LOMBARD STREET

A Description of the Money Market.

by

WALTER BAGEHOT

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 1 844.  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 866.  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,⁽⁶⁾ and of which all that is most material was thus described in the ‘Economist’:

‘THE GREAT IMPORTANCE OF THE LATE MEETING

OF THE PROPRIETORS OF THE BANK OF ENGLAND.

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

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

‘But the late meeting is a complete admission that such is the fact.  The Governor of the Bank said:

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

‘Now this is distinctly saying that the other banks of the country need not keep any such banking reserve—any such sum of actual cash—of real sovereigns and bank notes, as will help them through a sudden panic.  It acknowledges a "duty" on the part of the Bank of England to "support the banking community," to make the reserve of the Bank of England do for them as well as for itself.

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

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

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

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

‘I consider it to be the undoubted duty of the Bank of England to hold its banking deposits (reserving generally about one-third in cash) in the most available securities; and in the event of a sudden pressure in the money market, by whatever circumstance it may be caused, to bear its full share of a drain on its resources.  I am ready to admit, however, that a general opinion has long prevailed that the Bank of England ought to be prepared to do much more than this, though I confess my surprise at finding an advocate for such an opinion in the "Economist."⁽⁷⁾ If it were practicable for the Bank to retain money unemployed to meet such an emergency, it would be a very unwise thing to do so.  But I contend that it is quite impracticable, and if it were possible, it would be most inexpedient; and I can only express my regret that the Bank, from a desire to do everything in its power to afford general assistance in times of banking or commercial distress, should ever have acted in a way to encourage such an opinion.  The more the conduct of the affairs of the Bank is made to assimilate to the conduct of every other well-managed bank in the United Kingdom, the better for the Bank, and the better for the community at large.’

I am scarcely a judge, but I do not think Mr. Hankey replies to the ‘Economist’ very conclusively.

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

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

Thirdly.  Mr. Hankey should have observed that we know by the published figures that the joint stock banks of London do not keep one-third, or anything like one-third, of their liabilities in ‘cash’ even meaning by ‘cash’ a deposit at the Bank of England.  One-third of the deposits in joint stock banks, not to speak of the private banks, would be 30,000,000l.; and the private deposits of the Bank of England are i 8,000,000l.  According to his own statement, there is a conspicuous contrast.  The joint stock banks, and the private banks, no doubt, too, keep one sort of reserve, and the Bank of England a different kind of reserve altogether.  Mr. Hankey says that the two ought to be managed on the same principle; but if so, he should have said whether he would assimilate the practice of the Bank of England to that of the other banks, or that of the other banks to the practice of the Bank of England.

Fourthly.  Mr. Hankey should have observed that, as has been explained, in most panics, the principal use of a ‘banking reserve’ is not to advance to bankers; the largest amount is almost always advanced to the mercantile public and to bill-brokers.  But the point is, that by our system all extra pressure is thrown upon the Bank of England.  In the worst part of the crisis of 866, 50,000l. ‘fresh money’ could not be borrowed, even on the best security—even on Consols except at the Bank of England.  There was no other lender to new borrowers.

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

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

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

‘Mr. Whitmore—I am so much of the same opinion, that I never think it necessary to advert to the price of gold, or the state of the exchange, on the days on which we make our advances.

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

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

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

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

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

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

On Dec.  24, 1824, the coin and bullion in the Bank was £10,721,000

On Dec.  25, 1825, it was reduced to £1,260,000

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

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

But since 1857 there has been a great improvement.  By painful events and incessant discussions, men of business have now been trained to see that a large banking reserve is necessary, and to understand that, in the curious constitution of the English banking world, the Bank of England is the only body which could effectually keep it.  They have never acknowledged the duty; some of them, as we have seen, deny the duty; still they have to a considerable extent begun to perform the duty.  The Bank directors, being experienced and able men of business, comprehended this like other men of business.  Since 1857 they have always kept, I do not say a sufficient banking reserve, but a fair and creditable banking reserve, and one altogether different from any which they kept before.  At one period the Bank directors even went farther: they made a distinct step in advance of the public intelligence; they adopted a particular mode of raising the rate of interest, which is far more efficient than any other mode.  Mr. Goschen observes, in his book on the Exchanges: ‘Between the rates in London and Paris, the expense of sending gold to and fro having been reduced to a minimum between the two cities, the difference can never be very great; but it must not be forgotten that,—the interest being taken at a percentage calculated per annum, and the probable profit having, when an operation in three-month bills is contemplated, to be divided by four, whereas the percentage of expense has to be wholly borne by the one transaction, a very slight expense becomes a great impediment.  If the cost is only ½ per cent, there must be a profit of 2 per cent in the rate of interest, or ½ per cent on three months, before any advantage commences; and thus, supposing that Paris capitalists calculate that they may send their gold over to England for ½ per cent expense, and chance their being so favoured by the Exchanges as to be able to draw it back without any cost at all, there must nevertheless be an excess of more than 2 per cent in the London rate of interest over that in Paris, before the operation of sending gold over from France, merely for the sake of the higher interest, will pay.’

Accordingly, Mr. Goschen recommended that the Bank of England should, as a rule, raise their rate by steps of 1 per cent at a time when the object of the rise was to affect the ‘foreign Exchanges.’ And the Bank of England, from 86o onward, have acted upon that principle.  Before that time they used to raise their rate almost always by steps of ½ per cent, and there was nothing in the general state of mercantile opinion to compel them to change their policy.  The change was, on the contrary, most unpopular.  On this occasion, and, as far as I know, on this occasion alone, the Bank of England made an excellent alteration of their policy, which was not exacted by contemporary opinion, and which was in advance of it.  The beneficial results of the improved policy of the Bank were palpable and speedy.  We were enabled by it to sustain the great drain of silver from Europe to India to pay for Indian cotton in the years between 18621865.  In the autumn of 1864 there was especial danger; but, by a rapid and able use of their new policy, the Bank of England maintained an adequate reserve, and preserved the country from calamities which, if we had looked only to precedent, would have seemed inevitable.  All the causes which produced the panic of 1857 were in action in 1864the drain of silver in 1864 and the preceding year was beyond comparison greater than in 1857 and the years before it—and yet in 1864 there was no panic.  The Bank of England was almost immediately rewarded for its adoption of right principles by finding that those principles, at a severe crisis, preserved public credit.

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

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

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

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

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

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

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

II.

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

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

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

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

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

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

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

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

The non-banking customers of the Bank of England would be discredited as well as other people; their cheques would not be taken any more than those of others; they would have to draw out banknotes, and the Bank reserve would not be enough for a tithe of such payments.

The matter would come shortly to this: a great number of brokers and dealers are under obligations to pay immense sums, and in common times they obtain these sums by the transfer of certain securities.  If, as we said just now, No.  1 has borrowed 50,0001.  of No.  2 on Exchequer bills, he, for the most part, cannot pay No.  z till he has sold or pledged those bills to some one else.  But till he has the bills he cannot pledge or sell them; and if No.  2 will not give them up till he gets his money, No.  1 will be ruined, because he cannot pay it.  And if No.  2 has No.  3 to pay, as is very likely, he may be ruined because of No.  1’s default, and No.  4 only on account of No.  3’s default; and so on without end.  On settling day, without the Clearing-house, there would be a mass of failures, and a bundle of securities.  The effect of these failures would be a general run on all bankers, and on the Bank of England particularly.

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

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

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

Nothing, therefore, can be more certain than that the Bank of England has in this respect no peculiar privilege; that it is simply in the position of a Bank keeping the Banking reserve of the country; that it must in time of panic do what all other similar banks must do; that in time of panic it must advance freely and vigorously to the public out of the reserve.

And with the Bank of England, as with other Banks in the same case, these advances, if they are to be made at all, should be made so as if possible to obtain the object for which they are made.  The end is to stay the panic; and the advances should, if possible, stay the panic.  And for this purpose there are two rules:—First.  That these loans should only be made at a very high rate of interest This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it.  The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.

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

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

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

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

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

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

‘They reluctantly consented, and rescued us from a very embarrassing predicament.’

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

After 1825, there was not again a real panic in the money market till 1847.  Both of the crises of 1837 and 1839 were severe, but neither terminated in a panic: both were arrested before the alarm reached its final intensity; in neither, therefore, could the policy of the Bank at the last stage of fear be tested.

In the three panics since 1844—in 1847, 1857, and 1866—the policy of the Bank has been more or less affected by the Act of 1844, and I cannot therefore discuss it fully within the limits which I have pre scribed for myself.  I can only state two things: First, that the directors of the Bank above all things maintain, that they have not been in the earlier stage of panic prevented by the Act of 1844 from making any advances which they would otherwise have then made.  Secondly, that in the last stage of panic, the Act of 1844 has been already suspended, rightly or wrongly, on these occasions; that no similar occasion has ever yet occurred in which it has not been suspended; and that, rightly or wrongly, the world confidently expects and relies that in all similar cases it will be suspended again.  Whatever theory may prescribe, the logic of facts seems peremptory so far.  And these principles taken together amount to saying that, by the doctrine of the directors, the Bank of England ought, as far as they can, to manage a panic with the Act of 1844, pretty much as they would manage one without it—in the early stage of the panic because then they are not fettered, and in the latter because then the fetter has been removed.

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

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

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

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

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

CHAPTER VIII.

The Government of the Bank of England.

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

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

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

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

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

By old usage, the directors of the Bank of England cannot be themselves by trade bankers.  This is a relic of old times.  Every bank was supposed to be necessarily, more or less, in opposition to every other bank—banks in the same place to be especially in opposition.  In consequence, in London, no banker has a chance of being a Bank director, or would ever think of attempting to be one.  I am here speaking of bankers in the English sense, and in the sense that would surprise a foreigner.  One of the Rothschilds is on the Bank direction, and a foreigner would be apt to think that they were bankers if any one was.  But this only illustrates the essential difference between our English notions of banking and the continental.  Ours have attained a much fuller development than theirs.  Messrs.  Rothschild are immense capitalists, having, doubtless, much borrowed money in their hands.  But they do not take 100 l, payable on demand, and pay it back in cheques of 5l. each, and that is our English banking.  The borrowed money which they have is in large sums, borrowed for terms more or less long.  English bankers deal with an aggregate of small sums, all of which are repayable on short notice, or on demand.  And the way the two employ their money is different also.  A foreigner thinks ‘an Exchange business’—that is, the buying and selling bills on foreign countries—a main part of banking.  As I have explained, remittance is one of the subsidiary conveniences which early banks subserve before deposit banking begins.  But the mass of English country bankers only give bills on places in England or on London, and in London the principal remittance business has escaped out of the hands of the bankers.  Most of them would not know how to carry through a great ‘Exchange operation,’ or to ‘bring home the returns.’ They would as soon think of turning silk merchants.  The Exchange trade is carried on by a small and special body of foreign bill-brokers, of whom Messrs.  Rothschild are the greatest.  One of that firm may, therefore, well be on the Bank direction, notwithstanding the rule forbidding bankers to be there, for he and his family are not English bankers, either by the terms on which they borrow money, or the mode in which they employ it.  But as to bankers in the English sense of the word, the rule is rigid and absolute.  Not only no private banker is a director of the Bank of England, but no director of any joint stock bank would be allowed to become such.  The two situations would be taken to be incompatible.

The mass of the Bank directors are merchants of experience, employing a considerable capital in trades in which they have been brought up, and with which they are well acquainted.  Many of them have information as to the present course of trade, and as to the character and wealth of merchants, which is most valuable, or rather is all but invaluable, to the Bank.  Many of them, too, are quiet, serious men, who, by habit and nature, watch with some kind of care every kind of business in which they are engaged, and give an anxious opinion on it.  Most of them have a good deal of leisure, for the life of a man of business who employs only his own capital, and employs it nearly always in the same way, is by no means fully employed.  Hardly any capital is enough to employ the principal partner’s time, and if such a man is very busy, it is a sign of something wrong.  Either he is working at detail, which subordinates would do better, and which he had better leave alone, or he is engaged in too many speculations, is incurring more liabilities than his capital will bear, and so may be ruined.  In consequence, every commercial city abounds in men who have great business ability and experience, who are not fully occupied, who wish to be occupied, and who are very glad to become directors of public companies in order to be occupied.  The direction of the Bank of England has, for many generations, been composed of such men.

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

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

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

Even if the Bank of England were an ordinary bank, such a constitution would be insufficient; but its inadequacy is greater, and the consequences of that inadequacy far worse, because of its greater functions.  The Bank of England has to keep the sole banking reserve of the country; has to keep it through all changes of the money market, and all turns of the Exchanges; has to decide on the instant in a panic what sort of advances should be made, to what amounts, and for what dates;—and yet it has a constitution plainly defective.  So far the government of the Bank of England being better than that of any other bank—as it ought to be, considering that its functions are much harder and graver—any one would be laughed at who proposed it as a model for the government of a new bank; and that government, if it were so proposed, would on all hands be called old-fashioned, and curious.

As was natural, the effects—good and evil—of its constitution are to be seen in every part of the Bank’s history.  On one vital point the Bank’s management has been excellent.  It has done perhaps less ‘bad business,’ certainly less very bad business, than any bank of the same size and the same age.  In all its history I do not know that its name has ever been connected with a single large and discreditable bad debt.  There has never been a suspicion that it was ‘worked’ for the benefit of any one man, or any combination of men.  The great respectability of the directors, and the steady attention many of them have always given the business of the Bank, have kept it entirely free from anything dishonorable and discreditable.  Steady merchants collected in council are an admirable judge of bills and securities.  They always know the questionable standing of dangerous persons; they are quick to note the smallest signs of corrupt transactions; and no sophistry will persuade the best of them out of their good instincts.  You could not have made the directors of the Bank of England do the sort of business which ‘Overends’ at last did, except by a moral miracle—except by changing their nature.  And the fatal career of the Bank of the United States would, under their management, have been equally impossible.  Of the ultimate solvency of the Bank of England, or of the eventual safety of its vast capital, even at the worst periods of its history, there has not been the least doubt.

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

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

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

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

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

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

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

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

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

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

An election so liable to be disturbed by powerful vitiating causes would rarely end in a good choice.  The best candidate would almost never be chosen; often, I fear, one would be chosen altogether unfit for a post so important.  And the excitement of so keen an election would altogether disturb the quiet of the Bank.  The good and efficient working of a board of Bank directors depends on its internal harmony, and that harmony would be broken for ever by the excitement, the sayings, and the acts of a great election.  The board of directors would almost certainly be demoralised by having to choose a sovereign, and there is no certainty, nor any great likelihood, indeed, that they would choose a good one.  In France the difficulty of finding a good body to choose the Governor of the Bank has been met characteristically.  The Bank of France keeps the money of the State, and the State appoints its governor.  The French have generally a logical reason to give for all they do, though perhaps the results of their actions are not always so good as the reasons for them.  The Governor of the Bank of France has not always, I am told, been a very competent person; the Sub-Governor, whom the State also appoints, is, as we might expect, usually better.  But for our English purposes it would be useless to inquire minutely into this.  No English statesman would consent to be responsible for the choice of the Governor of the Bank of England.  After every panic, the Opposition would say in Parliament that the calamity had been ‘grievously aggravated,’ if not wholly caused, by the ‘gross misconduct’ of the Governor appointed by the ministry.  Or, possibly, offices may have changed occupants and the ministry in power at the panic would be the opponents of the ministry which at a former time appointed the Governor.  In that case they would be apt to feel, and to intimate, a ‘grave regret’ at the course which the nominee of their adversaries had ‘thought it desirable to pursue.’ They would not much mind hurting his feelings, and if he resigned they would have themselves a valuable piece of patronage to confer on one of their own friends.  No result could be worse than that the conduct of the Bank and the management should be made a matter of party politics, and men of all parties would agree in this, even if they agreed in almost nothing else.

I am therefore afraid that we must abandon the plan of improving the government of the Bank of England by the appointment of a permanent Governor, because we should not be sure of choosing a good governor, and should indeed run a great risk, for the most part, of choosing a bad one.

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

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

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

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

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

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

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

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

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

An objection is also taken to the large number of Bank directors.  There are twenty-four directors, a Governor and a Deputy-Governor, making a total court of twenty-six persons, which is obviously too large for the real discussion of any difficult business.  And the case is worse because the court only meets once a week, and only sits a very short time.  It has been said, with exaggeration, but not without a basis of truth, that if the Bank directors were to sit for four hours, there would be ‘a panic solely from that.’ ‘The court,’ says Mr. Tooke, ‘meets at half-past eleven or twelve; and, if the sitting be prolonged beyond half-past one, the Stock Exchange and the money market become excited, under the idea that a change of importance is under discussion; and persons congregate about the doors of the Bank parlour to obtain the earliest intimation of the decision.’ And he proceeds to conjecture that the knowledge of the impatience without must cause haste, if not impatience, within.  That the decisions of such a court should be of incalculable importance is plainly very strange.

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

CHAPTER IX.

The Joint Stock Banks.

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

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

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

‘But the main source of the profitableness of established banking is the smallness of the requisite capital.  Being only wanted as a "moral influence," it need not be more than is necessary to secure that influence.  Although, therefore, a banker deals only with the most sure securities, and with those which yield the least interest, he can nevertheless gain and divide a very large profit upon his own capital, because the money in his hands is so much larger than that capital.

‘Experience, as shown by plain figures, confirms these conclusions.  We print at the end of this article the respective profits of I 10 banks in England, and Scotland, and Ireland, being all in those countries of which we have sufficient information—the Bank of England excepted.  There are no doubt others, but they are not quoted even on local Stock Exchange lists, and in most cases publish no reports.  The result of these banks, as regards the dividends they pay, is

that is to say, above 25 per cent of the capital employed in these banks pays over 15 per cent, and 62 ½ per cent of the capital pays more than 10 per cent.  So striking a result is not to be shown in any other joint stock trade.

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

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

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

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

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

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

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

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

This success of Joint Stock Banking is very contrary to the general expectation at its origin.  Not only private bankers, such as Lord Overstone then was, but a great number of thinking persons feared that the joint stock banks would fast ruin themselves, and then cause a collapse and panic in the country.  The whole of English commercial literature between 1830 and 1840 is filled with that idea.  Nor did it cease in 1840.  So late as 1845, Sir R.  Peel thought the foundation of joint stock banks so dangerous that he subjected it to grave and exceptional difficulty.  Under the Act of 1845, which he proposed, no such companies could be founded except with shares of 100l. with 50l.; paid up on each; which effectually checked the progress of such banks, for few new ones were established for many years, or till that act had been repealed.  But in this, as in many other cases, perhaps Sir R.  Peel will be found to have been clear-sighted rather than far-sighted.  He was afraid of certain joint stock banks which he saw rising around him; but the effect of his legislation was to give to these very banks, if not a monopoly, at any rate an exemption from new rivals.  No one now founds or can found a new private bank, and Sir R.  Peel by law prevented new joint stock banks from being established.  Though he was exceedingly distrustful of the joint stock banks founded between 1826 and 1845, yet in fact he was their especial patron, and he more than any other man encouraged and protected them.

But in this wonderful success there are two dubious points, two considerations of different kinds, which forbid us to say that in other countries, even in countries with the capacity of co-operation, joint stock banks would succeed as well as we have seen that they succeed in England.  1st.  These great Banks have not had to keep so large a reserve against their liabilities as it was natural that they should, being of first-rate magnitude, keep.  They were at first, of course, very small in comparison with what they are now.  They found a number of private bankers grouped round the Bank of England, and they added themselves to the group.  Not only did they keep their reserve from the beginning at the Bank of England, but they did not keep so much reserve as they would have kept if there had been no Bank of England.  For a long time this was hardly noticed.  For many years questions of the ‘currency,’ particularly questions as to the Act of 1844, engrossed the attention of all who were occupied with these subjects.  Even those who were most anxious to speak evil of joint stock banks, did not mention this particular evil.  The first time, as far as I know, that it was commented on in any important document, was in an official letter written in 1857 by Mr. Weguelin, who was then Governor of the Bank, to Sir George Lewis, who was then Chancellor of the Exchequer.  The Governor and the Directors of the Bank of England had been asked by Sir George Lewis severally to give their opinions on the Act of 1 844, and all their replies were published.  In his, Mr. Weguelin says:

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

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

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

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

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

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

Nor, even if it were possible really to supervise a business by the effectual and constant inspection of fifteen or sixteen rich and capable persons, would even the largest business easily bear the expense of such a supervision.  I say rich, because the members of a board governing a large bank must be men of standing and note besides, or they would discredit the bank; they need not be rich in the sense of being worth millions, but they must be known to possess a fair amount of capital and be seen to be transacting a fair quantity of business.  But the labour of such persons, I do not say their spare powers, but their principal energies, fetches a high price.  Business is really a profession often requiring for its practice quite as much knowledge, and quite as much skill, as law and medicine; and requiring also the possession of money.  A thorough man of business, employing a fair capital in a trade, which he thoroughly comprehends, not only earns a profit on that capital, but really makes of his professional skill a large income.  He has a revenue from talent as well as from money; and to induce sixteen or eighteen persons to abandon such a position and such an income in order to devote their entire attention to the affairs of a joint stock company, a salary must be given too large for the bank to pay or for anyone to wish to propose.

And an effectual supervision by the whole board being impossible, there is a great risk that the whole business may fall to the general manager.  Many unhappy cases have proved this to be very dangerous.  Even when the business of joint stock banks was far less, and when the deposits entrusted to them were very much smaller, a manager sometimes committed frauds which were dangerous, and still oftener made mistakes that were ruinous.  Actual crime will always be rare; but, as an uninspected manager of a great bank has the control of untold millions, sometimes we must expect to see it: the magnitude of the temptation will occasionally prevail over the feebleness of human nature.  But error is far more formidable than fraud: the mistakes of a sanguine manager are, far more to be dreaded than the theft of a dishonest manager.  Easy misconception is far more common than long-sighted deceit.  And the losses to which an adventurous and plausible manager, in complete good faith, would readily commit a bank, are beyond comparison greater than any which a fraudulent manager would be able to conceal, even with the utmost ingenuity.  If the losses by mistake in banking and the losses by fraud were put side by side, those by mistake would be incomparably the greater.  There is no more unsafe government for a bank than that of an eager and active manager, subject only to the supervision of a numerous board of directors, even though that board be excellent, for the manager may easily glide into dangerous and insecure transactions, nor can the board effectually check him.

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

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

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

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

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

CHAPTER X.

The Private Banks.

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

I can imagine nothing better in theory or more successful in practice than private banks as they were in the beginning.  A man of known wealth, known integrity, and known ability is largely entrusted with the money of his neighbours.  The confidence is strictly personal.  His neighbours know him, and trust him because they know him.  They see daily his manner of life, and judge from it that their confidence is deserved.  In rural districts, and in former times, it was difficult for a man to ruin himself except at the place in which he lived; for the most part he spent his money there, and speculated there if he speculated at all.  Those who lived there also would soon see if he was acting in a manner to shake their confidence.  Even in large cities, as cities then were, it was possible for most persons to ascertain with fair certainty the real position of conspicuous persons, and to learn all which was material in fixing their credit.  Accordingly the bankers who for a long series of years passed successfully this strict and continual investigation, became very wealthy and very powerful.

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

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

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

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

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

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

Sooner or later, appearances indicate, and principle suggests, that the business of Lombard Street will be divided between the joint stock banks and a few large private banks.  And then we have to ask ourselves the question, can those large private banks be permanent ?  I am sure I should be very sorry to say that they certainly cannot, but at the same time I cannot be blind to the grave difficulties which they must surmount.

In the first place, an hereditary business of great magnitude is dangerous.  The management of such a business needs more than common industry and more than common ability.  But there is no security at all that these will be regularly continued in each generation.  The case of Overend, Gurney and Co., the model instance of all evil in business, is a most alarming example of this evil.  No cleverer men of business probably (cleverer I mean for the purposes of their particular calling) could well be found than the founders and first managers of that house.  But in a very few years the rule in it passed to a generation whose folly surpassed the usual limit of imaginable incapacity.  In a short time they substituted ruin for prosperity and changed opulence into insolvency.  Such great folly is happily rare; and the business of a bank is not nearly as difficult as the business of a discount company.  Still much folly is common, and the business of a great bank requires a great deal of ability, and an even rarer degree of trained and sober judgment.  That which happened so marvelously in the green tree may happen also in the dry.  A great private bank might easily become very rotten by a change from discretion to foolishness in those who conduct it.

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

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

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

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

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

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

CHAPTER XI.

The Bill-Brokers.

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

Many stock brokers transact such business upon a great scale.  They lend large sums on foreign bonds or railway shares or other such securities, and borrow those sums from bankers, depositing the securities with the bankers, and generally, though not always, giving their guarantee.  But by far the greatest of these intermediate dealers are the bill-brokers.  Mercantile bills are an exceedingly difficult kind of security to understand.  The relative credit of different merchants is a great ‘tradition’; it is a large mass of most valuable knowledge which has never been described in books and is probably incapable of being so described.  The subject matter of it, too, is shifting and changing daily; an accurate representation of the trustworthiness of houses at the beginning of a year might easily be a most fatal representation at the end of it.  In all years there are great changes; some houses rise a good deal and some fall.  And in some particular years the changes are immense; in years like 1871 many active men make so much money that at the end of the year they are worthy of altogether greater credit than anyone would have dreamed of giving to them at the beginning.  On the other hand, in years like i866 a contagious ruin destroys the trustworthiness of very many firms and persons, and often, especially, of many who stood highest immediately before.  Such years alter altogether an important part of the mercantile world: the final question of bill-brokers, ‘which bills will be paid and which will not ? which bills are second-rate and which first-rate ?’ would be answered very differently at the beginning of the year and at the end.  No one can be a good bill-broker who has not learnt the great mercantile tradition of what is called ‘the standing of parties" and who does not watch personally and incessantly the inevitable changes which from hour to hour impair the truth of that tradition.  The credit’ of a person—that is, the reliance which may be placed on his pecuniary fidelity—is a different thing from his property.  No doubt, other things being equal, a rich man is more likely to pay than a poor man.  But on the other hand, there are many men not of much wealth who are trusted in the market, ‘as a matter of business,’ for sums much exceeding the wealth of those who are many times richer.  A firm or a person who have been long known to ‘meet their engagements,’ inspire a degree of confidence not dependent on the quantity of his or their property.  Persons who buy to sell again soon are often liable for amounts altogether much greater than their own capital; and the power of obtaining those sums depends upon their ‘respectability,’ their ‘standing,’ and their ‘credit,’ as the technical terms express it, and more simply upon the opinion which those who deal with them have formed of them.  The principal mode in which money is raised by traders is by ‘bills of exchange;’ the estimated certainty of their paying those bills on the day they fall due is the measure of their credit; and those who estimate that liability best, the only persons indeed who can estimate it exceedingly well, are the bill-brokers.  And these dealers, taking advantage of their peculiar knowledge, borrow immense sums from bankers and others; they generally deposit the bills as a security; and they generally give their own guarantee of the goodness of the bill: but neither of such practices indeed is essential, though both are the ordinary rule.  When Overends failed, as I have said before, they had borrowed in this way very largely.  There are others now in the trade who have borrowed quite as much.

As is usually the case, this kind of business has grown up only gradually.  In the year 1810 there was no such business precisely answering to what we now call bill-broking in London.  Mr. Richardson, the principal ‘bill-broker’ of the time, as the term was then understood, thus described his business to the ‘Bullion Committee:’

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

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

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

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

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

Mr. Richardson was only a broker who found money for bills and bills for money.  He is further asked:

‘Do you guarantee the bills you discount, and what is your charge per cent ?—No, we do not guarantee them; our charge is one-eighth per cent brokerage upon the bill discounted—but we make no charge to the lender of the money.

‘Do you consider that brokerage as a compensation for the skill which you exercise in selecting the bills which you thus get discounted ?—Yes, for selecting of the bills, writing letters, and other trouble.

‘Does the party who furnishes the money give you any kind of compensation ?—None at all.

‘Does he not consider you as his agent, and in some degree responsible for the safety of the bills which you give him ?—Not at all.

‘Does he not prefer you on the score of his judging that you will give him good intelligence upon that subject ?—Yes, he relies upon us.

‘Do you then exercise a discretion as to the probable safety of the bills ?—Yes; if a bill comes to us which we conceive not to be safe, we return it.

‘Do you not then conceive yourselves to depend in a great measure for the quantity of business which you can perform on the favour of the party lending the money ?—Yes, very much so.  If we manage our business well, we retain our friends; if we do not, we lose them.’

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

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

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

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

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

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

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

Nor probably would the demands on the bill-brokers in such a system of banking be exceedingly formidable.  Considerable sums would no doubt be drawn from them, but there would be no special reason why money should be demanded from them more than from any other money dealers.  They would share the panic with the bankers who kept the reserve, but they would not feel it more than the bankers.  In each crisis the set of the storm would be determined by the cause which had excited it, but there would not be anything in the nature of bill-broking to attract the advance of the alarm peculiarly to them.  They would not be more likely to suffer than other persons; the only difference would be that when they did suffer, having no adequate reserve of their own, they would be obliged to ask the aid of others.

But under a one-reserve system of banking, the position of the bill-brokers is much more singular and much more precarious.  In fact, in Lombard Street, the principal depositors of the bill-brokers are the bankers, whether of London, or of provincial England, or of Scotland, or Ireland.  Such deposits are, in fact, a portion of the reserve of these bankers; they make an essential part of the sums which they have provided and laid by against a panic.  Accordingly, in every panic these sums are sure to be called in from the bill-brokers; they were wanted to be used by their owners in time of panic, and in time of panic they ask for them.  ‘Perhaps it may be interesting,’ said Alderman Salomons, speaking on behalf of the London and Westminster Bank, after the panic of 1857, to the committee, ‘to know that, on November 11, we held discounted bills for brokers to the amount of 5,623,0001.  Out of these bills 2,800,000l. matured between November 1 and December 4; 2,000,000l. more between December 1 and December 31; consequently we were prepared merely by the maturing of our bills of exchange for any demand that might come upon us.’ This is not indeed a direct withdrawal of money on deposit, but its principal effect is identical.  At the beginning of the time the London and Westminster Bank had lent 5,000,000l. more to the bill-brokers than they had at the end of it; and that 5,000,000l. the bank had added to its reserve against a time of difficulty.

The intensity of the demand on the bill-broker is aggravated therefore by our peculiar system of banking.  Just at the moment when, by the nature of their business, they have to resort to the reserves of bankers for necessary support, the bankers remove from them large sums in order to strengthen those reserves.  A great additional strain is thrown upon them just at the moment when they are least able to bear it; and it is thrown by those who under a natural system of banking would not aggravate the pressure on the bill-brokers, but relieve it.

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

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

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

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

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

CHAPTER XII.

The Principles Which Should Regulate the Amount of the Banking Reserve to Be Kept by the Bank of England.

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

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

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

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

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

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

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

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

First, the German Government had a large balance of its own lying at a particular Joint Stock Bank.  That bank lent this balance at its own discretion, to bill-brokers or others, and it formed a single item in the general funds of the London market.  There was nothing special about it, except that it belonged to a foreign government, and that its owner was always likely to call it in, and sometimes did so.  As long as it stayed unlent in the London Joint Stock Bank, it increased the balances of that bank at the Bank of England; but so soon as it was lent, say, to a bill-broker, it increased the bill-broker’s balance; and as soon as it was employed by the bill-broker in the discount of bills, the owners of those bills paid it to their credit at their separate banks, and it augmented the balances of those bankers at the Bank of England.  Of course if it were employed in the discount of bills belonging to foreigners, the money might be taken abroad, and by similar operations it might also be transferred to the English provinces or to Scotland.  But, as a rule, such money when deposited in London, for a considerable time remains in London; and so long as it does so, it swells the aggregate balances of the body of bankers at the Bank of England.  It is now in the balance of one bank, now of another, but it is always dispersed about those balances somewhere.  The evident consequence is that this part of the bankers’ balances is at the mercy of the German Government when it chooses to apply for it.  Supposing, then, the sum to be three or four millions and I believe that on more than one occasion in the last year or two it has been quite as much, if not morethat sum might at once be withdrawn from the Bank of England.  In this case the Bank of England is in the position of a banker who is liable for a large amount to a single customer, but with this addition, that it is liable for an unknown amount.  The German Government, as is well known, keeps its account (and a very valuable one it must be) at the London Joint Stock Bank; but the Bank of England has no access to the account of the German Government at that bank; they cannot tell how much German money is lying to the credit there.  Nor can the Bank of England infer much from the balance of the London Joint Stock Bank in their Bank, for the German money was probably paid in various sums to that bank, and lent out again in other various sums.  It might to some extent augment that bank’s balance at the Bank of England, or it might not, but it certainly would not be so much added to that balance; and inspection of that bank’s balance would not enable the Bank of England to determine even in the vaguest manner what the entire sum was for which it might be asked at any moment.  Nor would the inspection of the bankers’ balances as a whole lead to any certain and sure conclusions.  Something might be inferred from them, but not anything certain.  Those balances are no doubt in a state of constant fluctuation; and very possibly during the time that the German money was coming in some other might be going out.  Any sudden increase in the bankers’ balances would be a probable indication of new foreign money, but new foreign money might come in without causing an increase, since some other and contemporaneous cause might effect a counteracting decrease.

This is the first, and the plainest way in which the German Government could take, and did take, money from this country; and in which it might have broken the Bank of England if it had liked.  The German Government had money here and took it away, which is very easy to understand.  But the Government also possessed a far greater power, of a somewhat more complex kind.  It was the owner of many debts from England.  A large part of the ‘indemnity’ was paid by France to Germany in bills on England, and the German Government, as those bills became due, acquired an unprecedented command over the market.  As each bill arrived at maturity, the German Government could, if it chose, take the proceeds abroad; and it could do so in bullion, as for coinage purposes it wanted bullion.  This would at first naturally cause a reduction in the bankers’ balances; at least that would be its tendency.  Supposing the German Government to hold bill A, a good bill, the banker at whose bank bill A was payable would have to pay it; and that would reduce his balance; and as the sum so paid would go to Germany, it would not appear to the credit of any other banker: the aggregate of the bankers’ balances would thus be reduced.  But this reduction would not be permanent.  A banker who has to pay 100,000l. cannot afford to reduce his balance at the Bank of England 100,000l.; suppose that his liabilities are 2,000,000l., and that as a rule he finds it necessary to keep at the Bank one-tenth of these liabilities, or 200,000l., the payment of 100,000l. would reduce his reserve to 100,000l.; but his liabilities would be still 1,900,000 l, and therefore to keep up his tenth he would have 90,000l. to find.  His process for finding it is this: he calls in, say, a loan to the bill-brokers; and if no equal additional money is contemporaneously carried to these brokers (which in the case of a large withdrawal of foreign money is not probable), they must reduce their business and discount less.  But the effect of this is to throw additional business on the Bank of England.  They hold the ultimate reserve of the country, and they must discount out of it if no one else will: if they declined to do so there would be panic and collapse.  As soon, therefore, as the withdrawal of the German money reduces the bankers’ balances, there is a new demand on the Bank for fresh discounts to make up those balances.  The drain on the Bank is twofold: first, the banking reserve is reduced by exportation of the German money, which reduces the means of the Bank of England; and then out of those reduced means the Bank of England has to make greater advances.

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

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

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

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

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

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

And no indication of the likelihood or unlikelihood of that want can be found in the books of the Bank of England.

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

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

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

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

But that object is not attained if the amount of that reserve when so published is not enough to tranquillise people.  A panic is sure to be caused if that reserve is, from whatever cause, exceedingly low.  At every moment there is a certain minimum which I will call the apprehension minimum,’ below which the reserve cannot fall without great risk of diffused fear; and by this I do not mean absolute panic, but only a vague fright and timorousness which spreads itself instantly, and as if by magic, over the public mind.  Such seasons of incipient alarm are exceedingly dangerous, because they beget the calamities they dread.  What is most feared at such moments of susceptibility is the destruction of credit; and if any grave failure or bad event happens at such moments, the public fancy seizes on it, there is a general run, and credit is suspended.  The Bank reserve then never ought to be diminished below the ‘apprehension point.’ And this is as much as to say, that it never ought very closely to approach that point; since, if it gets very near, some accident may easily bring it down to that point and cause the evil that is feared.

There is no ‘royal road’ to the amount of the ‘apprehension minimum’: no abstract argument, and no mathematical computation will teach it to us.  And we cannot expect that they should.  Credit is an opinion generated by circumstances and varying with those circumstances.  The state of credit at any particular time is a matter of fact only to be ascertained like other matters of fact; it can only be known by trial and inquiry.  And in the same way, nothing but experience can tell us what amount of ‘reserve’ will create a diffused confidence; on such a subject there is no way of arriving at a just conclusion except by incessantly watching the public mind, and seeing at each juncture how it is affected.

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

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

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

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

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

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

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

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

CHAPTER XIII.

Conclusion.

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

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

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

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

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

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

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

APPENDIX.

Note A.

Liabilities and Cash Reserve of the Chief Banking Systems.

The following is a comparison of the liabilities to the public, and of the cash reserve, of the banking systems of the United Kingdom, France, Germany, and the United States.  For the United Kingdom the figures are the most defective, as they only include the deposits of the Bank of England, and of the London joint stock banks, and the banking reserve of the Bank of England, which is the only cash available against these liabilities is also the only cash reserve against the similar liabilities of the London private banks, the provincial English banks, and the Scotch and Irish banks.  In the case of England, therefore, the method of comparison exhibits a larger proportion of cash to liabilities than what really exists.  (1) ENGLISH BANKING.

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

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

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

Liabilities
Circulation	£ 110,000,000
Deposits	£ 15,000,000
Total liabilities	£ 125,000,000
Reserve of Cash.
Coin and bullion in hand	£ 32,000,000

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

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

Liabilities
Circulation	£ 63,000,000
Deposits	£ 8,000,000
Acceptances and Indorsements	£ 17,000,000
Total liabilities	£ 88,000,000
Reserves of Cash
Cash in Hand	£ 41,000,000

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

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

Liabilities
Circulation	£ 67,000,000
Deposits	£ 145,000,000
Total liabilities	£ 212,000,000
Reserve of Cash
Coin and legal tenders in hand	£ 26,000,000

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

SUMMARY

	Liabilities to the public	Cash held	Proportion of cash to liabilities per cent
Bank of England and London Joint Stock Banks	120,000,000	13,500,000	11.2
Bank of France	125,000,000	32,000,000	25.0
Banks of Germany	88,000,000	41,000,000	47.0
National Banks of United States .	212,000,000	26,000,000	12.3

Note B.

Extract from Evidence Given by Mr. Alderman Salomons before House of Commons Select Committee in 1858

1146.  Chairman.] The effect upon yourselves of the pressure in November was, I presume, to induce you to increase your reserve in your own hands, and also to increase your deposits with the Bank of England—’Yes, that was so; but I wish to tell the Committee that that was done almost entirely by allowing the bills of exchange which we held to mature, and not by raising any money, or curtailing our accommodation to our customers.  Perhaps it may be interesting to the Committee to know that on the 11th of November we held discounted bills for brokers to the amount of 5,623,000l.  Out of those bills, 2,800,000l. matured between the 11th of November and the 4th of December, and 2,000,0001.  more between the 4th of December and the 3 1st.  So that about 5,000,000l. of bills matured between the 1 1th of November and the 31st of December; consequently we were prepared, merely by the maturing of our bills of exchange, for any demands that might possibly come upon us.

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

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

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

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

1151.  Or to give the same amount to the bill-broker ?—For a while, instead of discounting for brokers and strangers, we allowed our bills to mature, and remained quiescent with a view to enable us to meet any demand that might be made on ourselves.

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

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

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

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

1156.  Mr. Weguelin.] In fact, it was used by the Bank of England ?  Undoubtedly; I should suppose so; there is no question about it.

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

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

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

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

1161.  Mr. Weguelin.] I refer not to the convertibility of the note, but to the state of the Banking Department of the Bank of England ?—If we had thought that there was any doubt whatever about it, we should have taken our bank-notes and put them in our own strong chest.  We could never for a moment believe an event of that kind as likely to happen.

1162.  Therefore you think that the measure taken by the Government, of issuing a letter authorising the Bank of England to increase their issues of notes upon securities, was what was generally expected by the commercial world, and what in future the commercial world would look to in such a conjunction of circumstances ?—We looked for some measure of that nature.  That, no doubt, was the most obvious one.  We had great doubts whether it would come when it did, until the very last moment.

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

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

1165.  Is that from a feeling that it is rather dangerous under particular circumstances ?—I cannot admit as to its being dangerous, but there can be no doubt of this, that there is a notion in the public mind which we ought not to contend against, that when you offer a high rate of interest for money, you rather do it because you want the person’s money, than because you are obeying the market rate; and I think it is desirable that we should show that if persons wish to employ their money, and want an excessive rate, they may take it away and employ it themselves.

1166.  You think that there is now a general understanding amongst the banks which you have mentioned, to act upon a different principle from that on which they acted during last October and November ?—I think I may say that I know that to be the case.

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

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

1169.  At a smaller rate than upon their deposits, I presume ?—I think at a smaller rate, but I believe it is a fixed rate on the minimum balance for some period, either six months or one month, I do not exactly know the period.  I think I ought to add (and I believe it is the case with all the banks) that the London and Westminster Bank, from the day of its first institution until the present day, has never re-discounted a bill.  No bill has ever left our bank unless it has been for payment.

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

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

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

1173.  Is not that equivalent to a re-discount of bills ?—No; the discount of a bill and the lending money on bills are very different things.  When we discount a bill, that bill becomes our property; it is in our control, and we keep it and lock it up until it falls due; but when brokers come to us and want to borrow, say 50,000l. on a deposit of bills, and we let them have the money and afterwards return those bills to them and we get back our money, surely that is not a re-discount.

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

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

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

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

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

1179.  Mr. Cayley.] The late Chancellor of the Exchequer stated before the adjournment, in a speech in the House of Commons, that during the Monday, Tuesday, Wednesday, and Thursday of the panic, the Bank was almost, if not entirely, the only body that discounted commercial bills; how can you reconcile that with what you have said, that you gave as much accommodation as usual to your customers ?—I am not responsible for what the Chancellor of the Exchequer said; I am responsible for what I am now stating as to the course of our bank, that our advances to our customers on the 31st of December were nearly 500,0001.  higher than they were on the 1st of October.  With regard to our not discounting for other parties, it was in consequence of the discredit which prevailed, that it was necessary we should hold a portion of our deposits in order that they should be available in case persons called for them; a certain number of persons did so; in the month of November we had a reduction of our deposits, and if we had gone on discounting for brokers we should have had to go into the market ourselves to raise money on our Government securities, but we avoided that by not discounting, and leaving our money at the Bank of England.

i8o.  Then you did not discount as much as usual for your customers during that period ?—Yes.  we did, and more.

1181.  But not to strangers ?—Not to strangers; I make a distinction between our transactions with our customers, who of course expect us to give accommodation, and discounts for brokers, which is entirely voluntary, depending upon our having money to employ.

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

1183.  What do you mean by that general expression of yours ?—It is impossible to predicate what may happen in time of panic and alarm.  A great alarm prevailed certainly amongst the commercial world, and it could never have been alleviated, except by some extraordinary means of relief.  We might probably have been in the state in which Hamburg was, where they have no bank-notes in circulation.

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

1185.  Cannot you tell us what your opinion would have been, if that last moment had happened to have elapsed, and the letter had not come ?  It is very difficult to say; it is too much to say that it could not have been got over.  There can be no doubt whatever that what created the difficulty existed out of London, and not in it; and therefore it is much more difficult for me to give an opinion.  I believe that the banking interest, both private and joint stock, was in a perfectly sound condition, and able to bear any strain which might have been brought upon it in London.

1186.  Mr. Han key.] Can you give the Committee any idea as to what proportion of deposits you consider generally desirable to keep in reserve ?  You must be very much guided by circumstances.  In times of alarm, when there are failures, of course all bankers strengthen their reserves; our reserve then is larger.  In times of ordinary business we find, both as regards our deposits at interest as well as those which are not at interest, that there is a constant circulation; that the receipts of money very nearly meet the payments.

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

1188.  In a normal state of commercial affairs, is there any fixed proportion, or can you give the Committee any idea of what you would consider about a fair and desirable proportion which should be so kept unemployed ?—I think the best idea which I can give upon that subject is to give our annual statement, or balance sheet, for the 31st of December.

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

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

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

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

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

1192.  Only to discount brokers ?  Yes.

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

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

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

Note C.

Statement of Circulation and Deposits of the Bank of Dundee at Intervals of Ten Years between 1764 and 1864.

Year	Circulation	Deposits
1764	30,395	—
1774	27,670	—
1784	56,342	—
1794	50,354	—
1804	54,096	157,821
1814	46,627	445,066
1824	29,675	343,948
1834	26,467	563,202
1844	27,504	535,253
1854	40,774	705,222
1864	41,118	684,898

The Bank did not begin to receive deposits until 1792, in which year they amounted to 35,9441.

Note D.  Meeting of the Proprietors of the Bank of England.  September 13, 1866.  (From ‘Economist,’ September 22, 1866.)

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

Mr. Launcelot Holland, the Governor of the Bank, who presided upon the occasion, addressed the proprietors as follows: This is one of the quarterly general courts appointed by our charter, and it is also one of our half-yearly general courts, held under our bye-laws, for the purpose of declaring a dividend.  From a statement which I hold in my hand it appears that the net profits of the Bank for the half-year ending on the 31st of August last amounted to 970,014).  17s.  10d.; making the amount of the rest on that day, 3,981,7831.  18s.  11d.; and after providing for a dividend at the rate of 6l. 10s.  per cent, the rest will stand at 3,035,838l..  18s.  11d.  The court of directors, therefore, propose that a half-yearly dividend of interest and profits, to the amount of 61.  10s.  per cent, without deduction on account of income tax, shall be made on the 10th of October next.  That is the proposal I have now to lay before the general court; but as important events have occurred since we last met, I think it right I should briefly advert to them upon this occasion.  A great strain has within the last few months been put upon the resources of this house, and of the whole banking community of London; and I think I am entitled to say that not only this house but the entire banking body acquitted themselves most honourably and creditably throughout that very trying period.  Banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year.  But the manner in which the banking establishments generally of London met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted.  This house exerted itself to the utmost—and exerted itself most successfully—to meet the crisis.  We did not flinch from our post.  When the storm came upon us, on the morning on which it became known that the house of Overend and Co.  had failed, we were in as sound and healthy a position as any banking establishment could hold; and on that day and throughout the succeeding week, we made advances which would hardly be credited.  I do not believe that any one would have thought of predicting, even at the shortest period beforehand, the greatness of those advances.  It was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the Bank should have gone to the Chancellor of the Exchequer and requested the Government to empower us to issue notes beyond the statutory amount, if we should think that such a measure was desirable.  But we had to act before we could receive any such power, and before the Chancellor of the Exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret.  But we could not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and I am not aware that any legitimate application for assistance made to this house was refused.  Every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house.  I have perhaps gone a little more into details than is customary upon these occasions, but the times have been unusually interesting, and I thought it desirable to say this much in justification of the course adopted by this house of running its balances down to a point which some gentlemen may consider dangerous.  Looking back, however, upon recent events, I cannot take any blame to this court for not having been prepared for such a tornado as that which burst upon us on the 11th of May; and I hope the court of proprietors will feel that their directors acted properly upon that occasion, and that they did their best to meet a very extraordinary state of circumstances.  I have now only to move that a dividend be declared at the rate of 6l. 10s.  per cent for the past half-year.

Mr. Hyam said that before the question was put he wished to offer a few observations to the court.  He believed that the statement of accounts which had just been laid before them was perfectly satisfactory.  He also thought that the directors had done their best to assist the commercial classes throughout the late monetary crisis; but it appeared to him at the same time that they were in fault in not having applied at an earlier period to the Chancellor of the Exchequer for a suspension of the Bank Act.  It was well known that the demand on the Bank was materially lessened in the earlier part of the day, in consequence of a rumour which had been extensively circulated that permission to overstep the limits laid down in the Act had been granted.  That concession, however, had only been made after the most urgent representations had been addressed to the Chancellor of the Exchequer at a late hour in the night, and if it had then been refused he felt persuaded that the state of affairs would have been much worse on the Saturday than it had been on the Friday.  The fact was that the Act of 1844 was totally unsuited to the present requirements of the country, which since that period had tripled or quadrupled its commerce; and he was sorry to know that the measure seemed to meet with the approval of many of their directors.  Any one who read the speeches made in the course of the discussion on Mr. Watkins’ motion must see that the subject called for further inquiry; and he trusted that the demand for that inquiry would yet be conceded.

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

Mr. Moxon said he should be glad to know what was the amount of bad debts made by the Bank during the past half-year.  It was stated very confidently out of doors that during that period the directors had between 3,000,0001.  and 4,000,000l. of bills returned to them.

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

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

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

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

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

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

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

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

The motion was accordingly put and unanimously adopted.

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

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

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

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

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

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

On the motion of Mr. Alderman Salomons, seconded by Mr. Botly, a vote of thanks was passed to the Governor and the directors for their able and successful management of the Bank during the past half-year, and the proceedings then terminated.

Notes:

6.  See Note D in the Appendix.

7.  Vide Economist of September 22, 1866.