Lombard Street: A Description of the Money Market

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Title: Lombard Street: A Description of the Money Market

Author: Walter Bagehot

Release date: August 1, 2003 [eBook #4359]
Most recently updated: October 20, 2014

Language: English

Other information and formats: www.gutenberg.org/ebooks/4359

Credits: Produced by Edited by Charles Aldarondo

*** START OF THE PROJECT GUTENBERG EBOOK LOMBARD STREET: A DESCRIPTION OF THE MONEY MARKET ***

Produced by Edited by Charles Aldarondo (aldarondo@yahoo.com)

LOMBARD STREET

A Description of the Money Market.

By WALTER BAGEHOT

CHAPTER I.

Introductory.

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

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

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

London (31st December, 1872) 120,000,000 L
Paris (27th February, 1873) 13,000,000 L
New York (February, 1873) 40,000,000 L
German Empire (31st January, 1873) 8,000,000 L

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

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

The effect is seen constantly. We are asked to lend, and do lend,
vast sums, which it would be impossible to obtain elsewhere. It is
sometimes said that any foreign country can borrow in Lombard Street
at a price: some countries can borrow much cheaper than others; but
all, it is said, can have some money if they choose to pay enough
for it. Perhaps this is an exaggeration; but confined, as of course
it was meant to be, to civilised Governments, it is not much of an
exaggeration. There are very few civilised Governments that could
not borrow considerable sums of us if they choose, and most of them
seem more and more likely to choose. If any nation wants even to
make a railway--especially at all a poor nation--it is sure to come to
this country--to the country of banks--for the money. It is true that
English bankers are not themselves very great lenders to foreign
states. But they are great lenders to those who lend. They advance
on foreign stocks, as the phrase is, with 'a margin;' that is, they
find eighty per cent of the money, and the nominal lender finds the
rest. And it is in this way that vast works are achieved with
English aid which but for that aid would never have been planned.

In domestic enterprises it is the same. We have entirely lost the
idea that any undertaking likely to pay, and seen to be likely, can
perish for want of money; yet no idea was more familiar to our
ancestors, or is more common now in most countries. A citizen of
London in Queen Elizabeth's time could not have imagined our state
of mind. He would have thought that it was of no use inventing
railways (if he could have understood what a railway meant), for you
would not have been able to collect the capital with which to make
them. At this moment, in colonies and all rude countries, there is
no large sum of transferable money; there is no fund from which you
can borrow, and out of which you can make immense works. Taking the
world as a whole--either now or in the past--it is certain that in poor
states there is no spare money for new and great undertakings, and
that in most rich states the money is too scattered, and clings too
close to the hands of the owners, to be often obtainable in large
quantities for new purposes. A place like Lombard Street, where in
all but the rarest times money can be always obtained upon good
security or upon decent prospects of probable gain, is a luxury
which no country has ever enjoyed with even comparable equality
before.

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

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

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

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

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

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

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

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

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

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

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

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

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

I am by no means an alarmist. I believe that our system, though
curious and peculiar, may be worked safely; but if we wish so to
work it, we must study it. We must not think we have an easy task
when we have a difficult task, or that we are living in a natural
state when we are really living in an artificial one. Money will not
manage itself, and Lombard street has a great deal of money to
manage.

CHAPTER II.

A General View of Lombard Street.

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

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

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

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

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

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

ISSUE DEPARTMENT.

BANKING DEPARTMENT.

GEO. FORBES, Chief Cashier.

Dated the 30th December, 1869.

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

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

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

Public deposits 8,585,000 L
Private deposits 18,205,000 L
Seven-day and other bills 445,000 L
------------
Total 27,235,000 L

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is the natural desire of all directors to make a good dividend
for their shareholders. The more money lying idle the less,
_caeteris paribus_, is the dividend; the less money lying idle the
greater is the dividend. And at almost every meeting of the
proprietors of the Bank of England, there is a conversation on this
subject. Some proprietor says that he does not see why so much money
is kept idle, and hints that the dividend ought to be more.

Indeed, it cannot be wondered at that the Bank proprietors do not
quite like their position. Theirs is the oldest bank in the City,
but their profits do not increase, while those of other banks most
rapidly increase. In 1844, the dividend on the stock of the Bank of
England was 7 per cent, and the price of the stock itself 212; the
dividend now is 9 per cent, and the price of the stock 232. But in
the same time the shares of the London and Westminster Bank, in
spite of an addition of 100 per cent to the capital, have risen from
27 to 66, and the dividend from 6 per cent to 20 per cent. That the
Bank proprietors should not like to see other companies getting
richer than their company is only natural.

Some part of the lowness of the Bank dividend, and of the consequent
small value of Bank stock, is undoubtedly caused by the magnitude of
the Bank capital; but much of it is also due to the great amount of
unproductive cash--of cash which yields no interest--that the Banking
Department of the Bank of England keeps lying idle. If we compare
the London and Westminster Bank--which is the first of the joint-stock
banks in the public estimation and known to be very cautiously and
carefully managed--with the Bank of England, we shall see the
difference at once. The London and Westminster has only 13 per cent
of its liabilities lying idle. The Banking Department of the Bank of
England has over 40 per cent. So great a difference in the
management must cause, and does cause, a great difference in the
profits. Inevitably the shareholders of the Bank of England will
dislike this great difference; more or less, they will always urge
their directors to diminish (as far as possible) the unproductive
reserve, and to augment as far as possible their own dividend.

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

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

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

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

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

II.

Such a reserve as we have seen is kept to meet sudden and unexpected
demands. If the bankers of a country are asked for much more than is
commonly wanted, then this reserve must be resorted to. What then
are these extra demands? and how is this extra reserve to be used?
Speaking broadly, these extra demands are of two kinds--one from
abroad to meet foreign payments requisite to pay large and unusual
foreign debts, and the other from at home to meet sudden
apprehension or panic arising in any manner, rational or irrational.

No country has ever been so exposed as England to a foreign demand
on its banking reserve, not only because at present England is a
large borrower from foreign nations, but also (and much more)
because no nation has ever had a foreign trade of such magnitude, in
such varied objects, or so ramified through the world. The ordinary
foreign trade of a country requires no cash; the exports on one side
balance the imports on the other. But a sudden trade of import like
the import of foreign corn after a bad harvestor (what is much less
common, though there are cases of it) the cessation of any great
export, causes a balance to become due, which must be paid in cash.

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

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

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

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

Whatever persons--one bank or many banks--in any country hold the
banking reserve of that country, ought at the very beginning of an
unfavourable foreign exchange at once to raise the rate of interest,
so as to prevent their reserve from being diminished farther, and so
as to replenish it by imports of bullion.

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

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

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

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

A panic, in a word, is a species of neuralgia, and according to the
rules of science you must not starve it. The holders of the cash
reserve must be ready not only to keep it for their own liabilities,
but to advance it most freely for the liabilities of others. They
must lend to merchants, to minor bankers, to 'this man and that
man,' whenever the security is good. In wild periods of alarm, one
failure makes many, and the best way to prevent the derivative
failures is to arrest the primary failure which causes them. The way
in which the panic of 1825 was stopped by advancing money has been
described in so broad and graphic a way that the passage has become
classical. 'We lent it,' said Mr. Harman, on behalf of the Bank of
England, 'by every possible means and in modes we had never adopted
before; we took in stock on security, we purchased Exchequer bills,
we made advances on Exchequer bills, we not only discounted
outright, but we made advances on the deposit of bills of exchange
to an immense amount, in short, by every possible means consistent
with the safety of the Bank, and we were not on some occasions
over-nice. Seeing the dreadful state in which the public were, we
rendered every assistance in our power.' After a day or two of this
treatment, the entire panic subsided, and the 'City' was quite calm.

The problem of managing a panic must not be thought of as mainly a
'banking' problem. It is primarily a mercantile one. All merchants
are under liabilities; they have bills to meet soon, and they can
only pay those bills by discounting bills on other merchants. In
other words, all merchants are dependent on borrowing money, and
large merchants are dependent on borrowing much money. At the
slightest symptom of panic many merchants want to borrow more than
usual; they think they will supply themselves with the means of
meeting their bills while those means are still forthcoming. If the
bankers gratify the merchants, they must lend largely just when they
like it least; if they do not gratify them, there is a panic.

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

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

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

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

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

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

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

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

Who then is to pour in the new money? Certainly not the bill
brokers. They have been used to re-discount with such banks as the
London and Westminster millions of bills, and if they see that they
are not likely to be able to re-discount those bills, they instantly
protect themselves and do not discount them. Their business does not
allow them to keep much cash unemployed. They give interest for all
the money deposited with them--an interest often nearly approaching
the interest they can charge; as they can only keep a small reserve
a panic tells on them more quickly than on anyone else. They stop
their discounts, or much diminish their discounts, immediately.
There is no new money to be had from them, and the only place at
which they can have it is the Bank of England.

There is even a simpler case: the banker who is uncertain of his
credit, and wants to increase his cash, may have money on deposit at
the bill brokers. If he wants to replenish his reserve, he may ask
for it, suppose, just when the alarm is beginning. But if a great
number of persons do this very suddenly, the bill brokers will not
at once be able to pay without borrowing. They have excellent bills
in their case, but these will not be due for some days; and the
demand from the more or less alarmed bankers is for payment at once
and to-day. Accordingly the bill broker takes refuge at the Bank of
England the only place where at such a moment new money is to be
had.

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

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

If we remember that the liabilities of Lombard Street payable on
demand are far larger than those of any like market, and that the
liabilities of the country are greater still, we can conceive the
magnitude of the pressure on the Bank of England when both Lombard
Street and the country suddenly and at once come upon it for aid. No
other bank was ever exposed to a demand so formidable, for none ever
before kept the banking reserve for such a nation as the English.
The mode in which the Bank of England meets this great
responsibility is very curious. It unquestionably does make enormous
advances in every panic

In 1847 the loans on 'private securities'
increased from 18,963,000 L to 20,409,000 L
1857 ditto ditto 20,404,000 L to 31,350,000 L
1866 ditto ditto 18,507,000 L to 33,447,000 L

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

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

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

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

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

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

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

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

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

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

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

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

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

Secondly. The government of the Bank should be improved in a manner
to be explained. We should diminish the 'amateur' element; we should
augment the trained banking element; and we should ensure more
constancy in the administration.

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

But to explain these proposals, and to gain a full understanding of
many arguments that have been used, we must look more in detail at
the component parts of Lombard street, and at the curious set of
causes which have made it assume its present singular structure.

CHAPTER III.

How Lombard Street Came to Exist, and Why It Assumed Its Present
Form.

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

The real history is very different. New wants are mostly supplied by
adaptation, not by creation or foundation. Something having been
created to satisfy an extreme want, it is used to satisfy less
pressing wants, or to supply additional conveniences. On this
account, political Government--the oldest institution in the world--has
been the hardest worked. At the beginning of history, we find it
doing everything which society wants done, and forbidding everything
which society does not wish done. In trade, at present, the first
commerce in a new place is a general shop, which, beginning with
articles of real necessity, comes shortly to supply the oddest
accumulation of petty comforts. And the history of banking has been
the same. The first banks were not founded for our system of deposit
banking, or for anything like it. They were founded for much more
pressing reasons, and having been founded, they, or copies from
them, were applied to our modern uses.

The earliest banks of Italy, where the name began, were finance
companies. The Bank of St. George, at Genoa, and other banks founded
in imitation of it, were at first only companies to make loans to,
and float loans for, the Governments of the cities in which they
were formed. The want of money is an urgent want of Governments at
most periods, and seldom more urgent than it was in the tumultuous
Italian Republics of the Middle Ages. After these banks had been
long established, they began to do what we call banking business;
but at first they never thought of it. The great banks of the North
of Europe had their origin in a want still more curious. The notion
of its being a prime business of a bank to give good coin has passed
out of men's memories; but wherever it is felt, there is no want of
business more keen and urgent. Adam Smith describes it so admirably
that it would be stupid not to quote his words:--'The currency of a
great state, such as France or England, generally consists almost
entirely of its own coin. Should this currency, therefore, be at any
time worn, clipt, or otherwise degraded below its standard value,
the state by a reformation of its coin can effectually re-establish
its currency. But the currency of a small state, such as Genoa or
Hamburgh, can seldom consist altogether in its own coin, but must be
made up, in a great measure, of the coins of all the neighbouring
states with which its inhabitants have a continual intercourse. Such
a state, therefore, by reforming its coin, will not always be able
to reform its currency. If foreign bills of exchange are paid in
this currency, the uncertain value of any sum, of what is in its own
nature so uncertain, must render the exchange always very much
against such a state, its currency being, in all foreign states,
necessarily valued even below what it is worth.

'In order to remedy the inconvenience to which this disadvantageous
exchange must have subjected their merchants, such small states,
when they began to attend to the interest of trade, have frequently
enacted, that foreign bills of exchange of a certain value should be
paid, not in common currency, but by an order upon, or by a transfer
in, the books of a certain bank, established upon the credit, and
under the protection of the state, this bank being always obliged to
pay, in good and true money, exactly according to the standard of
the state. The banks of Venice, Genoa, Amsterdam, Hamburgh and
Nuremburg, seem to have been all originally established with this
view, though some of them may have afterwards been made subservient
to other purposes. The money of such banks, being better than the
common currency of the country, necessarily bore an agio, which was
greater or smaller, according as the currency was supposed to be
more or less degraded below the standard of the state. The agio of
the bank of Hamburgh, for example, which is said to be commonly
about fourteen per cent, is the supposed difference between the good
standard money of the state, and the clipt, worn, and diminished
currency poured into it from all the neighbouring states.

'Before 1609 the great quantity of clipt and worn foreign coin,
which the extensive trade of Amsterdam brought from all parts of
Europe, reduced the value of its currency about 9 per cent below
that of good money fresh from the mint. Such money no sooner
appeared than it was melted down or carried away, as it always is in
such circumstances. The merchants, with plenty of currency, could
not always find a sufficient quantity of good money to pay their
bills of exchange; and the value of those bills, in spite of several
regulations which were made to prevent it, became in a great measure
uncertain.

'In order to remedy these inconveniences, a bank was established in
1609 under the guarantee of the City. This bank received both
foreign coin, and the light and worn coin of the country at its real
intrinsic value in the good standard money of the country, deducting
only so much as was necessary for defraying the expense of coinage,
and the other necessary expense of management. For the value which
remained, after this small deduction was made, it gave a credit in
its books. This credit was called bank money, which, as it
represented money exactly according to the standard of the mint, was
always of the same real value, and intrinsically worth more than
current money. It was at the same time enacted, that all bills drawn
upon or negotiated at Amsterdam of the value of six hundred guilders
and upwards should be paid in bank money, which at once took away
all uncertainty in the value of those bills. Every merchant, in
consequence of this regulation, was obliged to keep an account with
the bank in order to pay his foreign bills of exchange, which
necessarily occasioned a certain demand for bank money.'

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

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

The experience of Germany is the same. The accounts preceding the
war in North Germany showed the circulation of the issuing banks to
be 39,875,000 L., and the deposits to be 6,472,000 L. while the
corresponding figures at the present moment are--circulation,
60,000,000 L. and deposits 8,000,000 L. It would be idle to multiply
Instances.

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

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

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

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

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

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

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

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

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

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

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

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

II.

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

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

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

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

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

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

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

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

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

CHAPTER IV.

The Position of the Chancellor of the Exchequer in the Money Market.

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

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

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

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

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

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

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

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

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

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

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

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

And this system has plain and grave evils.

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

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

3rdly. Because, our one reserve is, by the necessity of its nature,
given over to one board of directors, and we are therefore dependent
on the wisdom of that one only, and cannot, as in most trades,
strike an average of the wisdom and the folly, the discretion and
the indiscretion, of many competitors.

Lastly. Because that board of directors is, like every other board,
pressed on by its shareholders to make a high dividend, and
therefore to keep a small reserve, whereas the public interest
imperatively requires that they shall keep a large one.

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

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

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

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

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

CHAPTER V.

The Mode in Which the Value of Money is Settled in Lombard Street.

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

There is at bottom, however, no difficulty in the matter. The value
of money is settled, like that of all other commodities, by supply
and demand, and only the form is essentially different. In other
commodities all the large dealers fix their own price; they try to
underbid one another, and that keeps down the price; they try to get
as much as they can out of the buyer, and that keeps up the price.
Between the two what Adam Smith calls the higgling of the market
settles it. And this is the most simple and natural mode of doing
business, but it is not the only mode. If circumstances make it
convenient another may be adopted. A single large holder--especially
if he be by far the greatest holder--may fix his price, and other
dealers may say whether or not they will undersell him, or whether
or not they will ask more than he does. A very considerable holder
of an article may, for a time, vitally affect its value if he lay
down the minimum price which he will take, and obstinately adhere to
it. This is the way in which the value of money in Lombard Street is
settled. The Bank of England used to be a predominant, and is still
a most important, dealer in money. It lays down the least price at
which alone it will dispose of its stock, and this, for the most
part, enables other dealers to obtain that price, or something near
it.

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

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

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

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

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

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

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

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

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

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

CHAPTER VI.

Why Lombard Street is Often Very Dull, and Sometimes Extremely
Excited.

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

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

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

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

Secondly. That as every producer is mainly occupied in producing
what others want, and not what he wants himself, it is desirable
that he should always be able to find, without effort, without
delay, and without uncertainty, others who want what he can produce.

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

The general truth of these principles is obvious, but what is not
obvious is the extreme greatness of their effects. Taken together,
they make the whole difference between times of brisk trade and
great prosperity, and times of stagnant trade and great adversity,
so far as that prosperity and that adversity are real and not
illusory. If they are satisfied, everyone knows whom to work for,
and what to make, and he can get immediately in exchange what he
wants himself. There is no idle labour and no sluggish capital in
the whole community, and, in consequence, all which can be produced
is produced, the effectiveness of human industry is augmented, and
both kinds of producers--both capitalists and labourers--are much
richer than usual, because the amount to be divided between them is
also much greater than usual.

And there is a partnership in industries. No single large industry
can be depressed without injury to other industries; still less can
any great group of industries. Each industry when prosperous buys
and consumes the produce probably of most (certainly of very many)
other industries, and if industry A fail and is in difficulty,
industries B, and C, and D, which used to sell to it, will not be
able to sell that which they had produced in reliance on A's demand,
and in future they will stand idle till industry A recovers, because
in default of A there will be no one to buy the commodities which
they create. Then as industry B buys of C, D, &c., the adversity of
B tells on C, D, &c., and as these buy of E, F, &c., the effect is
propagated through the whole alphabet. And in a certain sense it
rebounds. Z feels the want caused by the diminished custom of A, B,
& C, and so it does not earn so much; in consequence, it cannot lay
out as much on the produce of A, B, & C, and so these do not earn as
much either. In all this money is but an instrument. The same thing
would happen equally well in a trade of barter, if a state of barter
on a very large scale were not practically impossible, on account of
the time and trouble which it would necessarily require. As has been
explained, the fundamental cause is that under a system in which
everyone is dependent on the labour of everyone else, the loss of
one spreads and multiplies through all, and spreads and multiplies
the faster the higher the previous perfection of the system of
divided labour, and the more nice and effectual the mode of
interchange. And the entire effect of a depression in any single
large trade requires a considerable time before it can be produced.
It has to be propagated, and to be returned through a variety of
industries, before it is complete. Short depressions, in
consequence, have scarcely any discernible consequences; they are
over before we think of their effects. It is only in the case of
continuous and considerable depressions that the cause is in action
long enough to produce discernible effects.

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

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

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

Nor is this the only changeable element in modern industrial
societies. Credit--the disposition of one man to trust another--is
singularly varying. In England, after a great calamity, everybody is
suspicious of everybody; as soon as that calamity is forgotten,
everybody again confides in everybody. On the Continent there has
been a stiff controversy as to whether credit should or should not
be called capital:' in England, even the little attention once paid
to abstract economics is now diverted, and no one cares in the least
for refined questions of this kind: the material practical point is
that, in M. Chevalier's language, credit is 'additive,' or
additional--that is, in times when credit is good productive power is
more efficient, and in times when credit is bad productive power is
less efficient. And the state of credit is thus influential, because
of the two principles which have just been explained. In a good
state of credit, goods lie on hand a much less time than when credit
is bad; sales are quicker; intermediate dealers borrow easily to
augment their trade, and so more and more goods are more quickly and
more easily transmitted from the producer to the consumer.

These two variable causes are causes of real prosperity. They
augment trade and production, and so are plainly beneficial, except
where by mistake the wrong things are produced, or where also by
mistake misplaced credit is given, and a man who cannot produce
anything which is wanted gets the produce of other people's labour
upon a false idea that he will produce it. But there is another
variable cause which produces far more of apparent than of real
prosperity and of which the effect is in actual life mostly confused
with those of the others.

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

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

The panic was forgotten till Lord Macaulay revived the memory of it.
But, in fact, in the South Sea Bubble, which has always been
remembered, the form was the same, only a little more extravagant;
the companies in that mania were for objects such as these:--' "Wrecks
to be fished for on the Irish Coast--Insurance of Horses and other
Cattle (two millions)--Insurance of Losses by Servants--To make Salt
Water Fresh--For building of Hospitals for Bastard Children--For
building of Ships against Pirates--For making of Oil from Sun-flower
Seeds--For improving of Malt Liquors--For recovery of Seamen's Wages--For
extracting of Silver from Lead--For the transmuting of Quicksilver
into a malleable and fine Metal--For making of Iron with Pit-coal--For
importing a Number of large Jack Asses from Spain--For trading in
Human Hair--For fatting of Hogs--For a Wheel of Perpetual Motion." But
the most strange of all, perhaps, was "For an Undertaking which
shall in due time be revealed." Each subscriber was to pay down two
guineas, and hereafter to receive a share of one hundred, with a
disclosure of the object; and so tempting was the offer, that 1,000
of these subscriptions were paid the same morning, with which the
projector went off in the afternoon.' In 1825 there were
speculations in companies nearly as wild, and just before 1866 there
were some of a like nature, though not equally extravagant. The fact
is, that the owners of savings not finding, in adequate quantities,
their usual kind of investments, rush into anything that promises
speciously, and when they find that these specious investments can
be disposed of at a high profit, they rush into them more and more.
The first taste is for high interest, but that taste soon becomes
secondary. There is a second appetite for large gains to be made by
selling the principal which is to yield the interest. So long as
such sales can be effected the mania continues; when it ceases to be
possible to effect them, ruin begins.

So long as the savings remain in possession of their owners, these
hazardous gamblings in speculative undertakings are almost the whole
effect of an excess of accumulation over tested investment. Little
effect is produced on the general trade of the country. The owners
of the savings are too scattered and far from the market to change
the majority of mercantile transactions. But when these savings come
to be lodged in the hands of bankers, a much wider result is
produced. Bankers are close to mercantile life; they are always
ready to lend on good mercantile securities; they wish to lend on
such securities a large part of the money entrusted to them. When,
therefore, the money so entrusted is unusually large, and when it
long continues so, the general trade of the country is, in the
course of time, changed. Bankers are daily more and more ready to
lend money to mercantile men; more is lent to such men; more
bargains are made in consequence; commodities are more sought after;
and, in consequence, prices rise more and more.

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

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

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

'THE GREAT RISE IN THE PRICE OF COMMODITIES.

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

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

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

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

In 1869 the home stock of sheep was 29,538,000
In 1871 27,133,000
----------
Diminution 2,405,000
Equal to 8.1 per cent

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

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

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

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

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

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

From that time it fell, and it was very cheap during the whole of
1869 and 1870. The effect of this cheapness is great in every
department of industry. The working classes, having cheaper food,
need to spend so much less on that food, and have more to spend on
other things. In consequence, there is a gentle augmentation of
demand through almost all departments of trade. And this almost
always causes a great augmentation in what may be called the
instrumental trades--that is, in the trades which deal in machines and
instruments used in many branches of commerce, and in the materials
for such. Take, for instance, the iron trade--

In the year 1869 we exported 2,568,000 tons
" 1870 " 2,716,000 tons
-------------- 5,284,000 tons
" 1867 " 1,881,000 tons
" 1868 " 1,944,000 tons
-------------- 3,826,000 tons
--------------
Increase 1,458,000 tons

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

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

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

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

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

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

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

This prosperity is precarious as far as it is real, and transitory
in so far as it is fictitious. The augmented production, which is
the reason of the real prosperity, depends on the full working of
the whole industrial organisation--of all capitalists and labourers;
that prosperity was caused by that full working, and will cease with
it. But that full working is liable to be destroyed by the
occurrence of any great misfortune to any considerable industry.
This would cause misfortune to the industries dependent on that one,
and, as has been explained, all through society and back again. But
every such industry is liable to grave fluctuations, and the most
important--the provision industries--to the gravest and the suddenest.
They are dependent on the casualties of the seasons. A single bad
harvest diffused over the world, a succession of two or three bad
harvests, even in England only, will raise the price of corn
exceedingly, and will keep it high. And a great and protracted rise
in the price of corn will at once destroy all the real part of the
unusual prosperity of previous good times. It will change the full
working of the industrial machine into an imperfect working; it will
make the produce of that machine less than usual instead of more
than usual; instead of there being more than the average of general
dividend to be distributed between the producers, there will
immediately be less than the average.

And in so far as the apparent prosperity is caused by an unusual
plentifulness of loanable capital and a consequent rise in prices,
that prosperity is not only liable to reaction, but certain to be
exposed to reaction. The same causes which generate this prosperity
will, after they have been acting a little longer, generate an
equivalent adversity. The process is this: the plentifulness of
loanable capital causes a rise of prices; that rise of prices makes
it necessary to have more loanable capital to carry on the same
trade. 100,000 L. will not buy as much when prices are high as it
will when prices are low, it will not be so effectual for carrying
on business; more money is necessary in dear times than in cheap
times to produce the same changes in the same commodities. Even
supposing trade to have remained stationary, a greater capital would
be required to carry it on after such a rise of prices as has been
described than was necessary before that rise. But in this case the
trade will not have remained stationary; it will have
increased--certainly to some extent, probably to a great extent. The
'loanable capital,' the lending of which caused the rise of prices,
was lent to enable it--to augment. The loanable capital lay idle in
the banks till some trade started into prosperity, and then was lent
in order to develope that trade; that trade caused other secondary
developments; those secondary developments enabled more loanable
capital to be lent; and that lending caused a tertiary development
of trade; and so on through society.

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

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

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

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

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

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

Now too that we comprehend the inevitable vicissitudes of Lombard
Street, we can also thoroughly comprehend the cardinal importance of
always retaining a great banking reserve. Whether the times of
adversity are well met or ill met depends far more on this than on
any other single circumstance. If the reserve be large, its
magnitude sustains credit; and if it be small, its diminution
stimulates the gravest apprehensions. And the better we comprehend
the importance of the banking reserve, the higher we shall estimate
the responsibility of those who keep it.

CHAPTER VII.

A More Exact Account of the Mode in Which the Bank of England
Has Discharged Its Duty of Retaining a Good Bank Reserve,
and of Administering It Effectually.

The preceding chapters have in some degree enabled us to appreciate
the importance of the duties which the Bank of England is bound to
discharge as to its banking reserve.

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

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

'THE GREAT IMPORTANCE OF THE LATE MEETING
OF THE PROPRIETORS OF THE BANK OF ENGLAND.

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

'This meeting may be considered to admit and recognise the fact

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