I require


is

now
is

that the problem

delicate, that the

solution
result

varying and

difficult,
all.

and that the

inestimable to us

APPENDIX
NOTE
liabilities

I.

By Walter Bagehot.
A.

and cash reserve of the chief


banking systems.

is a comparison of the liabilities to the 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,

The

following

public,

is

also the only cash reserve against the similar liabili-

ties 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.
(i)

English Banking.
Liabilities,

29,000,030

Deposits of
Joint

Bank of England, less estimated Stock Bank balances, at December 31,

1872 Deposits of London Joint Stock Banks at December 31, 1872 (see * Economist,' February 8,
1873)

91,000,000

Total

liabilities

<

120,000,000

338

APPENDIX
Reserve of Cask,

Banking Reserve

in

Bank

of England
to

13,500,000
to

Making proportion of cash reserve


about 11*2 per cent.

liabilities

the public

(2)

Bank of France (February,


Liabilities.

1873).

110,000,000

Circulation

Deposits

Total

liabilities

....

15,000,000

125,000,000

Reserve of Cask.

32,000,000
to

Coin and bullion in hand

Making proportion of cash


about 25 per cent

reserve to liabilities

the public

(3)

Banks of Germany (January,


Liabilities.

1873).

63,000,000
8,000,000
17,000,000

Circulation

Deposits Acceptances and indorsements

....
,

Total

liabilities

>

88,000,000

Reserve of Cash,

.
.

Cash

in

hand

41,000,000
to

Making proportion of cash reserve


about 47 per cent.

to

liabilities

the public

(4)

National Banks of United States (October

3,

1872).

Circulation

.,...,..
Liabilities,
,
.

67,000,000
145,000,000

Deposits
Total
liabilities
v

212,000,000

APPENDIX
Reserve of Cask,

Z?>^

26,000,000
to

Coin and legal tenders

in

hand

Making proportion of cash


about 12-3 per cent.

reserve to

liabilities

the

public

Summary.
Liabilities to the

public

Cash held

Proportion of cash to
liabilities

per cent.

Bank of England and| London Joint Stock Banks


. . .

120,000,000
125,000,000 88,000,000

13,500,000
11*2

Banks of France Banks of Germany Banks National


United States

32,000,000 41,000,000
26,000,000

25-0

47 -o
12-3

of.
.

212,000,000

NOTE
EXTRACT

B,

FROM EVIDENCE GIVEN BY MR. ALDERMAN SALOMONS BEFORE HOUSE OF COMMONS SELECT COMMITTEE IN 1858.
1

146. Chairman.']

pressure in
increase
increase
that

The effect upon yourselves of the November was, I presume, to induce you to your reserve in your own hands, and also to your deposits with the Bank of England } Yes,

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 cusPerhaps it may be interesting to the Comtomers. mittee to know that on the nth of November we held
;

z 2

340

APPENDIX

discounted

bills for brokers to the amount of 5,623,000/ Out of those bills, 2,800,000/. matured between the nth of November and the 4th of December, and 2,000,000/. more between the 4th of December and the 31st. So

that about 5,000,000/. of bills matured between the

nth

of

November and

the 31st of

December; consequently

we were
upon
1

prepared, merely

of exchange, for
us.

by the maturing of our bills any demands that might possibly come

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 t Not exactly that the bills which we had discounted were allowed to mature, and we discounted
147. I

less
1

we kept
That

a large reserve of cash.


is

148.

to say

you withdrew from the com-

mercial 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. Weguelin?^ Had you any money at call 1 149. Mr.

with the

t A small amount perhaps about which we did not call in. Chairman^ What I understand you to say is, 1 1 50. 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

bill

brokers

500,000/. or less,

deposits with the

Bank of England.?

So

far

only as

ceasing to discount with strangers, persons not having


current accounts with us.

APPENDIX
1151.

341

Or

to give the

same amount
bills

to the bill broker

For

a while, instead of discounting for brokers and

and remained quiescent with a view to enable us to meet any demand that might be made on ourselves. 1 152. 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.
strangers,
to mature,

we allowed our

suppose at that time large sales of public 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
1

153. I

securities

largely, because they


1

always purchase when the funds fall. Are you prepared to give the Committee any opinion of your own as to the effect, one way or the other,
154.

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 }

should
those

state, generally, that the joint

stock banks, as well

as all other banks in

London, by collecting money from spare, must of necessity have assisted, and could not do otherwise than assist commerce, both then and at all other times. that your discounts, either at your 1 1 55. You say

who had

it

to

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


342

APPENDIX

own immediate customers ?


still
it

Yes

but the capital was

of England, and was capable of being used for short periods if we did not want it, others might have used it. 1 1 56. Mr. Weguelin?^ In fact, it was used by the Bank of England ? Undoubtedly I should suppose so there is no question about it. 1 course, felt quite certain that your 1 57. You, of deposits in the Bank of England might be had upon demand } We had no doubt about it.
there,

because

it

was

at the

Bank

158.

You

did not take into consideration the effect


1

of the law of

844, 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.
1 1

59.

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 We should always have thought the demands upon it 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
i*

have prevented
1 1

it.

60.

CJiairman?[

The
;

notion of the convertibility of

the note being in danger never crossed your

mind

Never
1

for a

moment

nothing of the kind.

161. Mr. WegiLelin?\ 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


APPENDIX
the
343

bank notes and put them


could never for a

in

our

own

strong chest.

We

moment

believe an event of that

kind as likely to happen.


1 162. 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. 1 163. 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
1

offer.

When you say that you have arrangement with regard to your come to some 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 under164.

Mr.

Cayley^
fresh

standing that

it

is

not desirable, either for their pro-

344

APPENDIX

prietors or for the public, to follow closely at all times

the alterations of the Bank.

I believe

it

is

understood

amongst them
1

all

that they do not intend following that

course in future.
165. Is that

from a feeling that


?

it is

rather dangerous

under particular circumxStances


its

cannot admit as to
this,

being dangerous, but there can be no doubt of


is

that there

a notion in the public mind which

we ought

not to contend against, that when you offer a high rate of

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 eminterest for
;

ploy
1

it

themselves.

166.

You

think that there

is

now a

general under-

standing amongst the banks which you have mentioned,


to act

upon a

different principle
last
I

from that on which they


.'*

acted during

October and November


that to be the case.
it

think

may
1 1

say that
67.

know

Was

not

the fact that this system of giving


at call commenced some banks during which, instead of demanding 10

so high a rate of interest upon

money

very

much with

the establishment of

the last year or two,

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
it
;

that, as regards
I

my own

bank,

we were

forced

into
in

forgot to say that, with regard to ourselves

taking

money on

deposit, the

parties

the

money

a month, or they lose interest.

We

must leave do not

APPENDIX
take

34J,

money from any


;

depositor at interest unless


it

upon

the understanding and condition that

remains a month

with us

he

may withdraw it within


;

the month, but then


it is

he

forfeits interest

it

will not carry interest unless


it

with us a month, and then

is

removable on demand

without notice.
1168. Is it or is it not a fact that some of the banks pay interest upon their current accounts ? Yes, I think most of the new banks do so and the Union Bank of

London does it. 1 169. At a smaller


presume 1
either six

rate than

upon

their deposits, I
I

think at a smaller rate, but

believe

it is

a fixed rate on the

minimum balance
I

for

some
I

period,

months or one month,


I

do not exactly know


believe
it is

the period.

think

ought to add (and


its
first

the case with

all

the banks) that the

London and Westinstitution until


bill.

minster Bank, from the day of


has ever
1

the present day, has never re-discounted a


left

No

bill

our bank unless

it

has been for payment.

70. Is not that generally the case with the

London

joint stock
1

banks

believe

it is

the case.

171. Mr.
bills

Wegtielin?[

But you sometimes lend money


bill

upon

deposited with you by

brokers

i*

Yes.

1172.

And you

occasionally call in that


}

re-deliver those securities

Yes

but that

money and we do to a

very small extent.


1
-

173. 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
brokers

it

come

and lock it up until it falls due to us and want to borrow, say

but

when
on

50,000/.

346

APPENDIX
bills,

a deposit of

and we
is

let

afterwards return those

bills

them have the money and to them and we get back

our money, surely that


1

not a re-discount.

short period, do

to employ your money for a you not frequently take bills of long date, and advance upon tnem ? But that is not a rediscount 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. we do not seek it It is not an advance of ours 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
174.

When you want

re-discount.
1

175.

Mr. Hankey!] Is there not


bill

this clear distinction

between returning a
counted a
that
1

on which you have made an advance and discounting a bill, that if you have disbill

your

liability

continues upon the


}

bill until

bill

has come to maturity

Yes.
liability

176. In the other case


.?

you have no further

whatever
1

Certainly. 177. Should you not distinction think


.-*

consider that a very important

it is

an important distinction. Take

this case

suppose a party comes to us and borrows


it

50,000/.,

and we lend

him, and

when the

loan becomes
is

due we take our money back again. a discount on our part.


1

Surely that

not

178.

Is

there not this distinction, that

if

discount you

may go on

pledging the

liability of

you reyour

bank

to an almost

unlimited amount, whereas in the

other case you only get back that

money which you

have lent

Undoubtedly.

APPENDIX
1 1 79.

347

Mn

Cayley?\

The

late Chancellor of the

Exin

chequer stated before the adjournment, in a speech


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

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/. higher than they

were on the 31st of October.


discounting for other parties,

With regard
it

to our not

was
it

in

consequence of

the discredit which prevailed that

was necessary we
a

should hold a portion of our deposits in order that they should be available in case persons called for them
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.
1

180.

Then you did not discount

as
?

much

as usual

for

your customers during that period


to

Yes,

we

did,

and more. 1 181. But not

strangers?

Not

to

strangers;

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.
distinction

make a

348

APPENDIX
182.

How

would

it

have been

if

the letter had not

issued at the last


1

moment ?

That

is

a question which

can hardly answer.


1 1

83.

What do you mean by


?

that general expression

of yours

It is

impossible to predicate what

may

hap-

pen

in

time of panic and alarm.

great alarm pre-

amongst the commercial world, and it 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. 1 1 84. Mr. Spooner.'] What did you mean by the exvailed certainly

could never have been alleviated, except by

pression,

'

the last

came out

moment of what } was late in the day it was a day of great distress. For two days there v/as a great deal of anxiety, and everybody expected that there would be some rehef; and it was when expectation, I suppose, was highly excited that the letter came, and it gave relief. 1 1 85. 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 I believe that the banking interest, to give an opinion. 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. 1 1 86. Mr. Hankey?\ Can you give the Committee any idea as to what proportion of deposits you consider
at the last
;

moment moment
'

.?

You

said that the letter

the last

It

.?

APPENDIX
generally desirable to keep in reserve?

349

You

must be

very

much guided by
;

circumstances.
all
is

In times of alarm

when

there are failures, of course

bankers strengthen
larger.

their reserves

our reserve then

In times of

ordinary business
there

we

find,

at interest as well as those


is

both as regards our deposits which are not at interest,- that


;

a constant circulation

that the receipts of

money

very nearly meet the payments.


1

187.

You probably keep

at all times a certain


;

amount
}

of your deposits totally unemployed

in reserve

Yes.

1 188. 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 unemI think the best idea which I can give upon ployed
.''

that subject

is

to give our annual statement, or balance

sheet, for the 31st of


1 1

December.

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 3 ist 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 on next page) 1 190. Do you consider that when your deposits are
89.

materially on the increase

it is

necessary to keep a larger

amount
reserve
deposits.

of

money
?

in reserve

than you would keep at


rule,

other times

may

say that, as a general

our

would always bear some proportion to our

350

APPENDIX
London and Westtninster Bank;
with, Bill

Total Lodgments with

also

Amount

of Cash in Hand, Moneys

Brokers at Call, and Govern-

ment

Securities held by the

Bank.
Cash in hand

DATE

Deposits

Money
Call

at

Government
Securities

TOTAL

31
.

1,039,745

2,231,317 1,996,352 1,863,332 2,043,642 2,011,505 1,763,936 1,224,029 1,884,881 1,990,815 2,169,932 2,080,301 2,122,483 2,371,621 2,622,571 2,937,993 3,202,369 2,631,783 2,960,207 3,248,505 3,489,165 4,474,216 5,007,987 6,925,121

December 1845
i

30 June
31
31 31

1846 1847 1848


,,

December
December

30 June

1849
,,

30 June

1850
,,

December December December


December

30 June
31 31 31

185
,,

30 June 30 June 30 June


31 December

1852
,,

1853
,,

1854
,,

30 June
31 31

1855
,,

December
December

30 June

1856
,,

30 June
31 December

1857
,,

628,500 563,072 3,590,014 423,060 3,280,864 634,575 350,108 721,325 2,733,753 3,170,118 588,871 159,724 176,824 645,468 3,089,659 552,642 246,494 3,392,857 686,761 3,680,623 263,577 3,821,022 258,177 654,649 566,039 3,969,648 334,982 691,719 424,195 4,414,179 4,677,298 653,946 378,337 206,687 861,778 5,245,135 5,581,706 855,057 397,087 6,219,817 904,252 499,467 6,259,540 791,699 677,392 6,892,470 827,397 917,557 486,400 694,309 7,177,244 722,243 8,166,553 483,890 847,856 8,744,095 451,575 601,800 11,170,010 906,876 432,000 11,438,461 1,119,591 687,730 13,913,058 967,078 13,889,021 2,226,441 1,115,883

938,717 791,899
1,295,047 1,189,213

964,800 973,691 972,055


1,089,794 1,054,018 1,054,018 1,054,018 1,119,477 1,218,852 1,468,902 1,457,415 1,451,074 1,754,074 1,949,074 1,980,489 2,922,625 3,353,179 3,582,797

191.

Do you employ

your money

in the

discounting

of

bills for

other persons than your

own customers ?

Discount brokers.
1

192. 193.

Only to discount brokers? Yes. Not to strangers who are in the habit of bringin bills
;

ing you

commercial houses ? I should say 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
generally not.

We

for bill brokers.

APPENDIX
1

35,

194.

Do you
by

consider that any advantage can arise


the

to the public

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

said

before, as long as there are


is,

good

bills in circulation,

that

bills

about which there would be no doubt of their


bills

being paid at maturity, there should be some means by

which those
1

could be discounted.
think that
it is

195.

And do you

part of the functions


bill for

of the

Bank

of England to discount a

anybody,

merely because the party holding the


vert
will
it

bill

wishes to con-

into cash

As

said before, the

Bank of England
public,

have great difficulty venient idea which there


that the

in getting rid of that inconis

in the
is

mind of the

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.

Bank of England

35

APPENDIX

NOTE

C.

Statement of Circulation and Deposits of the Bank of Dundei AT Intervals of Ten Years between 1764 and 1864.
Year
Circulation

Deposits *

I
1764 1774 T784 1794 1804 1814 1824 1834 1844 1854 1864
30,395 27,670 56,342 50,254 54,096 46,627 29,675 26,467 27,504 40,774 41,118


48,809 157,821 445,066 343,948 563,202 535,253 705,222 684,898

NOTE

D.

MEETING OF THE PROPRIETORS OF THE BANK OF ENGLAND.


September
13, 1866.

{From Economist
^

September 22^ 1866.)

A General Court of
the

the

Bank

Bank

at twelve o'clock

of England was held at on the 13th instant, for the

purpose of declaring a dividend for the past half-year.

Mr. Launcelot Holland, the Governor of the Bank, presided upon the occasion, addressed the proThis is one of the quarterly general prietors as follows

who

courts appointed by our charter, and

it is

also

one of our
1792, in

* The Bank did not begin to receive deposits

until

which year they amounted to 35,944/-

APPENDIX
the purpose of declaring a dividend.

353

half-yearly general courts, held under our bye-laws, for

From

a statement

which
of the

hold in

my

hand

it

appears that the net profits

Bank

for the

half-year

ending on the 31st of

August last amounted to 970,014/. \Js. lod., making the amount of the rest on that day 3,981,783/. 18^. lid. and after providing for a dividend at the rate of 61. los.
;

per cent, the rest will stand

at 3,035,838/.

i2>s.

lid.

The

court of directors, therefore, propose that a half-

yearly dividend of interest and profits, to the


61. los.

amount

of

per cent, without deduction on account of income

tax, shall
is

be made on the loth of October next.


I

That

the proposal
;

court
last

have now to lay before the general but as important events have occurred since we

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
;

think

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

itself to the utmost and exerted most successfully to meet the crisis. We did not flinch from our post. When the storm came upon us, on

AA

354

APPENDIX
morning on which
it

the

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

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
hold
;

predicting, even at the shortest period beforehand, the

greatness of those advances.

It

was not unnatural that


degree of alarm should

in this state of things a certain

who

have taken possession of the public mind, and that those 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

APPENDIX
balances

355

down
I

consider dangerous.

cent events,

some gentlemen may Looking back, however, upon recannot take any blame to this court for
to a point which

not having been prepared for such a tornado as that

which burst upon us on the

nth

of

May; and

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


6/. \Qs.

at

the rate of

per cent, for the past half-year.

Mr.

Hyam

said that before the question

wished to

offer a

was put he few observations to the court. He


perfectly satisfactory.

believed that the statement of accounts which had just

been

laid before

them was

He

also thought that the directors


assist the

had done

their best to
late

commercial classes throughout the


;

moneearliei

tary crisis

but

it

appeared to him at the same time that

they were in fault in not having applied at an


pension of the Bank Act.
It

period to the Chancellor of the Exchequer for a sus-

was well known that

the

demand on

the

Bank was

materially lessened in the

consequence of a rumour which been extensively circulated that permission to overhad step the limits laid down in the Act had been granted.
earlier part of the day, in

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
A.

356
tripled or

APPENDIX
quadrupled
its

commerce

to

know

that the measure seemed to

and he was sorry meet with the

approval of
the

many of their directors. Anyone who read speeches made in the course of the discussion on
;

Mr. Watkins' motion must see that the subject called and he trusted that the demand for for further inquiry
that inquiry

would yet be conceded. Mr. Jones said he entirely dissented from the views

with respect to the


proprietor

Bank Act

entertained

by the hon.
In his
crisis

who had

just addressed the court.

opinion the main cause of the recent monetary


that, while

was

we had bought

produce

in

275,000,000/. worth of foreign the year 1865, the value of our exports had

only been 165,000,000/., so that we had a balance against


us to the

amount of

10,000,000/.

He

believed that the

Bank

acted wisely in resisting every attempt to increase


felt

the paper currency, and he

convinced that the work-

ing classes would be the people least likely to benefit

by the
Mr.

rise in prices

which would take place under such

a change.

know what was 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
said he should be glad to

Moxon

the

3,000,000/.

and 4,000,000/. of
of the
that
for

bills

returned to them.
I

The Governor
your authority
trace

Bank

May

ask what
are

is

statement.?

We

rather

amused at hearing it, and we have never been able to 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

APPENDIX
told at their last

357

railway debentures

meeting that the Bank held a great many 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
If that

perhaps the stoppage of the Bank of England. were not so, the sooner the public were fully in-

joint stock

formed upon the point the better. But if ten or twelve banks had large balances in the Bank of England, and if the Bank balances were to run very lo\f^ 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 He bethe expediency of paying interest on deposits. lieved 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 pro;

viding,

first,

that a

list

of

all

the proprietors of

Bank

stock

358

APPENDIX.

should be printed, with a separate entry of the names of


all

those persons not entitled to vote from the smallness


secondly, that a copy of the charter of the
rules, orders,

of their stock or from the shortness of time during which

they held

it

Bank, with the


for

good government of

and bye-laws passed for the be printed the use of the shareholders and thirdly, that auditors
their corporation, should
;

should be appointed to
accounts.

make

detailed audits of their

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
joint stock

managers and shareholders of 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
satisfactory to the
;

more

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 gentle-


APPENDIX
men who have addressed
359

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 they were themselves tempted to invest the
the bottom of the sea, where a

call,

while
so

money

received in speculations in Ireland or in America, or at


it

was not available when


call.

moment

of pressure arrived.

Mr. Botly said he did not mean deposits on

The Governor
That
is

of the

Bank

of England continued
;

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
I

has referred to the amount of our debts, but, as

stated

when

took the liberty of interrupting him,

we

could never trace the origin of any rumour which prevailed

upon that
existed,
it

far as it can be said to have ever 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 marvellously small amount of bad debts which we contracted. It has never been a feature of the Bank to state what was the

subject.
its

As

had

origin

precise

were to mention

amount of those debts but it upon the present


;

believe that
it

if I

occasion,
I

would

be found to be so inconsiderable that


obtain credence for the announcement

should hardly
should have to

make.

am

convinced that our present dividend has

36b

APPENDIX

been as honestly and as hardly earned as any that we have ever realised but it has been obtained by means
;

of great vigilance and great anxiety on the part of each

and all of your directors and I will add that I believe you would only diminish their sense of responsibility^ and introduce confusion into the management of your business, if you were to transfer to auditors the making up of your accounts. If your directors deser\^e your con;

fidence they are surely capable of performing that duty,

and

if

they do not deserve

it

you ought not

to continue to the sup-

them

in their present office.

With regard

must observe that, with 14,000,000/. 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 and what more than that do you want > 45,000,000/. It has been recommended that we should take charge of securities but we have found it necessary to refuse all and I believe securities except those of our customers 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 ParHaving alluded to those subjects, liamentary limits. I will now put the motion for the declaration of the
posed lock-up of our
capital, I
;
;
:

dividend.

The motion was


adopted.

accordingly put and unanimously


that that resolution

The chairman then announced

APPENDIX
much
Bank could

361

should be confirmed by ballot on Tuesday next, inas-

under the provisions of its Act of Parliament, declare otherwise than in that form
as the
not,

a dividend higher than that which

it

bad

distributed

during the preceding half-year.

The

three resolutions proposed


;

by Mr. Moxon were

then read

but they were not put to the meeting, inas-

much

as they found

no seconders.

Mr. Alderman Salomons said that their Governor had


observed that he thought the payment of interest on
deposits

was objectionable
But he took
it

and everyone must see that


granted that the Governor

such a practice ought not to be adopted by the Bank of

England.
did not

for

mean

that his statement should apply to joint

stock banks which he had himself told them had con-

ducted 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 termina'ted.

APPENDIX
By
E.

IL

Johnstone.
I.

NOTE
This pre-eminent
magnitude of
its

position

in

regard to the relative

resources the

London Market has not

fully maintained.

The deposits of the metropolitan banks


;

have indeed enormously increased. They amounted at but in this the end of December 1905 to 504,000,000/. total was comprised (as closely as can be estimated, since, owing to amalgamations, an exact comparison is
about 230,000,000/. held by banks which were not included in the statement for December 31, 1872, most of them banks with country branches, and
impossible)

which hold, therefore, a great deal of provincial as well Allowing for this, a greater relative as London money.
increase
is shown by the New York associated banks, whose deposits at the end of 1905 (including Government deposits) amounted to a little over 195,000,000/. as compared with the 40,000,000/. held by them in 1873.

But, as in the case of the

London banks, the

deposits of

banks include a large amount consisting of the balances of other banks throughout the country. In Germany also there has been a great development
the
of deposit banking.
tics are

New York

drawn up
those

in

Unfortunately the German statisa form which renders any com-

parison with

of the British banks exceedingly

APPENDIX
difficult, if

II.

363

not impossible.
'

The German banks


left

place

under

'

deposits

only such amounts as are

with

them upon call or for specific terms, usually three or six months. There is, however, another heading, Creditors,' under which is included amounts due to account holders on account current business, and apparently some other forms of liability. According to the Frankfurter Zeitung^ the deposits of the eight largest Berlin banks (exclusive of the Reichsbank) amounted at the end of 1905 to 52,100,000/., and their 'creditors' to 98,463,000/. And, in addition, the Reichsbank at that date owed its
' '

'

current account holders 24,105,000/

The Frankfurter

Zeitung also gives


of the
less

statistics of the forty


is,

Empire that

leading banks banks having a capital of not

than 500,000/ (but not including the Reichsbank).


the end of 1905 these held in
in
'
'

At

deposits

'

73,736,000/.,

and

creditors' 144,223,000/

Nor

is it

only that the


;

resources of the

these banks
in

German banks have greatly increased now play a much more important part cosmopolitan finance. Berlin is now an important
for foreign loans,

market

of the banks large

and through the instrumentality amounts of German capital have

been embarked

in foreign industrial enterprises.

The
the
It

growth of these and other markets, however, has not


operated to the relief of
contrary,
it
*

Lombard

Street'

On

has added to the delicacy of


in

its position.

has increased the magnitude of the demands for gold


that

may

be made upon us
it

times of pressure, and


that

thus

renders

more necessary than ever

the

Bank of England should maintain an adequate

reserve.

364

APPENDIX

11.

NOTE
On December
31, 1891,

II.

the deposits of these four

banks amounted to 70,000,000/., but owing to amalgamations which have altered the identity of two out of the four, the further growth of the deposits since Mr.

Bagehot wrote cannot be accurately traced. Some it, however, may be gathered from the fact that five purely Metropolitan banks (including one of comparatively small magnitude) held on Decemindication of

amount of 78,000,000/., and at the same date ten London banks with country branches held between them deposits aggregating over 374,000,000/ The private deposits of the Bank of England on December 27, 1905, amounted to
ber 31, 1905, deposits to the
44,000,000/.

INDEX
A.CT, Peel's, of 1844, 2, 3, 23, 25, 29, 35, 42, 47, 113, 163, 206, 255,

256, 355 Althorp, Lord, committee for publication of

Bank

account, 323

America, 23

Civil

War, 47

banking methods, 334

Amsterdam, Bank of, 82, 83 Appendix I. (Walter Bagehot) Note A. Liabilities and cash reserve

of

the

chief

banking

systems, Z2>7-Z2>9 Note B. Extract of evidence given by Alderman Salomons before House of Commons Select Committee, 1858, 339-351 Note C. Statement of circulation and deposits of the Bank of

Dundee at intervals of ten years between 1764 and 1864, 352 Note D. Meeting of the Proprietors of the Bank of England, September 13, 1866 (from Economist, September 22, 1866), 352361

Appendix Note I.
Note
II.

II.

(E. Johnstone) Deposits in London,

New

York, and German banks,

362, 363

Deposits of five metropoUtan banks, 364


1844,
2, 3, 23, 25, 29, 35,

Bank, Acts,
355
;

42, 47, 113, 163,206, 255, 256,

1742, 99 deposits, 5, 12, 13, 30 seq. ; of savings banks, 322 distinctive function of a, 21 ; earliest type of, 80
;

growth
;

of, -364

remittance of

money, 84 supply of paper circulation, 85, 89 note issues, 89, 91, 92 reserves, 26-34 minimum, 325-328 ; importance See Bank of England 2)Z7Austro-Hungarian, 33
;

of,

161, 209

366

INDEX

Bank
of

continued
;

OF England,
;

Statement, Note C, Appendix, 352 20 effect of Act of 1844, 23 issue department, banking department, 25-32, panic no effect on, 198 24, 164 reserves on deposit, 2842, 64, 163, 189, 196, 197, 200, 303 34 liability for international payment, iz> 35 responsibility small of directors, i^, 37, 43 their singular position, 38-44 value of stock, 40, 41 demands upon reserve, 45, 46 elevaforeign drain, 49 domestic drain, 49-58 tion of rate, 47 advances in time of panic, 64, 66, 67, 68, 190, 193, 318, 325, anomalous system of one State account, 65, 305-309 333 Origin, incorporareserve, 68 three remedies, 73, 75, 76. tion, PRIVILEGES, 94-102; period of restriction, 112, 119; Chapter VII., Adsettlement of value of money, 1 15-123. unrecognised ministration OF Bank reserve, 162-209 Governor's speech on panic of 1866, responsibility, 162 Mr. Hankey's observations, 171 166, 177 Appendix, 352-361 criticism of, 173 strength and weakness of directors, 176, 177 180-182 their mistakes, improvement since 1857, 182 rate raised by steps of i per cent., 184 chronic faults of policy, one-third reserve not adequate, 189 Clearing House 187 system, 194, 195 attitude in time of panic, 190-198 rules for advances, 199 policy of inconsistency, 201 successful action in large and small a.4vances, 204 Banking security,' 207 Discount Office, 207 importance of amount of advance, 208. Chapter VIII., Government of the Bank of England, 210elder 244 election of directors, 210 young men chosen, 211 members on committee of Treasury, 213, 242 no banker a director, 214 character of directors, 216 no fixed executive, 218 duties of Governor and Deputy-Governor, 218 constitution of, 219, 220, 243 question of permanent Governor, of Deputy-Governor, 233-239 223-232 suggested reforms, rivalry of 240-244 Sir George Lewis and directors of, 256 bill brokers, 299 rule of 1858, 300. Chapter XII., Principles to regulate the amount of reserve, 303-330 nature of liabiUties and deposits, Government account, 305 304 Budget account, 307 public deposits, 307 analysis of return, 308; bankers' deposits, 309; utmost caution required, 310; transactions of the German Government, 310-314 withdrawal of foreign deposits, 314-317 opinions as to lending bankers' balances, 317 changes involving change of rules, 321 object of publishing account, 323 apprehension minimum,' 325

Dundee, 86

18,

>'

'

'

INDEX
Bank

367

of England continued time required for operation, 326 estimates for minimum reserve, 327, 328 faulty system, 331 proposals to amend single-reserve system, 331-336; cash reserves (Appendix I.), 3S7 meeting of proprietors, 1866 (Economist), 352 of France, 32, 33, 71, 72, 87, 90, 181, 186, 231, 320, 338 of Genoa, 80
;
;

Germany, Imperial, 88, Hamburg, 81, 82 London and Westminster,


of of

338, s^;^
39, 40, 60, loi, 107, 163, 240,

297

of Russia, $$ Savings, 308, 332 of Scotland, 86

Swiss, 90 Banks, joint stock,


facts

18,

20,

21,
;

69, 217.

Chapter IX., 245-268

capital as guarantee,

and

fears,

252
;

profits and dividends, 248, 249 245 success contrary to expectation, 253
;

government, 257 responsibility of managers, 262 errors of, working committee of directors, 265 importance of 263 clearly known government, 267 balances of German Govern;

ment

with, 3 1 1-3

1
:

private, 21.

character of, 269, 270 concompetition against, reasons, 272 271 case of Overend, Gurney 273 privileged opportunities, 274 & Co., 275-277 new business, 279 organisation, 281
;

Chapter X., 269-282


;

tinuance doubtful,
;

United States, 338 Baring Brothers, 19


of
Bill brokers, 13, 21, 28, 32, 60, 61, 62, 157

Messrs. Rothschild, 215 reserves of joint stock banks, 256. Chapter XI., 283-302 as intermediaries, 283 mercantile tradition of the standing of
; ;
:

'

in

biUs of exchange, 286 Mr. Richardson's evidence 287; existence of old practice, 290; modern bill in time of broking, 291 interest and its consequences, 293 panic, 294, 296 effect of one-reserve system, 297, 298 rivalry Overends,' 301 action of with Bank of England, 299 anomalies of position, 302 German Government and, 311
parties,' 285
; ;

1810,

'

Botly, Mr., 358, 359 Bullion, 46, 47 committee, 287


;

Caisse d'Escompte, 93 Canal, Suez, 14 Capital, English runs where wanted, 13, 14
:

sudden demands for, 14

368
Capital, English

INDEX
continued organisation of, 15; loanable, 48; credit or surplus of loanable, 150, 151 rise of prices, 155
;

capital,

131;

German, 363 Cayley. Mr., 343, 347 Chancery funds, 308 Charles II., 95 Chevalier, M., 131

House system, 194, 195, 197, 309 Commerce, English democratic nature of, 9
Clearing
:

prompt

to seize

new

10; propensity to variation, 11; foreign complacing petition, 16 trade on borrowed capital, 16, 191 savings at interest, 135; beginning of companies, 136; the investing mania, 159 adventure, the Hfe of, 234

advantages,

Commons, House

of,

179

Companies, growth of trading, 135-138, 159


Consols, 62, 63, 66, 207, 333 Credit, organisation of, 21

soundness of, 22 best credit, 50 auxihary dealers in, 51, 52; 'instinctive confidence,' 71; varying nature of, 131 causes. 132 rise of prices and rise of credit, 140 checks to credit, 158 sustained by large reserve. 161 an opinion generated by circumstances, 325 cash and Currency (legal tender), 22, 23 limit of issue, 23-25 bullion,' 46, 47 supply of paper, 85, 86 automatic since Act of 1844, 163; reserve, 181 Bank of England notes and, 198
; ;

'

'

'

Deposits, known, 4

borrowable money,' 5 county savings, 12 bills in profitable trades, 13 pecuhar and distinct, 17 dangers attending, 18, 30 nature of foreign, 35 and banking, 78-89 savings bank, 32* growth of, 364 Discount, Office, 207 result of raising rate of, 326 Downing Street, 307 Dundee, Bank of, 86, 352
' ; ;
; ;

East India Company, 14, 134, 244, 307 Economist, the, 141, 164, 171, 175, 352 England, Bank of. See Bank Exchange, uncertain foreign, 81, 82 bills Exchequer, Chancellor of the, position
;

of,

286

the Money Market, 103-114: Government and banking, 104-106; deficiency bills, 108 Treasury bills, 108 evils of position, 109, no; Pitt's policy, 112; authority from the, 167; Sir George Lwis as, 255 ; Exchequer biUs, 53, 202, 203
in

Chapter IV.,

INDEX
France, Bank of, see Bank to Germany, 314
Frankfurter Zeitung, 363

369

banking

in, 78, 79, 2>y

war indemnity

'Gazette,' the, 293 Genoa, 9 bank of St. George, 80, 82 German banks, 363 Government and English banks, 310-319 Gerstenberg, Mr., 358
;

Gladstone, Mr., 168 Goschen, Mr. (afterwards Lord), 183 Government and the Money Market, 103-106 and Bank of Engof of Charles II., 95 land, see Bank of William III., 96 France and paper money, 93 Governors of the Bank of England, 187 election, 210 age, 211 ; Committee of Treasury, 213 change of office, 218 a perDeputy-Governor, 226 greatest manent Governor, 223 reform possible, 239 inclusion of bankers, 239 alteration of
;
;

constitution, 243, 334

Greenbacks, 23 Grundzuge der National-Oekonomie


'

'

(Wirth), 90

Hamburg, Bank
Hankey, Mr.,

of, 81,

82
\,

37, 171-175, i8(

208, 346, 348

Harman,

Mr., 53, 178

Holland, Launcelot, 352

Hudson's Bay Company, 224


Huskisson, Mr., 202

Hyam,

Mr., 355
securities,

India, 14, 184

Interest, not a universal idea, 132


;
;

Secretary of State as lender, 307 difficulty of investing at, 134, 135 the stockjobber, 135 low rate followed by rapid rise, 156 ; investing mania, 159 London and Paris rates, 183 Italy, earliest banks of, 80
;

207

James

II.,

96

Jevons, Professor, 141 Joint stock banks. See Banks Jones, Mr., 356

Laurie, P. N., 361 Law's failure in France, 93

-370

INDEX

Legal tender, 22, 23. See Currency Lewis, Sir George, 255, 256 Liabilities and cash reserve of chief banking systems, Appendix

I..

Z17-ZZ9

Lombard

Street,

i,

combination of power and deHcacy,


6,

4,

loans to foreign countries,


;

to British traders,
;

8,

17 the
;

great go-between, 11, 12 system, 17, 20 danger, single and many reserve systems, 69-73. 31
;

8,

30; reserves,

How
ITS

Chapter III., Lombard Street came to exist and why it assumed


:

present form, 77-102 growth and early history of banking, 77-81 remittances of money, 84 paper circulation of, 85-94 monarchical form of, 94 origin and history of the Bank of England, 94-102. Chapter V., The mode in which the value of money is settled in Lombard Street, i 15-123 the higgling of the market, 116 power of the Bank of England, 1 17-120; fluctuations of value, 121-123. Chapter VI., Why Lombard Street is often very dull and sometimes extremely excited, 1 24-1 6 1 time and element in trade operations, 126; partnership in industries, 127; general effect of depression, 128 case of agriculture, 129 causes of varying credit, 132 difficulty of investing at interest, 135 growth of companies, 135 'The Great Rise in the Price of Commodities (Bagehot, Economist, 1871), 142-150; expansion of industry, prosperity, true and apparent, 152-156 high prices and 151 fraud, 160 confidence importance of banking reserve, 161
; ; ; ;
:

'

in

Lombard
7,

Street, 323

relative position of,

Appendix

II.,

-i^^i

London,

14, 26, 28, 29, 30, 32,


;

n,

34, 35, 94, 107, 171, 197, 256,

County Council, 107 ; loan fund, 4, 15 ; London 259, 276, 312 London Banker,' as clearing house to foreign countries, 34
' ;

270 London and Westminster Bank, see Bank London Joint Stock Bank, 311, 315 Lowe, Mr., weekly Government account with the Bank of England, 308
;
;

Macaulay, Lord,
Merchant

94, 96, 133, 137

Macculloch, Mr., 15
princes, 9, 10, 11

Metropolitan Board of Works, 107 Money Market, the, concrete and real, r Money Market money, 5 beginning of modern, of England, 6 liabihties and means, 18 49 two maladies of, 50, 94 panics, 51-60 why England is a
;

great, 93.

Chapter

IV.,

Position of the Chancellor of


INDEX

371

Money Market continued THE Exchequer in the Money Market, 103-114: Government and its money, 103 and banks, 104-106 action in case
;

108; evils of system, 110-112; charmed life of Bank of England, 113 aid of State, 114; settlement of the fluctuation of prices, 142-150; value of money, 115-123 publication of Bank account gives bill brokers and, 292, 300 sensitive state not necessarily insecure, 336 stability to, 323
of collapse,
;

relative

position

of

London,

Appendix

II.,

363.

See

also

Bank
Murrieta

of England,

Lombard

Street

Moxon, Mr.,

&

356, 361 Co., Messrs., 19

National Debt, 96

New

York, 32
Co.,
18,
19,

Overend, Gurney &

167, 169,

185,

193, 221, 268,

275, 276, 286, 291, 301, 354, 359 Overstone, Lord, 252, 253

Panic, incipient, 51 species of neuralgia, 53; of 1825, 53, 201 ; problem of managing, 54, 55 strain on reserve of Bank of England, 59-68 classification of, 124 preparation for, 125 of 1866, 164, 167, 205 of 1857, 60, 169, 205 Bank of England and, 190, 193, 235, 318, 333 Clearing House during, 197 in 1844, 205 joint stock banks and, 267 brokers in time of, 294 recipe for, 322, 324, 336
;

Paris, 33, 34

Pearse, Mr., 177


Peel, Sir Robert, 43, 202, 203, Pitt, William, 112, 203

254

Act

of 1844, see

Act

Queen Elizabeth,
Queen
Victoria, 70
15, 21, 57

RiCARDO,

Richardson, Mr., 286-289, 292 Rothschild, Messrs., 214, 241


St.

Petersburg, 202 Salomons, Alderman, 169, 296


1858,

evidence before Select Committee,

Appendix

I.,

Note

B., 339, 358, 361

372

INDEX
;

bankers, 139; Savings, speculative investment of, 133-138 through in banks, 144 savings banks, 308, 322 excess deposited
;

Scotland, Royal

Bank of, 86 Smith, Adam, 81, 84, 116, 245, 246 Somerset House, 65 South Sea Bubble, 137, 159, 224
Spoon er, Mr., 348 Stock Exchange settlements, 195
Suez Canal, 14
'Times,' the, 186 Tocqueville, M. de. 14

Turgot, 93

United States,
Venice, 9
;

23

Bank
82

of,

220

Bank

of,

Watkins, Mr., 356 Wealth of Nations


'

(Smith), 84 Weguelin, Mr., 188, 255, 256, 340, 342, 34 Wellington, Duke of, 202
'

Whitmore, Mr., 178 William III., 96, 135

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