A General View of Lombard Street.

I.

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

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

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

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

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

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

ISSUE DEPARTMENT.

Notes issued 33,288,640 L Government debt 11,015,100 L
Other securities 3,984,900 L
Gold coin and bullion 18,288,640 L
Silver bullion
33,288,640 33,288,640 L

BANKING DEPARTMENT.
Proprietors' capital 14,553,000 L Government Securities 13,811,953 L
Rest 3,103,301 L Other securities 19,781,988 L
Public deposits, Notes 10,389,690 L
including Exchequer, Gold and silver coins 907,982 L
Savings' Banks,
Commissioners of
National Debt,
and dividend
accounts 8,585,215 L
Other deposits 18,204,607 L
Seven-day and other
bills 445,490 L
44,891,613 L 44,891,613 L

GEO. FORBES, Chief Cashier.

Dated the 30th December, 1869.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


II.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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