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Lombard Street: A Description of the Money Market - Chapter 1

1. Chapter 1

2. Chaper 2

3. Chaper 3

4. Chapter 4

5. Chapter 5

6. Chapter 6

7. Chapter 7

8. Chapter 8

9. Chapter 9

10. Chapter 10

11. Chapter 11

12. Chapter 12

13. Chapter 13

14. Appendix


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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