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Westport, Connecticut

Published in 1962 by Richard D. Irwin. Inc., Homewood, III.
Introduction Copyright. 1962, by Richard D. Irwin. Inc.
Reprinted by permission ol* the copyright owner.
Hyperion reprint edition 1979
Library of Congress Catalog Number 78-59001
ISBN 0-88355-677-4
Printed in the United States of America
Library of Congress Cataloging in Publication Data
Bagehot, Walter, 1826-1877.
Lombard Streep
Reprint of the 1962 ed, published by R. I>. Irwin, Home­
wood. III.
I. Banks and banking—England—London. 2. Banks
and banking—Great Britain. 3. Finance—England—Lon­
don. 4. Finance—Great Britain. I. Title.
[HG3000.L82B3 I979bj 332.1 'I '09421
ISBN 0-88355-677-4


by Frank C. Genovese
the art of tht banker’s bank, has grown out of a
troubled past. Its stages of evolution are marked by three great docu­
ments, Lombard Street, the Macmillan Report, and the Radcliffe
Report. Each of these arose out of the accumulated concern with
the progress of events in the world. Each represented a search for
answers to urgent questions of its day.
The reports deal largely with the adjustments and modifications
of British central banking to external difficulties and problems. The
Macmillan Report appeared as the world crumbled into the depres­
sion of the 1930’s. TTie Radcliffe Report of 1959 appeared in an epoch
of shaky alliances ai.d emerging trading blocs. Both followed a period
of inflation and international readjustment after the holocaust of war.
It was in the aftermath of war also that emerging capitalism and
deposit banking fell into the difficulties which led to the production
of the greatest of the documents, Lombard Street. Priority in time
gave it the task, not of suggesting necessary modifications in central
banking, but the more vital one, of enumerating the prime func­
tions of a central bank. It created the concept of a central bank and
thereby has for all time assured to its author a secure position in bank­
ing thought.
The Macmillan and Radcliffe studies are the works of many men
who had staffs and the benefit of much data. Lombard Street is the
product of only one man, Walter Bagehot, and as such reflects his
deep understanding and intimate knowledge of banking, business and
fiscal affairs. Its ideas were first expressed in a series of articles in
The Economist during the 1 850’s and were put into book form in 1870.
During his relatively short lifetime (1826-1877) Bagehot wrote
extensively on a wide range of literary, political, and economic sub­
jects. His collected works run into five substantial volumes. While
obviously a many faceted man, his main interests lay in the broad field
of political economy and his chief occupation was that of editor of
The Economist, the world’s most influential financial paper.
Bagehot was born into a banking family and succeeded his father
as vice chairman of Stuckey’s Banking Co. of Langport, Somerset.
C e n r a l b a n k in g ,




He represented the bank in the “G ty ” (i.e., London’s financial dis­
trict.) Although he was educated as a lawyer, literary and financial
matters were more attractive to him than was the law. It was through
his interest in free trade that he met James Wilson, the editor and
owner of The Economist. This encounter led to his marriage to
Wilson’s daughter, Eliza. When Wilson died while serving on a
governmental mission in India, Bagehot became editor of the paper.
He was the ideal editor for this journal. His brilliance and his
writing style, which, like his conversation, was challenging, provoca­
tive, and yet often amusing, aided the growth of The Economist's cir­
culation. Descriptions of Bagehot by his contemporaries abound with
the adjectives “alert,” “sagacious,” “speculative,” and “witty.” His
“ originality,” “force,” “acuteness,” and “inventiveness” have been
praised. John Morely spoke of these things and “above all the quaint
and whimsical humour of that striking genius.” Others spoke of his
“vivid sense of reality and strong impulse to unite theorizing with
practical problems.” His qualities became those of The Economist,
and its influence grew steadily under his stewardship.
Bagehot occupied a position in British financial affairs similar to
that which Walter Lippman holds regarding American foreign affairs.
The British Prime Minister Gladstone called him “the permanent
Chancellor of the Exchequer.” This title was merited not only by
his constant commentary on the state of the nation and its financial
affairs, but by the singular fact that he invented the Treasury Bill.
In 1877 Sir Stafford Northcote, the then official Chancellor of the
Exchequer, sought Bagehot’s counsel on what might be done to raise
needed funds in the light of the unpopularity which Exchequer Bills
were currently facing. Bagehot at oncc said that what the Treasury
needed was a security which resembled as closely as possible a com­
mercial bill of exchange. In other words, it should be short term,
highly negotiable and should be sold on a discount basis. His inven­
tion has been a spectacularly successful one. Treasury bills are an
important instrument of governmental finance in virtually all devel­
oped countries today.
Lombard Street shows the marriage of theorizing and concern with
problems which is so typical of Bagehot. The book describes the
origin and operation of the English money market and the nature of
the role of the Bank of England in that market. Its comments on the
nature of banking and bankers are brilliant and represent the sharing
of the experience of a sophisticated man of affairs. But Lombard
Street is also a piece of advocacy. It urges reform and modification



rather than reformulation and reorganization. The advocacy has
been successful although the battle was won only over a rather long
period of time. It took time to (as Keynes saw Bagehot’s purpose)
“knock two or three fundamental truths into the heads of City
The book is easy to read and every budding economist and banker
should read it early in his career. The novice can learn much in
seeing the situation out of which Bagehot’s recommendation of proper
banking principles arose. He has the experience of watching the
growth of banking practices similar to that which the law student re­
ceives in his study of the development of case law. He acquires a
kind of institutionalism in his view of economic matters that is hard to
convey in any other fashion. This is an exciting view of economics.
The world is seen as it really is. The future is found to evolve out
of the past as old institutions are progressively adapted to meet
changing problems.
Perhaps it was his legal training that gave Bagehot’s writings their
institutional overcast and influenced him to draw little distinction
between description and theory. His approach is in many ways simi­
lar to that of Wesley Clair Mitchell. For both of them economics
clearly had time and space dimensions. Bagehot held that one reason
for the dullness of much political economy was its attempt to be uni­
versal. Consequently he confined his efforts to problems of the day.
It may be proper to say that his economics even had personality
dimensions since Lombard Street discusses bankers almost as much as
it does banking. On this score one feels a twinge of sympathy for Mr.
Aloxon whose ill-advised actions at the General Court of the Bank of
England are recorded for posterity in Bagehot’s Appendix. The inci­
dent there reproduced illustrates the way not to get things done in a
meeting. In a Memoir to Bagehot, R. H. Hutton, his associate for
many years says, “. . . Bagehot’s most original writing was due less to
his deductions from the fundamental axioms of the modem science
than to that deep insight into men which he had gained in many dif­
ferent fields.” It is these last mentioned features which the profes­
sional reader of Lombard Street savors. And thus we see why
Lombard Street is a classic. It is absorbing on first reading to the
young and delightful in the rereading by their elders.
There is little point in summarizing here the principal ideas of
this pellucid book. The reader will enjoy the original much better
than any summation. However, a brief mention may be made of its
formal scope. It explains the origins and operation of British banking

and bill trading. It sets forth the relations that exist between the Bank
of England, other banks, bill brokers, the Government, and foreign
countries. It also explains the relationships which should exist. Not
generally appreciated, in spite of W. W. Rostow’s essay on the matter,
is Bagehot’s strikingly modem ideas of the nature and functioning of
the business cycle. There is little in his description which should
be amended or omitted today, save for its rather heavy emphasis on
agricultural matters.
Lombard Street, written in response to problems of the day, has an
air of urgency and cogency. To appreciate it the student of central
banking needs a brief account of the events which led Bagehot to
write it.
Bagehot’s world of 1850 was a vastly different place than that of
1750. The Industrial Revolution had altered the physical landscape of
the Old World and brought changes in governmental, philosophical,
and economic thinking. The New World was asserting a right to its
own destiny. Adam Smith had launched the idea that wealth lay in
store for the nation that let its businessmen fight for gain in untram­
melled markets. The fight against the corn laws had been waged
and won.
While Smith had expressed doubt that the English Government
could safely be entrusted to run a public bank and commented on the
extravagance of democracies in times of war, it was war which im­
posed the most serious banking and monetary difficulties on the coun­
try and which ultimately set Bagehot to enunciating the way England
could have good banking. In any event, by 1850 the time had come
when institutions had to be changed to meet new circumstances.
The very long series of Napoleonic Wars beginning in 1792 precip­
itated the monetary troubles which continued through Bagehot’s time.
The immediate antagonists, France, Austria, and Prussia, were soon
to be joined by Great Britain, Holland, Spain, and Sardinia. The next
twenty-three years of strife were anxious but opportune times for
Britain’s banks and bankers. Large sums were raised for loans to
allies, for the expansion of trade in war supplies, and for their pro­
By 1795 gold began to rise in price, and with the depreciation of
English money, foreign supplies became increasingly expensive. The
partial failure of the English com crop and the war-stimulated demand
for food added to this problem. In 1797, under these strains and be­
cause of runs on English banks, the Restriction Act was passed. It
prohibited all banks, including the Bank of England, from paying out



gold and silver in return for their notes until six months after the
close of hostilities. With the country off a metallic standard and
the restraining effect of the need for specie removed, the number of
banks in the country rose rapidly, and by 1814 their number had more
than quadrupled.
The Restriction Act and the high price of gold produced concern
and argument among leading figures of the day. The debate which
ensued has come to be called the “ Bullionist Controversy.” The
“bullionist” faction argued that the premium on gold had come about
as a result of excessive note issue. They urged a return to a metallic
currency. The “anti-bullionists,” among whom was the Governor
of the Bank of England, were impressed with the necessity and the
profitability of financing the war and supported the Government’s
act. In 1809 David Ricardo published a pamphlet entitled The High
Price of Bullion, in which he more or less allied himself with the
Bullionists. He held that the high price of bullion had been occa­
sioned by the overissue of paper money and advocated its gradual re­
duction and a return to convertibility. The convertibility which he
sought was not to mean the end of paper money circulation and its
replacement with coinage, but envisaged the more sophisticated gold
bullion standard. Under this standard only substantial sums of notes
could be converted into gold in the form of bullion or bars.
The Bullion Committee, a Parliamentary Committee, in its 1810
report relied heavily upon Ricardo’s thinking. It advocated (as did
a later committee in 1819) a return to convertibility with gold. (The
Gold Standard Act of 1816 had abolished bimetallism in Britain.) Its
advice was heeded when, in 1822, cash payments for notes were re­
sumed. This would have happened earlier save for a depression in
1810 and for Napoleon’s reappearance on the continent in 1815 after
his escape from Elba.
The ideas that persisted from this controversy were that in order
to assure sound banking the note issue must be tied firmly down, and
that it must be very directly related to the size of the Bank of Eng­
land’s gold stock. The adoption of these views in the Charter Act of
1844 was the immediate cause of Bagehot’s concern in Lombard Street.
But other developments also help explain the nature of the 1844
Charter Act. With the cessation of war finance a period of bank
failures was ushered in, and of the now enlarged number of banks,
240 ceased payment in 1814-16. The resumption of payment in specie
by no means helped alleviate this troubled financial picture, for in
1825, in another wave of bank failures, 70 more banks closed. The



British government in 1826 sought to deal with this pattern of depres­
sion and bank failures by allowing joint-stock banks to issue notes
outside of a 65-mile radius of London. This privilege, long held by
private banks, was extended to the joint-stock banks in the belief that
these larger banks would be better able to remain solvent and to stave
off bank runs. Since this act ended the monopoly of the Bank of
England, alone among joint-stock banks, to issue notes, the bank re­
acted to this new competition by establishing branches in principal
cities. This development fortuitously tended to case the burden of
transferring funds within the country and thus added to the security
of the banking system.
In 1833 joint-stock banks were allowed to open in London, al­
though the exclusive note-issuing power of the Bank of England was
not further weakened. With these legal changes there was a great
growth of joint-stock banks, over 100 being established, to the dis­
advantage of the private banks, by 1836. With the expansion of
deposit banking, especially in London’s metropolitan area, the use of
checks became much more important. But the liberalization of the
law regarding note issuing by joint stock, and thus presumably
sounder banks, itself led to speculation. It was soon demonstrated
that even joint-stock banks could overissue notes, for bank failures
The series of bank failures in 1837, 1839, and 1842 clcarlv demon­
strated that the changes that had been made had not sufficed, and that
the problem of achieving a sound monetary and banking system still
remained. Fresh controversies arose as to a way out of the diffi­
culties. The “Currency School” held that what was needed to remedy
all ills was the 100 per cent backing of all currency with gold. The
opposing “Banking” view was that a fractional gold reserve would
In 1844 Sir Robert Peel seized the opportunity presented by the
necessity of periodical re-enactment of the Bank of England’s charter
and combined these views. The new Charter Act provided that the
Bank of England could issue notes in the amount of £ 14 million se­
cured by government securities, and that any note issue above this
amount was to be 100 per cent backed with gold or silver. Silver was
not to cover over one fifth of this amount. Notes were to be payable
in gold coin. A buying and selling range for gold was announced. No
new banks were to be given the privilege of issuing notes, and those al­
ready possessing the privilege were limited as to the absolute amounts
they could issue. The amounts were set at the average note issue out­



standing during the three months prior to the introduction of the bill.
When a private bank ceased payment, acquired more than six part­
ners, became a joint-stock bank, or amalgamated with another bank,
it lost all right to issue notes. The Bank of England then would
acquire the right to issue up to two thirds of the lapsed issue. The
Bank of England was also thenceforth required to publish in the press
weekly accounts of its final position. The Act provided the basis for
the peculiar form of the Bank of England Accounts, namely a division
of its activities under a note-issuing department and a banking depart­
ment. This division also served as a basis for apportioning the earnings
of the bank betw een the government and the proprietors. The form
of the accounts even today is unchanged, although the bank was
nationalized and the proprietors compensated for their loss of owner­
ship in 1946.
Lombard Street stands as a testimony that this Act of 1844 proved
no panacea. The Act represented a triumph of the “Currency
School” over the “Banking School.” The Currency School’s think­
ing closely resembled that of the early bullionists. They had great
faith in the money metal and saw notes as mere receipts for it. They
were concerned with keeping the exchange rate stable, and they felt
that sufficient gold backing and restraint of the note issue were all
that were needed to assure a sound monetary and banking system.
The later doctrine of the workings of the automatic gold standard
with its consequences of variable domestic note issue is a continua­
tion of their position.
Bagehot and his predecessor on the Economist, James Wilson, rep­
resented the banking school. They were painfully aware of the
fact that a hamstrung note issuer could get into serious difficulties
and thus cause hardship to the whole economy as well as to the
banking community. They saw that what was involved in the man­
agement of the Nation’s money and needed watching, was not the
mere size of the note issue, but the entire size of the credit system
as it functioned through the banks, bill brokers, and security dealers.
They saw deposits as money, especially those created in the financing
of bills of exchange which, quite as much as notes, required Bank
of England support. Bagehot would have preferred to trust prudent
banking management rather than some arbitrary limit to note and
credit creation, which indeed in times of crises might need to be sus­
pended. He also felt that prudence dictated larger gold reserves
than the Bank was in the habit of maintaining. But then this story
should be left to be told by Bagehot himself.



For further information concerning Bagehot and monetary de­
velopments before 1870, the student will find the following useful:
The Spare Chancellor, The Life of Walter Bagehot.
East Lansing: Michigan State University Press, i960.
D e Kock, M. H. Central Banking. 2d ed. London: Staples Press Limited,
H ayes, C a r lto n J. H . A Political and Cultural History of Modem
Europe, Vol. 1. New Y ork: The Macmillan Co., 1936.
H eaton, H erbert. Economic History of Europe. New York: Harper
& Bros., 1936.
Kisch, C. H., and E lk in , W . A. Central Banks. London: Macmillan and
Co., Ltd., 1928.
M organ, F o rre st (ed.). The Works of Walter Bagehot, Vols., I-V.
Hartford, Conn.: Travelers Insurance Co., 1889.
Roberts, D. W . An Outline of the Economic rIistory of England. 5th
ed. London: Longmans, Green and Co., 1948.
R o ll , E ric. A History of Economic Thought. 2d ed. New York:
Prentice-Hall, Inc., 1946.
S t. John-Stevas, N orm an. Walter Bagehot. Bloomington: Indiana
University Press, 1959.
V in e r, Jacob. Studies in the Theory of International Trade. New York:
Harper & Bros., 1937.
W h itta k e r, Edmund. A History of Economic Ideas. New York: Long­
mans, Green and Co., 1940.
Buchan, A la s ta ir.


of this little book has occupied a much longer time
than, perhaps, my readers may think its length or its importance de­
serves. It was begun as long ago as the autumn of 1870; and though
its progress has been often suspended by pressing occupations and
imperfect health, I have never ceased to work at it when I could.
But I fear that in consequence, in some casual illustrations at least,
every part of the book may not seem, as the lawyers would say, *to
speak from the same time.’ The figures and the examples which it is
most natural to use at one time are not quite those which it is most
natural to use at another; and a slowly written book on a living and
changing subject is apt a little to want unity in this respect.
I fear that I must not expect a very favourable reception for this
work. It speaks mainly of four sets of persons—the Bank of England,
Joint Stock Banks other than that Bank, private bankers, and billbrokers; and I am much afraid that neither will altogether like what
is said of them. I can only say that the opinions now expressed have
not been formed hastily or at a distance from the facts; that, on the
contrary, they have been slowly matured in ‘Lombard Street’ itself,
and that, perhaps, as they will not be altogether pleasing to anyone,
I may at least ask for the credit of having been impartial in my
T h e co m p o sitio n

I should also say that I am indebted to a friend for the correction
of the final proof sheets, which an attack of illness prevented me from
fully revising. If it had not been for his kind assistance, the publica­
tion o f the book must have been postponed till the autumn, which,
as its production has already been so slow, would have been very
annoying to me.
W a l t e r B ageh o t.
T h e P oplars , W im bledon .

April 26, 1873





i. I n t r o d u c t o r y ..................................................................................i


G en er a l V ie w of L ombard S t r e e t .................................... u

hi. H o w Lombard S tr e e t Cam e to E xist, and W h y I t Assumed
Its P resen t F o r m ........................................................................ 37
iv. T he P osition of th e C hancellor of the E xchequer in the
M o n ey M a r k e t ........................................................................ 50
v. T he M ode in W hich the V a l u e of M o n ey I s S ettled in L o m ­

S t r e e t ................................................................................. 56

vi. W h y L ombard S treet Is O ft en V e r y D u l l , and S o m etim es
E x t r e m e l y E x c i t e d ...............................................................


A M ore E xact A ccount of th e M ode in W hich the B ank of
E ngland H as D ischarged I ts D u t y of R etaining a G ood
B a n k R eserve , and of A dm inistering It E ff e c t u a l l y .


T he G o vern m en t of the B ank of E ngland



. 102

ix. T he J oint S tock B a n k s ............................................................... 119





x. T h e P rivate B a n k s ........................................................................ 130
xi. T h e B il l -B r o k e r s ........................................................................ 137
xii .

T h e P rinciples W hich S hould R eg u late the A m o u n t of the
Banking Reserve to B e K ep t

x iii.


th e Bank o f E n glan d .

. 147

C o n c l u s i o n .......................................................................................... 160



Liabilities and Cash Reserve o f th e C h ief Banking
S y s t e m s ................................................................................. 163



E x t r a c t fro m Evidence G iven by M r. A ld erm an S a lo ­
mons before th e House o f Commons S e le c t Com ­
m ittee in 1 8 5 8 ............................................................... 164



S t a t e m e n t of C irculation and D eposits of the B ank

D undee a t I ntervals of T e n Y ears , b e tw e e n 1764




1 8 6 4 ................................................................................. 171

M eeting of the P roprietors of the B ank of E ngland ,
S eptem ber 1 3 ,1 8 6 6 ............................................................... 172



I v e n t u r e 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 die Act of 1844 really were,
as is commonly thought, the primtmt 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 ‘PostPeel* agencies, so that those who have had enough of that wellworn 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
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 dis­
posable and ready cash than any other country. But very few persons
are aware how much greater the ready balance—the floating loanfund which can be lent to anyone or for any purpose—is in England
than it is anywhere else in the world. A very few figures will show
how large the London loan-fund is, and how much greater it is than
any other. The known deposits—the deposits of banks which publish
their accounts—are, in
London (31st December, 1 8 7 2 ) .............................. 120^)00,000
Paris (27th February, 1 8 7 3 ) ......................................13,000,000
New York (February, 1 8 7 3 ) ......................................40,000,000
German Empire (31st January, 1873) . . . .

And the unknown deposits—the deposits in banks which do not pub­
lish their accounts—are in London much greater than those in any
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, ‘moneymarket 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 con­
fidence 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 exag­
geration. 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 an­
cestors, or is more common now in most countries. A citizen of Lon­



don in Queen Elizabeth's time could not have imagined our state of
mind. He would have thought that it was of no use inventing railways
(if he could have understood what a railway meant), for you would
not have been able to collect the capital with which to make them. At
this moment, in colonies and all rude countries, there is no large sum
of transferable money; there is no fund from which you can borrow,
and out of which you can make immense works. Taking the world
as a whole—either now or in the past—it is certain that in poor states
there is no spare money for new and great undertakings, and that in
most rich states the money is too scattered, and clings too close to
the hands of the owners, to be often obtainable in large quantities for
new purposes. A place like Lombard Street, where in all but the
rarest times money can be always obtained upon good security or
upon decent prospects of probable gain, is a luxury which no country
has ever enjoyed with even comparable equality before.
But though these occasional loans to new enterprises and foreign
States are the most conspicuous instances of the power of Lombard
Street, they are not by any means the most remarkable or the most
important use of that power. English trade is carried on upon bor­
rowed 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 ad­
vantage in the struggle of trade. If a merchant have 50,000/. all his
own,—to gain 10 per cent on it he must make 5,000/. a year, and must
charge for his goods accordingly; but if another has only 10,000/., and
borrows 40,0001, by discounts (no extreme instance in our modern
trade), he has the same capital of 50,000/. to use, and can sell much
cheaper. If the rate at which he borrows be 5 per cent., he will have
to pay 2,000/. a year; and if, like the old trader, he make 5,000/. a year,
he will still, after paying his interest, obtain 3,0001, a year, or 30 per
cent, on his own 10,000/. 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 oldfashioned trader—the man who trades on his own capital—out of the
market. In modern English business, owing to the certainty of
obtaining loans on discount of bills or otherwise at a moderate rate
of interest, there is a steady bounty on trading with borrowed capital,
and a constant discouragement to confine yourself solely or mainly
to your own capital.



This increasingly democratic structure of English commerce is
very unpopular in many quarters, and its effects are no doubt ex­
ceedingly 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 busi­
ness. This constant levelling of our commercial houses is, too, un­
favourable 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 com­
merce 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 die 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. Com­
merce 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 sav­
ings 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 in­
dustrial 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. Polit­
ical 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 in­
clined to doubt it because they could not see it. In England, how­
ever, 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 cateris
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 com trade becomes on a sudden
profitable, immediately ‘com 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 instandy-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 pre­
dicted 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 un­
equalled 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 com­
parison 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 there­
fore an income will be an ample recompense to the poor man which
would starve the rich man out of the trade. All the common notions
about the new competition of foreign countries with England and
its dangers—notions in which there is in other aspects much truth—
require to be reconsidered in relation to this aspect. England has a
special machinery for getting into trade new men who will be con­
tent 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 con­
clusion is very plain—that English trade is become essentially a trade
on borrowed capital, and that it is only by this refinement of our
banking system that we are able to do the sort of trade we do, or to
get through the quantity of it.
But in exact proportion to the power of this system is its delicacy
—I should hardly say too much if I said its danger. Only our fa­
miliarity 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, in­
finitely the greater proportion is held by bankers or others on short
notice or on demand; that is to say, the owners could ask for it all any
day they please: in a panic some of them do ask for some of it. If
any large fraction of that money really was demanded, our banking
system and our industrial system too would be in great danger.
Some of those deposits too are of a peculiar and very distinct nature.
Since the Franco-German war, we have become to a much larger ex­
tent 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 re­
sources 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 discre­
tion. 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 die
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 G ty 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/.; they now are more
than 60,000,000/. The private deposits of the Bank of England then
were 9,000,000/.; they now are 18,000,000/. There was in 1844
throughout the country but a fraction of the vast deposit business
* See Note A at the end of the volume.



which now exists. We cannot appeal, therefore, to experience to
prove the safety of our system as it now is, for the present magnitude
of that system is entirely new. Obviously a system may be fit to
regulate a few millions, and yet quite inadequate when it is set to cope
with many millions. And thus it may be with ‘Lombard Street,' so
rapid has been its growth, and so unprecedented is its nature.
I am by no means an alarmist. I believe that our system, though
curious and peculiar, may be worked safely; but if we wish so to work
it, we must study it. We must not think we have an easy task when
we have a difficult task, or that we are living in a natural state when
we are really living in an artificial one. Money will not manage
itself, and Lombard street has a great deal of money to manage.


A General View of Lombard Street.


o b je c t s which you sec 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 de­
scribing 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 o th ersas 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 an­
other is ‘soundness.* Credit means that a certain confidence is given,
and a certain trust reposed. Is that trust justified? and is that con­
fidence wise? These are the cardinal questions. To put it more
simply—credit is a set of promises to pay; will those promises be kept?
Especially in banking, where the ‘liabilities,* or promises to pay, are
so large, and the time at which to pay them, if exacted, is so short,
an instant capacity to meet engagements is the cardinal excellence.
All which a banker wants to pay his creditors is a sufficient supply
of the legal tender of the country, no matter what that legal tender
may be. Different countries differ in their laws of legal tender, but
for the primary purposes of banking these systems are not material.
A good system of currency will benefit the country, and a bad system
will hurt it. Indirectly, bankers will be benefited or injured with
the country in which they live; but practically, and for the purposes
of their daily life, they have no need to think, and never do think, on
theories of currency. They look at the matter simply. They say—
‘I am under an obligation to pay such and such sums of legal currency;
how much have I in my till, or have I at once under my command, of



that currency?’ In America, for example, it is quite enough for a
banker to hold ‘greenbacks/ though the value of these changes as the
Government chooses to enlarge or contract the issue. But a prac­
tical New York banker has no need to think of the goodness or bad­
ness 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
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 ‘green­
backs/ dependent on the will of the State; it is limited by the provisions
of the Act of 1844. That Act separates the Bank of England into
two halves. The Issue Department only issues notes, and can only
issue 15,000,000/. on Government securities; for all the rest it must
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 D epartment.

Notes issued



Government debt .
Other securities
Gold coin and bullion
Silver bullion .



B anking D epartment.


Proprietors’ capital .
R e s t ..............................
Public deposits, including
Banks, Commissioners
of National Debt, and
dividend accounts.
Other deposits .
Seven-day and other bills

Government securities
Other securities .
Notes .
Gold and silver coin .



GEO. FORBES, Chief Cashier.

Dated the 30th December, 1869.



There are here 15,000,0001, bank notes issued on securities, and 18,288,640/. represented by bullion. The Bank of England has no power
by law to increase the currency in any other manner. It holds the
stipulated amount of securities, and for all the rest it must have bullion.
This is the ‘cast iron* system—the ‘hard and fast' line which the op­
ponents 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 ‘le­
gal 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 care­
fully 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
Public deposits .
Private deposits .
Seven-day and other bills .




and a cash reserve of 11,297,000/. 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 depart­
ment 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 11,297,00o/. in its till against liabilities of nearly three times



the amount. It had ‘Consols’ and other securities which it could offer
for sale no doubt, and which, if sold, would augment its supply of
bank notes—and the relation of such securities to real cash will be dis­
cussed presently; but of real cash, the Bank of England for this pur­
pose—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 im­
portance in its own till beyond what is wanted for daily purposes.
All London banks keep their principal reserve on deposit at the Bank­
ing 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 de­
sirable 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
tent was reduced to
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/., and was within an ace
of stopping payment.
But the danger to the depositing banks is not the sole or the prin­
cipal 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 lia­
bilities in cash—that it lends three-fifths of its deposits and retains in
reserve only two-fifths. If then the aggregate of the bankers* de­
posited reserve be 5,000,000/., 3,000,000/. of it will be lent by the
Banking Department, and 2,000,00ol. will be kept in the till. In conse­
quence, that 2,000,000/. 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/. 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 Englandsome 10,000,000/. 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 develop­
ment of our credit system—in plain English, at the immense amount
of our debts payable on demand, and the smallness of the sum of
actual money which we keep to pay them if demanded. But there
is more to come. Lombard Street is not only a place requiring to
keep a reserve, it is itself a place where reserv es are kept. All country
bankers keep their reserve in London. They only retain in each coun­
try town the minimum of cash necessary to the transaction of the
current business of that country town. Long experience has told
them to a nicety how much this is, and they do not waste capital and
lose profit by keeping more idle. They send the money to London,
invest a part of it in securities, and keep the rest with the London



bankers and the bill brokers. The habit of Scotch and Irish bankers
is much the same. All their spare money is in London, and is invested
as all other London money now is; and, therefore, the reserve in the
Banking Department of the Bank of England is the banking reserve
not only of the Bank of England, but of all London—and not only of
all London, but of all England, Ireland, and Scotland too.
Of late there has been a still further increase in our liabilities. Since
the Franco-German war, we may be said to keep the European re­
serve 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 Eng­
land. No doubt foreigners cannot take from us our ovm 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 Euro­
pean 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, Lon­
don 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 neces­
sary for the business of the world. During the immense payments
from France to Germany, the sum in transitu—the sum in London
—has perhaps been unusually large. But it will ordinarily be very
great. The present political circumstances no doubt will soon change.
We shall soon hold in Lombard Street far less of the money of foreign
governments; but we shall hold more and more of the money of
private persons; for the deposit at a clearing-house necessary to settle
the balance of commerce must tend to increase as that commerce
itself increases.
And this foreign deposit is evidently of a delicate and peculiar
nature. It depends on the good opinion of foreigners, and that opinion
may diminish or may change into a bad opinion. After the panic
of 1866, especially after the suspension of Peel’s Act (which many
foreigners confound with a suspension of cash payments), a large
amount of foreign money was withdrawn from London. And we
may reasonably presume that in proportion as we augment the de­
posits 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 Eng­
land for its security. On the wisdom of the directors of that one Joint
Stock Company, it depends whether England shall be solvent or in­
solvent. 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/. 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 acknowl­
edge 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 con­
ducted 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 re­
serve; 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 di­
rectors 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, c<eteri$
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
Some part of the lowness of the Bank dividend, and of the conse­
quent small value of Bank stock, is undoubtedly caused by the magni­
tude of the Bank capital; but much of it is also due to the great amount
of unproductive cash—of cash which yields no interest—that the Bank­
ing Department of the Bank of England keeps lying idle. If we com­
pare the London and Westminster Bank—which is the first of the
joint-stock banks in the public estimation and known to be very cau­
tiously and carefully managed—with the Bank of England, we.shall
see the difference at once. The London and Westminster has only
13 per cent of its liabilities lying idle. The Banking Department of
the Bank of England has over 40 per cent. So great a difference in the
management must cause, and does cause, a great difference in the
profits. Inevitably the shareholders of the Bank of England will
dislike this great difference; more or less, they will always urge their
directors to diminish (as far as possible) the unproductive reserve,
and to augment as 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 1844the 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 un­
divided, was in a certain sense most sound; it could ultimately have
paid all its creditors all it owed, and returned to its shoreholders 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 ‘wind­
ing up’ the English nation.
Since then the Bank of England, as a bank, is exempted from the
perpetual apprehension that makes other bankers keep a large reserve
—the apprehension of discredit—it would seem particularly necessary
that its managers should be themselves specially interested in keeping
that reserve, and specially competent to keep it. But I need not say
that the Bank directors have not their personal fortune at stake in the
management of the Bank. They are rich City merchants, and their
stake in the Bank is trifling in comparison with the rest of their wealth.
If the Bank were wound up, most of them would hardly in their in­
come 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 mak­
ing money in their own business and for themselves.
It might be expected that as this great public duty was cast upon
the Banking Department of the Bank, the principal statesmen (if not
Parliament itself) would have enjoined on them to perform it. But
no distinct resolution of Parliament has ever enjoined it; scarcely any
stray word of any influential statesman. And, on the contrary, there
is a whole catena of authorities, beginning with Sir Robert Peel and
ending with Mr. Lowe, which say that the Banking Department of



the Bank of England is only a Bank like any other bank—a Company
like other companies; that in this capacity it has no peculiar position,
and no public duties at all. Nine-tenths of English statesmen, if they
were asked as to the management of the Banking Department of the
Bank of England, would reply that it was no business of theirs or of
Parliament at all; that the Banking Department alone must look to it.
The result is that we have placed the exclusive custody of our entire
banking reserve in the hands of a single board of directors not par­
ticularly trained for the duty—who might be called ‘amateurs,*—
who have no particular interest above other people in keeping it un­
diminished—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 strange­
ness can only be comprehended when we know what the custody of
a national banking reserve means, and how delicate and difficult it is.
Such a reserve as we have seen is kept to meet sudden and unex­
pected demands. If the bankers of a country are asked for much more
than is commonly wanted, then this reserve must be resorted to. What
then are these extra demands? and how is this extra reserve to be used?
Speaking broadly, these extra demands are of two kinds—one from
abroad to meet foreign payments requisite to pay large and unusual
foreign debts, and the other from at home to meet sudden apprehen­
sion or panic arising in any manner, rational or irrational.
No country has ever been so exposed as England to a foreign de­
mand on its banking reserve, not only because at present England is a
large borrower from foreign nations, but also (and much more) be­
cause 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 importlike the import of foreign com after a bad harvest—or (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 with­



drawn in countries where banking is at all developed, is a ‘bank re­
serve.' In England especially, except a few sums of no very con­
siderable amount held by bullion dealers in the course of their busi­
ness, 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 Govern­
ment 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—I 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 Gvil 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
That instrument is the elevation of the rate of interest. If the in­
terest 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 ex­
changes, 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 bul­
lion coming to this country after the rise in the rate than there was
Whatever persons—one bank or many banks—in any country hold
the banking reserve of that country, ought at the very beginning of
an unfavourable foreign exchange at once to raise the rate of interest,
so as to prevent their reserve from being diminished farther, and so
as to replenish it by imports of bullion.
This duty, up to about the year i860, the Bank of England did not
perform at all, as I shall show farther on. A more miserable history
can hardly be found than that of the attempts of the Bank—if indeed
they can be called attempts—to keep a reserve and to manage a foreign
drain between the year 1819 (when cash payments were resumed by
the Bank, and when our modem 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 en­
hanced, by a foreign drain. Times without number the public have
been alarmed mainly because they saw that the Banking reserve
was already low, and that it was daily getting lower. The two
maladies—an external drain and ap 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 conversa­
tion: 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 cus­
tomer, 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 them­
selves,’ 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 minutiae of bills, look into special
securities which busy bankers have not time for, and so gain a liveli­
hood. 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^nd 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 ad­
vance to these second-class dealers is annoying, but may not the re­
fusal 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,’ when­
ever 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 un­
bounded, 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 whom­
soever kept) is not kept out of show, but for certain essential pur­
poses, 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 con­
trary, 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 neces­
sarily 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 1825, 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 in­
cipient alarm.
The management of the Money Market is the more difficult, be­
cause, as has been said, periods of internal panic and external demand
for bullion commonly occur together. The foreign drain empties
the Bank dll, 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 alleviadve treatment with large and ready loans.
Before we had much specific experience, it was not easy to prescribe
for this compound disease; but now we know how to deal with it.
We must look first to the foreign drain, and raise the rate of interest
as high as may be necessary. Unless you can stop the foreign export,
you cannot allay the domestic alarm. The Bank will get poorer and
poorer, and its poverty will protract or renew the apprehension.
And at the rate of interest so raised, the holders—one or more—of the
final Bank reserve must lend freely. Very large loans at very high



rates are the best remedy for the worst malady of the money market
when a foreign drain is added to a domestic drain. Any notion that
money is not to be had, or that it may not be had at any price, only
raises alarm to panic and enhances panic to madness. But though
the rule is clear, the greatest delicacy, the finest and best skilled
judgment, are needed to deal at once with such great and contrary
And great as is the delicacy of such a problem in all countries, it
is far greater in England now than it was or is elsewhere. The strain
thrown by a panic on the final bank reserve is proportional to the
magnitude of a country’s commerce, and to the number and size of
the dependent banks—banks, that is, holding no cash reserve—that
are grouped around the central bank or banks. And in both respects
our system causes a stupendous strain. The magnitude of our com­
merce, 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 de­
mand.* 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
• See Note B. at the end of the volume.



a middleman. To pay his own bill to the maker of the goods, he
must discount the bills he has received from the shopkeepers to whom
he has sold the goods; but if there is a sudden cessation in the means of
discount, he will not be able to discount them. All our mercantile
community must obtain new loans to pay old debts. If some one
else did not pour into the market the money which the banks like the
London and Westminster Bank take out of it, the bills held by the
London and Westminster Bank could not be paid.
Who then is to pour in the new money? Certainly not the bill
brokers. They have been used to re-discount with such banks as
the London and Westminster millions of bills, and if they see that
they are not likely to be able to re-discount those bills, they instantly
protect themselves and do not discount them. Their business does not
allow them to keep much cash unemployed. They give interest for
all the money deposited with them—an interest often nearly approach­
ing 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 re­
serve. 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/. worth of Consols, he will not find 500,000/.
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 magni­
tude 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 responsi­
bility is very curious. It unquestionably does make enormous ad­
vances in every panic—
In 1847 the loans on ‘private securities*£
increased from
1857 ditto
1866 ditto

18,963,000 to 20409,000
20404,000 to 31,350,000
18,507,000 to 33447,000

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 ques­
tions 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 Gov­
ernment 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 Govern­
ment money may chance to be much or little when the panic comes.
There is no relation or connection between the two. And the State,
in getting the Bank to keep what money it may chance to have, or in
borrowing of it what money it may chance to want, does not hire
it to stop a panic or much help it if it tries.
The real reason has not been distinctly seen. As has been already
said—but on account of its importance and perhaps its novelty it is
worth saying again—whatever bank or banks keep the ultimate bank­
ing 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 there­
fore 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 indefi­
nitely 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 con­



fidence 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 de­
struction 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 mo­
ment they say that ‘whatever happens to the community, they can pre­
serve themselves.* Both in 1847 and 1857 (I believe also in 1866,
though there is no printed evidence of it) the Bank directors con­
tended that the Banking Department was quite safe though its reserve
was nearly all gone, and that it could strengthen itself by selling secu­
rities and by refusing to discount. But this is a complete dream. The
Bank of England could not sell ‘securities,’ for in an extreme panic
there is no one else to buy securities. The Bank cannot stay still and
wait till its bills are paid, and so fill its coffers, for unless it discounts
equivalent bills, the bills which it has already discounted will not be
paid. When the reserve in the ultimate bank or banks—those keeping
the reserve—runs low, it cannot be augmented by the same means that
other and dependent banks commonly adopt to maintain their reserve,
for the dependent banks trust that at such moments the ultimate banks
will be discounting more than usual and lending more than usual. But
ultimate banks have no similar rear-guard to rely upon.
I shall have failed in my purpose if I have not proved that the sys­
tem 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, de­
pendent 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 Eng­
land, 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 phe­
nomenon. One or more get for a time a better business than the
others, but no single bank permanently obtains an unquestioned pre­
dominance. 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 con­
stitution 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 advan­
tage, 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 manyreserve 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 practi­
cal purposes, it is not even worth while to examine these arguments.
Queen Victoria is loyally obeyed—without doubt, and without reason­
ing—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 calam­
ity swept it away, generations must elapse before at all the same
trust would be placed in any other equivalent. A many-reserve sys­
tem, 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 ridi­
cule 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 bank*
ing 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 share­
holders. The nation itself—the Executive Government—names the
governor and deputy-govemor 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 logi­
cal 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 palpa­
bly 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 prin­
ciples 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 Parlia­
ment) 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 in­
distinctly 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
Jew/'-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 en­
sure 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 sys­
tem, 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.


How Lombard Street Came to Exist} and Why
It Assumed Its Present Form.
I n t h e last century, a favourite subject of literary ingenuity was

‘conjectural history/ as it was then called. Upon grounds of proba­
bility a fictitious sketch was made of the possible origin of things
existing. If this kind of speculation were now applied to banking,
the natural and first idea would be that large systems of deposit bank­
ing grew up in the early world, just as they grow up now in any
large English colony. As soon as any such community becomes rich
enough to have much money, and compact enough to be able to lodge
its money in single banks, it at once begins so to do. English colonists
do not like the risk of keeping their money, and they wish to make
an interest on it. They carry from home the idea and the habit
of banking, and they take to it as soon as they can in their new world.
Conjectural history would be inclined to say that all banking began
thus: but such history is rarely of any value. The basis of it is false.
It assumes that what works most easily when established is that
which it would be the most easy to establish, and that what seems
simplest when familiar would be most easily appreciated by the mind
though unfamiliar. But exactly the contrary is true. Many things
which seem simple and which work well when firmly established,
are very hard to establish among new people, and not very easy to
explain to them. Deposit banking is of this sort. Its essence is that
a very large number of persons agree to trust a very few persons,
or some one person. Banking would not be a profitable trade if
bankers were not a small number, and depositors in comparison an
immense number. But to get a great number of persons to do exactly
the same thing is always very difficult, and nothing but a very palpable
necessity will make them on a sudden begin to do it. And there is
no such palpable necessity in banking. If you take a country town
in France, even now, you will not find any such system of banking
as ours. Cheque-books are unknown, and money kept on running
account by bankers is rare. People store their money in a caisse at
their houses. Steady savings, which are waiting for investment, and
which are sure not to be soon wanted, may be lodged with bankers;
but the common floating cash of the community is kept by the com­




munity themselves at home. They prefer to keep it so, and it would
not answer a banker’s purpose to make expensive arrangements for
keeping it otherwise. If a ‘branch,* such as the National Provincial
Bank opens in an English country town, were opened in a correspond­
ing French one, it would not pay its expenses. You could not get
any sufficient number of Frenchmen to agree to put their money
there. And so it is in all countries not of British descent, though
in various degrees. Deposit banking is a very difficult thing to begin,
because people do not like to let their money out of their sight, espe­
cially do not like to let it out of sight without security—still more,
cannot all at once agree on any single person to whom they are con­
tent to trust it unseen and unsecured. Hypothetical history, which
explains the past by what is simplest and commonest in the present,
is in banking, as in most things, quite untrue.
The real history is very different. New wants are mostly supplied
by adaptation, not by creation or foundation. Something having been
created to satisfy an extreme want, it is used to satisfy less pressing
wants, or to supply additional conveniences. On this account, po­
litical Government—the oldest institution in the world—has been the
hardest worked. At the beginning of history, we find it doing every­
thing which society wants done, and forbidding everything which
society does not wish done. In trade, at present, the first commerce
in a new place is a general shop, which, beginning with articles of real
necessity, comes shortly to supply the oddest accumulation of petty
comforts. And the history of banking has been the same. The first
banks were not founded for our system of deposit banking, or for
anything like it They were founded for much more pressing reasons,
and having been founded, they, or copies from them, were applied to
our modern uses.
The earliest banks of Italy, where the name began, w ere finance
companies. The Bank of St. George, at Genoa, and other banks
founded in imitation of it, were at first only companies to make
loans to, and float loans for, the Governments of the cities in which
they were formed. The want of money is an urgent want of Govern­
ments at most periods, and seldom more urgent than it was in the
tumultuous Italian Republics of the Middle Ages. After these banks
had been long established, they began to do what we call banking
business; but at first they never thought of it. The great banks of
the North of Europe had their origin in a want still more curious.
The notion of its being a prime business of a bank to give good coin
has passed out of men’s memories; but wherever it is felt, there is



no want of business more keen and urgent. Adam Smith describes
it so admirably that it would be stupid not to quote his words:—‘The
currency of a great state, such as France or England, generally con­
sists almost entirely of its own coin. Should this currency, therefore,
be at any time worn, dipt, or otherwise degraded below its standard
value, the state by a reformation of its coin can effectually re-establish
its currency. But the currency of a small state, such as Genoa or
Hamburgh, can seldom consist altogether in its own coin, but must
be made up, in a great measure, of the coins of all the neighbouring
states with which its inhabitants have a continual intercourse. Such
a state, therefore, by reforming its coin, will not always be able to
reform its currency. If foreign bills of exchange are paid in this
currency, the uncertain value of any sum, of what is in its own
nature so uncertain, must render the exchange always very much
against such a state, its currency being, in all foreign states, necessarily
valued even below what it is worth.
‘In order to remedy the inconvenience to which this disadvantage­
ous exchange must have subjected their merchants, such small states,
when they began to attend to the interest of trade, have frequently
enacted, that foreign bills of exchange of a certain value should be
paid, not in common currency, but by an order upon, or by a trans­
fer in, the books of a certain bank, established upon the credit, and
under the protection of the state, this bank being always obliged to
pay, in good and true money, exactly according to the standard of
the state. The banks of Venice, Genoa, Amsterdam, Hamburgh and
Nuremburg, seem to have been all originally established with this
view, though some of them may have afterwards been made sub­
servient to other purposes. The money of such banks, being better
than the common currency of the country, necessarily bore an agio,
which was greater or smaller, according as the currency was sup­
posed to be more or less degraded below the standard of the state.
The agio of the bank of Hamburgh, for example, which is said to
be commonly about fourteen per cent, is the supposed difference
between the good standard money of the state, and the dipt, worn,
and diminished currency poured into it from all the neighbouring
‘Before 1609 the great quantity of dipt and worn foreign coin,
which the extensive trade of Amsterdam brought from all parts of
Europe, reduced the value-of its currency about 9 per cent below
that of good money fresh from the mint. Such money no sooner
appeared than it was melted down or carried away, as it always is in



such circumstances. The merchants, with plenty of currency, could
not always find a sufficient quantity of good money to pay their bills
of exchange; and the value of those bills, in spite of several regula­
tions which were made to prevent it, became in a great measure un­
‘In order to remedy these inconveniences, a bank was established
in 1609 under the guarantee of the City. This bank received both
foreign coin, and the light and worn coin of the country at its real
intrinsic value in the good standard money of the country, deducting
only so much as was necessary for defraying the expense of coinage,
and the other necessary expense of management. For the value
which remained, after this small deduction was made, it gave a credit
in its books. This credit was called bank money, which, as it repre­
sented money exactly according to the standard of the mint, was
always of the same real value, and intrinsically worth more than cur­
rent money. It was at the same time enacted, that all bills drawn
upon or negotiated at Amsterdam of the value of six hundred guilders
and upwards should be paid in bank money, which at once took
away all uncertainty in the value of those bills. Every merchant,
in consequence of this regulation, was obliged to keep an account
with the bank in order to pay his foreign bills of exchange, which
necessarily occasioned a certain demand for bank money.’ *
Again, a most important function of early banks is one which the
present banks retain, though it is subsidiary to their main use; viz.
the function of remitting money. A man brings money to the bank
to meet a payment which he desires to make at a great distance, and
the bank, having a connection with other banks, sends it where it is
wanted. As soon as bills of exchange are given upon a large scale,
this remittance is a very pressing requirement. Such bills must be
made payable at a place convenient to the seller of the goods in pay­
ment of which they are given, perhaps at the great town where his
warehouse is. But this may be very far from the retail shop of the
buyer who bought those goods to sell them again in the country.
For these, and a multitude of purposes, the instant and regular re­
mittance of money is an early necessity of growing trade; and that
remittance it was a first object of early banks to accomplish.
These are all uses other than those of deposit banking which banks
Smith’s *Wealth of Nations,’ Book IV. chap. iii. ‘Digression concerning
Banks of Deposit,’ &c.

supplied that afterwards became in our English sense deposit banks.
By supplying these uses, they gained the credit that afterwards en­
abled them to gain a living as deposit banks. Being trusted for one
purpose, they came to be trusted for a purpose quite different, ulti­
mately far more important, though at first less keenly pressing. But
these wants only affect a few persons, and therefore bring the bank
under the notice of a few only. The real introductory function
which deposit banks at first perform is much more popular, and it
is only when they can perform this more popular kind of business
that deposit banking ever spreads quickly and extensively. This
function is the supply of the paper circulation to the country, and
it will be observed that I am not about to overstep my limits and
discuss this as a question of currency. In what form the best paper
currency can be supplied to a country is a question of economical
theory with which I do not meddle here. I am only narrating un­
questionable history, not dealing with an argument where every step
is disputed. And part of this certain history is that the best way
to diffuse banking in a community is to allow the banker to issue bank­
notes of small amount that can supersede the metal currency. This
amounts to a subsidy to each banker to enable him to keep open a
bank till depositors choose to come to it. The country where deposit
banking is most diffused is Scotland, and there the original profits
were entirely derived from the circulation. The note issue is now
a most trifling part of the liabilities of the Scotch banks, but it was
once their mainstay and source of profit. A curious book, lately
published, has enabled us to follow the course of this in detail. The
Bank of Dundee, now amalgamated with the Royal Bank of Scotland,
was founded in 1763, and had become before its amalgamation, eight
or nine years since, a bank of considerable deposits. But for twentyfive years from its foundation it had no deposits at all. It subsisted
mostly on its note issue, and a little on its remittance business. Only
in 1792, after nearly thirty years, it began to gain deposits, but from
that time they augmented very rapidly.* The banking history of
England has been the same, though we have no country bank ac­
counts in detail which go back so far. But probably up to 1830
in England, or thereabouts, the main profit of banks was derived from
the circulation, and for many years after that the deposits were treated
as very minor matters, and the whole of so-called banking discussion
turned on questions of circulation. We are still living in the debris of
that controversy, for, as I have so often said, people can hardly think
* See Note C in Appendix.



of the structure of Lombard Street, except with reference to the
paper currency and to the Act of 1844, which regulates it now. The
French are still in the same epoch of the subject. The great enquete
of 1865 is almost wholly taken up with currency matters, and mere
banking is treated as subordinate. And the accounts of the Bank of
France show why. The last weekly statement before the German
war showed that the circulation of the Bank of France was as much
as 59,244,000/., and that the private deposits were only 17,127,000/.
Now the private deposits are about the same, and the circulation is
112,000,000/. So difficult is it in even a great country like France
for the deposit system of banking to take root, and establish itself
with the strength and vigour that it has in England.
The experience of Germany is the same. The accounts preceding
the war in North Germany showed the circulation of the issuing
banks to be 39,875,000/., and the deposits to be 6,472,000/. while the
corresponding figures at the present moment are—circulation, 60,000,000/. and deposits 8,000,000/. It would be idle to multiply
The reason why the use of bank paper commonly precedes the
habit of making deposits in banks is very plain. It is a far easier habit
to establish. In the issue of notes the banker, the person to be most
benefited, can do something. He can pay away his own ‘promises’
in loans, in wages, or in.payment of debts. But in the getting of
deposits he is passive. His issues depend on himself; his deposits on
the favour of others. And to the public the change is far easier too.
To collect a great mass of deposits with the same banker, a great
number of persons must agree to do something. But to establish a
note circulation, a large number of persons need only do nothing.
They receive the banker’s notes in the common course of their busi­
ness, and they have only not to take those notes to the banker for
payment. If the public refrain from taking trouble, a paper circula­
tion is immediately in existence. A paper circulation is begun by
the banker, and requires no effort on the part of the public; on the
contrary, it needs an effort of the public to be rid of notes once is­
sued; but deposit banking cannot be begun by the banker, and requires
a spontaneous and consistent effort in the community. And there­
fore paper issue is the natural prelude to deposit banking.
The way in which the issue of notes by a banker prepares the way
for the deposit of money with him is very plain. When a private
person begins to possess a great heap of bank-notes, it will soon
strike him that he is trusting the banker very much, and that in re­



turn he is getting nothing. He runs the risk of loss and robbery
just as if he were hoarding coin. He would run no more risk by
the failure of the bank if he made a deposit there, and he would be
free from the risk of keeping the cash. No doubt it takes time be­
fore even this simple reasoning is understood by uneducated minds.
So strong is the wish of most people to see their money that they
for some time continue to hoard bank-notes: for a long period a
few do so. But in the end common sense conquers. The circulation
of bank-notes decreases, and the deposit of money with the banker
increases. The credit of the banker having been efficiently advertised
by the note, and accepted by the public, he lives on the credit so
gained years after the note issue itself has ceased to be very important
to him.
The efficiency of this introduction is proportional to the diffusion
of the right of note issue. A single monopolist issuer, like the Bank
of France, works its way with difficulty through a country, and
advertises banking very slowly. Even now the Bank of France, which,
I believe, by law ought to have a branch in each Department, has
only branches in sixty out of eighty-six. On the other hand, the
Swiss banks, where there is always one or more to every Canton,
diffuse banking rapidly. We have seen that the liabilities of the Bank
of France stand thus:


u 2,000,000

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



The reason is that a central bank, which is governed in the capital
and descends on a country district, has much fewer modes of lending
money safely than a bank of which the partners belong to that dis­
trict, and know the men and things in it. A note issue is mainly be­
gun by loans; there are then no deposits to be paid. But the mass
of loans in a rural district are of small amount; the bills to be dis­
counted are trifling; the persons borrowing are of small means and
only local repute; the value of any property they wish to pledge
depends on local changes and local circumstances. A banker who
These are the amounts at December 31,1865. See ‘Grundziige der NationalOckonomie. Von Max Wirth.’ Dritter Band, p. 491.



lives in the district, who has always lived there, whose whole mind
is a history of the district and its changes, is easily able to lend money
safely there. But a manager deputed by a single central establishment
does so with difficulty. The worst people will come to him and ask
for loans. His ignorance is a mark for all the shrewd and crafty
people thereabouts. He will have endless difficulties in establishing
the circulation of the distant bank, because he has not the local knowl­
edge which alone can teach him how to issue that circulation with
A system of note issues is therefore the best introduction to a large
system of deposit banking. As yet, historically, it is the only intro­
duction: no nation as yet has arrived at a great system of deposit
banking without going first through the preliminary stage of note
issue, and of such note issues the quickest and most efficient in this
way is one made by individuals resident in the district, and conversant
with it.
And this explains why deposit banking is so rare. Such a note
issue as has been described is possible only in a country exempt from
invasion, and free from revolution. During an invasion note-issuing
banks must stop payment; a run is nearly inevitable at such a time,
and in a revolution too. In such great and close civil dangers a nation
is always demoralised; everyone looks to himself, and everyone likes
to possess himself of the precious metals. These are sure to be valu­
able, invasion or no invasion, revolution or no revolution. But the
goodness of bank-notes depends on the solvency of the banker, and
that solvency may be impaired if the invasion is not repelled or the
revolution resisted.
Hardly any continental country has been till now exempt for long
periods both from invasion and revolution. In Holland and Ger­
many-two countries where note issue and deposit banking would
seem as natural as in England and Scotland—there was never any
security from foreign war. A profound apprehension of external
invasion penetrated their whole habits, and men of business would
have thought it insane not to contemplate a contingency so frequent
in their history, and perhaps witnessed by themselves.
France indeed, before 1789, was an exception. For many years
under the old regime she was exempt from serious invasion or at­
tempted revolution. Her Government was fixed, as was then thought,
and powerful; it could resist any external enemy, and the prestige
on which it rested seemed too firm to fear any enemy from within.
But then it was not an honest Government, and it had shown its



dishonesty in this particular matter of note issue. The regent in
Law’s time had given a monopoly of note issue to a bad bank, and
had paid off the debts of the nation in worthless paper. The Govern­
ment had created a machinery of ruin, and had thriven on it. Among
so apprehensive a race as the French the result was fatal. For many
years no attempt at note issue or deposit banking was possible in
France. So late as the foundation of the Caisse cFEscompte, in
Turgot’s time, the remembrance of Law’s failure was distinctly felt,
and impeded the commencement of better attempts.
This therefore is the reason why Lombard Street exists; that is,
why England is a very great Money Market, and other European
countries but small ones in comparison. In England and Scotland a
diffused system of note issues started banks all over the country;
in these banks the savings of the country have been lodged, and by
these they have been sent to London. No similar system arose else­
where, and in consequence London is full of money, and all conti­
nental cities are empty as compared with it.
The monarchical form of Lombard Street is due also to the note
issue. The origin of the Bank of England has been told by Macaulay,
and it is never wise for an ordinary writer to tell again what he has
told so much better. Nor is it necessary, for his writings are in every­
one’s hands. Still I must remind my readers of the curious story.
Of all institutions in the world the Bank of England is now proba­
bly the most remote from party politics and from ‘financing.’ But
in its origin it was not only a finance company, but a Whig finance
company. It was founded by a Whig Government because it was
in desperate want of money, and supported by the ‘City’ because the
‘City’ was Whig. Very briefly, the story was this. The Govern­
ment of Charles II. (under the Cabal Ministry) had brought the
credit of the English State to the lowest possible point. It had per­
petrated one of those monstrous frauds, which are likewise gross
blunders. The goldsmiths, who then carried on upon a trifling scale
what we should now call banking, used to deposit their reserve of
treasure in the ‘Exchequer,’ with the sanction and under the care of
the Government. In many European countries the credit of the
State had been so much better than any other credit, that it had been
used to strengthen the beginnings of banking. The credit of the
state had been so used in England: though there had lately been a



civil war and several revolutions, the honesty of the English Govern­
ment was trusted implicitly. But Charles II. showed that it was
trusted undeservedly. He shut up the ‘Exchequer,* would pay no
one, and so the ‘goldsmiths’ were ruined.
The credit of the Stuart Government never recovered from this
monstrous robbery, and the Government created by the Revolution
of 1688 could hardly expect to be more trusted with money than its
predecessor. A Government created by a revolution hardly ever is.
There is a taint of violence which capitalists dread instinctively, and
there is always a rational apprehension that the Government which
one revolution thought fit to set up another revolution may think
fit to pull down. In 1694, the credit of William III.’s Government
was so low in London that it was impossible for it to borrow any
large sum; and the evil was the greater, because in consequence of the
French war the financial straits of the Government were extreme.
At last a scheme was hit upon which would relieve their necessities.
‘The plan,’ says Macaulay, ‘was that twelve hundred thousand pounds
should be raised at what was then considered as the moderate rate
of 8 per cent.’ In order to induce the subscribers to advance the
money promptly on terms so unfavourable to the public, the sub­
scribers were to be incorporated by the name of the Governor and
Company of the Bank of England. They were so incorporated, and
the 1,200,000/. was obtained.
On many succeeding occasions, their credit was of essential use to
the Government. Without their aid, our National Debt could not
have been borrowed; and if we had not been able to raise that money
we should have been conquered by France and compelled to take back
James II. And for many years afterwards the existence of that debt
was a main reason why the industrial classes never would think of
recalling the Pretender, or of upsetting the revolution settlement.
The ‘fund-holder’ is always considered in the books of that time
as opposed to his ‘legitimate* sovereign, because it was to be feared
that this sovereign would repudiate the debt which was raised by
those who dethroned him, and which was spent in resisting him and
his allies. For a long time the Bank of England was the focus of
London Liberalism, and in that capacity rendered to the State in­
estimable services. In return for these substantial benefits the Bank
of England received from the Government, either at first or after­
wards, three most important privileges.
First. The Bank of England had the exclusive possession of the
Government balances. In its first period, as I have shown, the Bank



gave credit to the Government, but afterwards it derived credit from
the Government. There is a natural tendency in men to follow the
example of the Government under which they live. The Govern­
ment is the largest, most important, and most conspicuous entity with
which the mass of any people are acquainted; its range of knowledge
must always be infinitely greater than the average of their knowl­
edge, and therefore, unless there is a conspicuous warning to the con­
trary, most men are inclined to think their Government right, and,
when they can, to do what it does. Especially in money matters a
man might fairly reason—‘If the Government is right in trusting the
Bank of England with the great balance of the nation, I cannot be
wrong in trusting it with my little balance.'
Second. The Bank of England had, till lately, the monopoly of
limited liability in England. The common law of England knows
nothing of any such principle. It is only possible by Royal Charter
or Statute Law. And by neither of these was any real bank (I do not
count absurd schemes such as Chamberlayne’s Land Bank) permitted
with limited liability in England till within these few years. Indeed,
a good many people thought it was right for the Bank of England,
but not right for any other bank. I remember hearing the conversa­
tion of a distinguished merchant in the City of London, who well
represented the ideas then most current. He was declaiming against
banks of limited liability, and some one asked—‘Why, what do you
say, then, to the Bank of England, where you keep your own ac­
count?’ ‘Oh! ’ he replied, ‘that is an exceptional case.’ And no doubt
it was an exception of the greatest value to the Bank of England, be­
cause it induced many quiet and careful merchants to be directors
of the Bank, who certainly would not have joined any bank where
all their fortunes were liable, and where the liability was not limited.
Thirdly. The Bank of England had the privilege of being the
sole joint stock company permitted to issue bank notes in England.
Private London bankers did indeed issue notes down to the middle
of the last century, but no joint stock company could do so. The
explanatory clause of the Act of 1742 sounds most curiously to our
modern ears. ‘And to prevent any doubt that may arise concerning
the privilege or power given to the said governor and company’—
that is, the Bank of England—‘o f e x c l u s iv e b a n k in g ; and also in
regard to creating any other bank or banks by Parliament, or restrain­
ing other persons from banking during the continuance of the said
privilege granted to the governor and company of the Bank of Eng­
land, as before recited;—it is hereby further enacted and declared by



the authority aforesaid, that it is the true intent and meaning of the
said Act that no other bank shall be created, established, or allowed
by Parliament, and that it shall not be lawful for any body politic or
corporate whatsoever created or to be created, or for any other per­
sons whatsoever united or to be united in covenants or partnership
exceeding the number of six persons in that part of Great Britain
called England, to borrow, owe, or take up any sum or sums of money
on their bills or notes payable on demand or at any less time than
six months from the borrowing thereof during the continuance of
such said privilege to the said governor and company, who are
hereby declared to be and remain a corporation with the privilege of
exclusive banking, as before recited.* To our modem ears these
words seem to mean more than they did. The term banking was
then applied only to the issue of notes and the taking up of money on
bills on demand. Our present system of deposit banking, in which
no bills or promissory notes are issued, was not then known on a great
scale, and was not called banking. But its effect was very important.
It in time gave the Bank of England the monopoly of the note issue
of the Metropolis. It had at that time no branches, and so it did not
compete for the country circulation. But in the Metropolis, where
it did compete, it was completely victorious. No company but the
Bank of England could issue notes, and unincorporated individuals
gradually gave way, and ceased to do so. Up to 1844 London private
bankers might have issued notes if they pleased, but almost a hun­
dred years ago they were forced out of the field. The Bank of Eng­
land has so long had a practical monopoly of the circulation, that it is
commonly believed always to have had a legal monopoly.
And the practical effect of the clause went further: it was believed
to make the Bank of England the only joint stock company that
could receive deposits, as well as the only company that could issue
notes. The gift of ‘exclusive banking* to the Bank of England was
read in its most natural modem sense: it was thought to prohibit
any other banking company from carrying on our present system
of banking. After joint stock banking was permitted in the country,
people began to inquire why it should not exist in the Metropolis
too? And then it was seen that the words I have quoted only forbid
the issue of negotiable instruments, and not the receiving of money
when no such instrument is given. Upon this construction, the
London and Westminster Bank and all our older joint stock banks
were founded. But till they began, the Bank of England had among
companies not only the exclusive privilege of note issue, but that of



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


The Position of the Chancellor of the
Exchequer in the Money Market.
N o th in g can be truer in theory than the economical principle that
banking is a trade and only a trade, and nothing can be more surely
established by a larger experience than that a Government which
interferes with any trade injuries that trade. The best thing un­
deniably that a Government can do with the Money Market is to
let it take care of itself.
But a Government can only carry out this principle universally
if it observe one condition: it must keep its own money. The Gov­
ernment is necessarily at times possessed of large sums in cash. It is
by far the richest corporation in the country; its annual revenue pay­
able in money far surpasses that of any other body or person. And
if it begins to deposit this immense income as it accrues at any bank,
at once it becomes interested in the welfare of that bank. It cannot
pay the interest on its debt if that bank cannot produce the public
deposits when that interest becomes due; it cannot pay its salaries,
and defray its miscellaneous expenses, if that bank fail at any time.
A modem Government is like a very rich man with very great debts
which he cannot well pay; its credit is necessary to its prosperity,
almost to its existence, and if its banker fail when one of its debts
becomes due its difficulty is intense.
Another banker, it will be said, may take up the Government ac­
count. He may advance, as is so often done in other bank failures,
what the Government needs for the moment in order to secure the
Government account in future. But the imperfection of this remedy
is that it fails in the very worst case. In a panic, and at a general
collapse of credit, no such banker will probably be found. The old
banker who possesses the Government deposit cannot repay it, and
no banker not having that deposit will, at a bad crisis, be able to find
the 5,000,000/. or 6,000,000/. which the quarter day of a Govern­
ment such as ours requires. If a finance Minister, having entrusted
his money to a bank, begins to act strictly, and say he will in all cases
let the Money Market take care of itself, the reply is that in one case
the Money Market will take care of him too, and he will be insolvent.
In the infancy of Banking it is probably much better that a Govern­


ment should as a rule keep its own money. If there are not Banks
in which it can place secure reliance, it should not seem to rely upon
them. Still less should it give peculiar favour to any one, and by
entrusting it with the Government account secure to it a mischievous
supremacy above all other banks. The skill of a financier in such an
age is to equalise the receipt of taxation, and the outgoing of ex­
penditure; it should be a principal care with him to make sure that
more should not be locked up at a particular moment in the Govern­
ment coffers than is usually locked up there. I f the amount of dead
capital so buried in the Treasury does not at any time much exceed
the common average, the evil so caused is inconsiderable: it is only
the loss of interest on a certain sum of money, which would not be
much of a burden on the whole nation; the additional taxation it would
cause would be inconsiderable. Such an evil is nothing in comparison
with that of losing the money necessary for inevitable expence by
entrusting it to a bad Bank, or that of recovering this money by
identifying the national credit with the bad Bank and so propping
it up and perpetuating it. So long as the security of the Money
Market is not entirely to be relied on, the Goverment of a country
had much better leave it to itself and keep its own money. If the
banks are bad, they will certainly continue bad and will probably
become worse if the Government sustains and encourages them. The
cardinal maxim is, that any aid to a present bad Bank is the surest
mode of preventing the establishment of a future good Bank.
When the trade of Banking began to be better understood, when
the Banking system was thoroughly secure, the Government might
begin to lend gradually; especially to lend the unusually large sums
which even under the most equable system of finance will at times
accumulate in the public exchequer.
Under a natural system of banking it would have every facility.
Where there were many banks keeping their own reserve, and each
most anxious to keep a sufficient reserve, because its own life and
credit depended on it, the risk of the Government in keeping a banker
would be reduced to a minimum. It would have the choice of many
bankers, and would not be restricted to any one.
Its course would be very simple, and be analogous to that of other
public bodies in the country. The Metropolitan Board of Works,
which collects a great revenue in London, has an account at the
London and Westminster Bank, for which that bank makes a deposit
of Consols as a security. The Chancellor of the Exchequer would
have no difficulty in getting such security either. If, as is likely, his

account would be thought to be larger than any single bank ought
to be entrusted with, the public deposits might be divided between
several. Each would give security, and the whole public money
would be safe. If at any time the floating money in the hands of
Government were exceptionally large, he might require augmented
security to be lodged, and he might obtain an interest. He would
be a lender of such magnitude and so much influence, that he might
command his own terms. He might get his account kept safe if
anyone could.
If, on the other hand, the Chancellor of the Exchequer were a
borrower, as at times he is, he would have every facility in obtaining
what he wanted. The credit of the English Government is so good
that he could borrow better than anyone else in the world. He would
have greater facility, indeed, than now, for, except with the leave
of Parliament, the Chancellor of die Exchequer cannot borrow by
our present laws in the open market. He can only borrow from the
Bank of England on what are called ‘deficiency bills.’ In a natural
system, he would borrow of any one out of many competing banks,
selecting the one that would lend cheapest; but under our present
artificial system, he is confined to a single bank, which can fix its
own charge.
If contrary to expectation a collapse occurred, the Government
might withdraw, as the American Government actually has with­
drawn, its balance from the bankers. It might give its aid, lend Ex­
chequer bills, or otherwise pledge its credit for the moment, but when
the exigency was passed it might let the offending banks suffer. There
would be a penalty for their misconduct. New and better banks,
who might take warning from that misconduct, would arise. As in
all natural trades, what is old and rotten would perish, what is new
and good would replace it. And till the new banks had proved, by
good conduct, their fitness for State confidence, the State need not
give it. The Government could use its favour as a bounty on pru­
dence, and the withdrawal of that favour as a punishment for culpable
Under a good system of banking, a great collapse, except from
rebellion or invasion, would probably not happen. A large number
of banks, each feeling that their credit was at stake in keeping a good
reserve, probably would keep one; if any one^lid not, it would be
criticised constantly, and would soon lose its standing, and in the end
disappear. And such banks would meet an incipient panic freely,
and generously; they would advance out of their reserve boldly and



largely, for each individual bank would fear suspicion, and know that
at such periods it must ‘show strength,* if at such times it wishes to
be thought to have strength. Such a system reduces to a minimum the
risk that is caused by the deposit. If the national money can safely be
deposited in banks in any way, this is the way to make it safe.
But this system is nearly the opposite to that which the law and
circumstances have created for us in England. The English Govern­
ment, far from keeping cash from the money market till the position
of that market was reasonably secure, at a very early moment, and
while credit of all kinds was most insecure, for its own interests
entered into the Money Market. In order to effect loans better,
it gave the custody and profit of its own money (along with other
privileges) to a single bank, and therefore practically and in fact it
is identified with the Bank of this hour. It cannot let the money
market take care of itself because it has deposited much money in that
market, and it cannot pay its way if it loses that money.
Nor would any English statesman propose to ‘wind up’ the Bank
of England. A theorist might put such a suggestion on paper, but no
responsible government would think of it. At the worst crisis and in
the worst misconduct of the Bank, no such plea has been thought of:
in 1825 when its till was empty, in 1837 when it had to ask aid from
the Bank of France, no such idea was suggested. By irresistible tradi­
tion the English Government was obliged to deposit its money in
the money market and to deposit with this particular Bank.
And this system has plain and grave evils.
1st. Because being created by state aid, it is more likely than a
natural system to require state help.
2ndly. Because, being a owe-reserve system, it reduces the spare
cash of the Money Market to a smaller amount than any other system,
and so makes that market more delicate. There being a less hoard to
meet liabilities, any error in the management of that reserve has a
proportionately greater effect.
3rdly. Because, our one reserve is, by the necessity of its nature,
given over to one board of directors, and we are therefore dependent
on the wisdom of that one only, and cannot, as in most trades, strike
an average of the wisdom and the folly, the discretion and the in­
discretion, of many competitors.
Lastly. Because that board of directors is, like every other board,
pressed on by its shareholders to make a high dividend, and therefore
to keep a small reserve, whereas the public interest imperatively re­
quires that they shall keep a large one.



These four evils were inseparable from the system, but there is
besides an additional and accidental evil. The English Government
not only created this singular system, but it proceeded to impair it,
and demoralise all the public opinion respecting it. For more than a
century after its creation (notwithstanding occasional errors) the
Bank of England, in the main, acted with judgment and with caution.
Its business was but small as we should now reckon, but for the most
part it conducted that business with prudence and discretion. In
1696, it had been involved in the most serious difficulties, and had
been obliged to refuse to pay some of its notes. For a long period it
was in wholesome dread of public opinion, and the necessity of retain­
ing public confidence made it cautious. But the English Government
removed that necessity. In 1797, Mr. Pitt feared that he might not
be able to obtain sufficient species for foreign payments, in conse­
quence of the low state of the Bank reserve, and he therefore required
the Bank not to pay in cash. He removed the preservative appre­
hension which is the best security of all Banks.
For this reason the period under which the Bank of England did
not pay gold for its notes—the period from 1797 to 1819—is always
called the period of the Bank restriction. As the Bank during that
period did not perform, and was not compelled by law to perform,
its contract of paying its notes in cash, it might apparently have been
well called the period of Bank license. But the word ‘restriction’
was quite right, and was the only proper word as a description of
the policy of 1797. Mr. Pitt did not say that the Bank of England
need not pay its notes in specie; he ‘restricted’ them from doing 50;
he said that they must not.
In consequence, from 1797 to 1844 (when a new era begins), there
never was a proper caution on the part of the Bank directors. At
heart they considered that the Bank of England had a kind of charmed
life, and that it was above the ordinary banking anxiety to pay its
way. And this feeling was very natural. A bank of issue, which
need not pay its notes in cash, has a charmed life; it can lend what
it wishes, and issue what it likes, with no fear of harm to itself, and
with no substantial check but its own inclination. For nearly a
quarter of a century, the Bank of England was such a bank, for all
that time it could not be in any danger. And naturally the public
mind was demoralised also. Since 1797, the public have always ex­
pected the Government to help the Bank if necessary. I cannot fully
discuss the suspensions of the Act of 1844 in 1847, 1857, and 1866;
but indisputably one of their effects is to make people think that



Government will always help the Bank if the Bank is in extremity.
And this is the sort of anticipation which tends to justify itself, and
to cause what it expects.
On the whole, therefore, the position of the Chancellor of the Ex­
chequer in our Money Market is that of one who deposits largely
in it, who created it, and who demoralised it. He cannot, therefore,
banish it from his thoughts, or decline responsibility for it. He must
arrange his finances so as not to intensify panics, but to mitigate them.
He must aid the Bank of England in the discharge of its duties; he
must not impede or prevent it.
His aid may be most efficient. He is, on finance, the natural ex­
ponent of the public opinion of England. And it is by that opinion
that we wish the Bank of England to be guided. Under a natural sys­
tem of banking we should have relied on self-interest, but the State
prevented that; we now rely on opinion instead; the public approval
is a reward, its disapproval a severe penalty, on the Bank directors;
and of these it is most important that the finance minister should be
a sound and felicitous exponent.


The Mode in Which the Value of Money Is
Settled in Lombard Street.
M a n y p e r so n s believe that the Bank of England has some peculiar
power of fixing the value of money. They see that the Bank of
England varies its minimum rate of discount from time to time, and
that, more or less, all other banks follow its lead, and charge much
as it charges; and they are puzzled why this should be. ‘Money,’ as
economists teach, *is a commodity, and only a commodity;’ why then,
it is asked, is its value fixed in so odd a way, and not the way in
which the value of all other commodities is fixed?
There is at bottom, however, no difficulty in the matter. The
value of money is settled, like that of all other commodities, by
supply and demand, and only the form is essentially different. In
other commodities all the large dealers fix their own price; they try
to underbid one another, and that keeps down the price; they try
to get as much as they can out of the buyer, and that keeps up the price.
Between the two what Adam Smith calls the higgling of the market
settles it. And this is the most simple and natural mode of doing
business, but it is not the only mode. If circumstances make it con­
venient another may be adopted. A single large holder—especially
if he be by far the greatest holder—may fix his price, and other dealers
may say whether or not they will undersell him, or whether or not
they will ask more than he does. A very considerable holder of an
article may, for a time, vitally affect its value if he lay down the
minimum price which he will take, and obstinately adhere to it. This
is the way in which the value of money in Lombard Street is settled.
The Bank of England used to be a predominant, and is still a most
important, dealer in money. It lays down the least price at which
alone it will dispose of its stock, and this, for the most part, enables
other dealers to obtain that price, or something near it.
The reason is obvious. At all ordinary moments there is not money
enough in Lombard Street to discount all the bills in Lombard Street
without taking some money from the Bank of England. As soon
as the Bank rate is fixed, a great many persons who have bills to dis­
count try how much cheaper than the Bank they can get these bills
discounted. But they seldom can get them discounted very much


cheaper, for if they did everyone would leave the Bank, and the outer
market would have more bills than it could bear.
In practice, when the Bank finds this process beginning, and sees
that its business, is much diminishing, it lowers the rate, so as to
secure a reasonable portion of the business to itself, and to keep a fair
part of its deposits employed. At Dutch auctions an upset or maxi­
mum price used to be fixed by the seller, and he came down in his
bidding till he found a buyer. The value of money is fixed in Lombard
Street in much the same way, only that the upset price is not that
of all sellers, but that of one very important seller, some part of whose
supply is essential.
The notion that the Bank of England has a control over the Money
Market, and can fix the rate of discount as it likes, has survived from
the old days before 1844, when the Bank could issue as many notes
as it liked. But even then the notion was a mistake. A bank with a
monopoly of note issue has great sudden power in the Money Market,
but no permanent power: it can affect the rate of discount at any
particular moment, but it cannot affect the average rate. And the
reason is, that any momentary fall in money, caused by the caprice
of such a bank, of itself tends to create an immediate and equal rise,
so that upon an average the value is not altered.
What happens is this. If a bank with a monopoly of note issue
suddenly lends (suppose) 2,000,000/. more than usual, it causes a pro­
portionate increase of trade and increase of prices. The persons to
whom that 2,000,000/. was lent, did not borrow it to lock it up; they
borrow it, in the language of the market, to ‘operate with’—that is,
they try to buy with it; and that new attempt to buy—that new de­
mand raises prices. And this rise of prices has three consequences.
First. It makes everybody else want to borrow money. Money is
not so efficient in buying as it was, and therefore operators require
more money for the same dealings. If railway stock is 10 per cent
dearer this year than last, a speculator who borrows money to enable
him to deal must borrow 10 per cent more this year than last, and
in consequence there is an augmented demand for loans. Secondly.
This is an effectual demand, for the increased price of railway stock
enables those who wish it to borrow more upon it. The common
practice is to lend a certain portion of the market value of such secu­
rities, and if that value increases, the amount of the usual loan to be
obtained on them increases too. In this way, therefore, any artificial
reduction in the value of money causes a new augmentation of the
demand for money, and thus restores that value to its natural level.



In all business this is well known by experience: a stimulated market
soon becomes a tight market, for so sanguine are enterprising men,
that as soon as they get any unusual ease they always fancy that the
relaxation is greater than it is, and speculate till they want more than
they can obtain.
In these two ways sudden loans by an issuer of notes, though they
may temporarily lower the value of money, do not lower it perma­
nently, because they generate their own counteraction. And this
they do whether the notes issued are convertible into coin or not.
During the period of Bank restriction, from 1797 to 1819, the Bank
of England could not absolutely control the Money Market, any
more than it could after 1819, when it was compelled to pay its notes
in coin. But in the case of convertible notes there is a third effect,
which works in the same direction, and works more quickly. A rise
of prices, confined to one country, tends to increase imports, because
other countries can obtain more for their goods if they send them
there, and it discourages exports, because a merchant who would
have gained a profit before the rise by buying here to sell again will
not gain so much, if any, profit after that rise. By this augmentation
of imports the indebtedness of this country is augmented, and by
this diminution of exports the proportion of that indebtedness which
is paid in the usual way is decreased also. In consequence, there is
a larger balance to be paid in bullion; the store in the bank or banks
keeping the reserve is diminished, and the rate of interest must be
raised by them to stay the efflux. And the tightness so produced
is often greater than, and always equal to, the preceding unnatural
There is, therefore, no ground for believing, as is so common, that
the value of money is settled by different causes than those which
affect the value of other commodities, or that the Bank of England
has any despotism in that matter. It has the power of a large holder
of money, and no more. Even formerly, when its monetary powers
were greater and its rivals weaker, it had no absolute control. It was
simply a large corporate dealer, making bids and much influencing
—though in no sense compelling—other dealers thereby.
But though the value of money is not settled in an exceptional way,
there is nevertheless a peculiarity about it, as there is about many
articles. It is a commodity subject to great fluctuations of value,
and those fluctuations are easily produced by a slight excess or a
slight deficiency of quantity. Up to a certain point money is a
necessity. I f a merchant has acceptances to meet to-morrow, money

he must and will find today at some price or other. And it is this
urgent need of the whole body of merchants which runs up the value
of money so wildly and to such a height in a great panic. On the
other hand, money easily becomes a ‘drug,’ as the phrase is, and there
is soon too much of it. The number of accepted securities is limited,
and cannot be rapidly increased; if the amount of money seeking
these accepted securities is more than can be lent on them the value
of money soon goes down. You may often hear in the market that
bills are not to be had,—meaning good bills of course,—and when you
hear this you may be sure that the value of money is very low.
If money were all held by the owners of it, or by banks which did
not pay an interest for it, the value of money might not fall so fast.
Money would, in the market phrase, be ‘well held.’ The possessors
would be under no necessity to employ it all; they might employ
part at a high rate rather than all at a low rate. But in Lombard
Street money is very largely held by those who do pay an interest
for it, and such persons must employ it all, or almost all, for they have
much to pay out with one hand, and unless they receive much with
the other they will be ruined. Such persons do not so much care
what is the rate of interest at which they employ their money: they
can reduce the interest they pay in proportion to that which they
can make. The vital points to them is to employ it at some rate. If
you hold (as in Lombard Street some persons do) millions of other
people's money at interest, arithmetic teaches that you will soon be
ruined if you make nothing of it even if the interest you pay is not
The fluctuations in the value of money are therefore greater than
those on the value of most other commodities. At times there is an
excessive pressure to borrow it, and at times an excessive pressure to
lend it, and so the price is forced up and down.
These considerations enable us to estimate the responsibility which is
thrown on the Bank of England by our system, and by every system
on the bank or banks who by it keep the reserve of bullion or of
legal tender exchangeable for bullion. These banks can in no degree
control the permanent value of money, but they can completely con­
trol its momentary value. They cannot change the average value,
but they can determine the deviations from the average. If the
dominant banks manage ill, the rate of interest will at one time be
excessively high, and at another time excessively low: there will be
first a pernicious excitement, and next a fatal collapse. But if they
manage well, the rate of interest will not deviate so much from the

average rate; it will neither ascend so high nor descend so low. As
far as anything can be steady the value of money will then be steady,
and probably in consequence trade will be steady too—at least a
principal cause of periodical disturbance will have been withdrawn
from it.


Why Lombard Street Is Often Vzry Dully
and Sometimes Extremely Excited.
event which creates a great demand for actual cash may
cause, and will tend to cause, a panic in a country where cash is much
economised, and where debts payable on demand are large. In such
a country an immense credit rests on a small cash reserve, and an
unexpected and large diminution of that reserve may easily break
up and shatter very much, if not the whole, of that credit. Such
accidental events are of the most various nature: a bad harvest, an
apprehension of foreign invasion, the sudden failure of a great firm
which everybody trusted, and many other similar events, have all
caused a sudden demand for cash. And some writers have en­
deavoured to classify panics according to the nature of the particular
accidents producing them. But little, however, is, I believe, to be
gained by such classifications. There is little difference in the effect
of one accident and another upon our credit system. We must be
prepared for all of them, and we must prepare for all of them in the
same way—by keeping a large cash reserve.
But it is of great importance to point out that our industrial or­
ganisation is liable not only to irregular external accidents, but like­
wise to regular internal changes; that these changes make our credit
system much more delicate at some times than at others; and that it
is the recurrence of these periodical seasons of delicacy which has
given rise to the notion that panics come according to a fixed rule,—
that every ten years or so we must have one of them.
Most persons who begin to think of the subject are puzzled on the
threshold. They hear much of ‘good times’ and ‘bad times,* mean­
ing by ‘good’ times in which nearly everyone is very well off, and
by ‘bad’ times in which nearly everyone is comparatively ill off.
And at first it is natural to ask why should everybody, or almost
everybody, be well off together? Why should there be any great
tides of industry, with large diffused profit by way of flow, and
large diffused want of profit, or loss, by way of ebb? The main
answer is hardly given distinctly in our common books of political
economy. These books do not tell you what is the fund out of
which large general profits are paid in good times, nor do they ex­
A n y su d d en




plain why that fund is not available for the same purpose in bad times.
Our current political economy does not sufficiently take account
of time as an element in trade operations; but as soon as the division of
labour has once established itself in a community, two principles at
once begin to be important, of which time is the very essence. These
First. That as goods are produced to be exchanged, it is good that
they should be exchanged as quickly as possible.
Secondly. That as every producer is mainly occupied in producing
what others want, and not what he wants himself, it is desirable that
he should always be able to find, without effort, without delay, and
without uncertainty, others who want what he can produce.
In themselves these principles are self-evident. Everyone will
admit it to be expedient that all goods wanting to be sold should be
sold as soon as they are ready; that every man who wants to work
should find employment as soon as he is ready for it. Obviously also,
as soon as the ‘division of labour’ is really established, there is a dif­
ficulty about both of these principles. A produces what he thinks B
wants, but it may be a mistake, and B may not want it. A may be
able and willing to produce what B wants, but he may not be able to
find B—he may not know of his existence.
The general truth of these principles is obvious, but what is not
obvious is the extreme greatness of their effects. Taken together,
they make the whole difference between times of brisk trade and great
prosperity, and times of stagnant trade and great adversity, so far as
that prosperity and that adversity are real and not illusory. If they
are satisfied, everyone knows whom to work for, and what to make,
and he can get immediately in exchange what he wants himself. There
is no idle labour and no sluggish capital in the whole community, and,
in consequence, all which can be produced is produced, the effective­
ness of human industry is augmented, and both kinds of producers—
both capitalists and labourers—are much richer than usual, because the
amount to be divided between them is also much greater than usual.
And there is a partnership in industries. No single large industry
can be depressed without injury to other industries; still less can any
great group of industries. Each industry when prosperous buys and
consumes the produce probably of most (ccrtainlv of very many)
other industries, and if industry A fail and is in difficulty, industries
B, and C, and D, which used to sell to it, will not be able to sell that
which they had produced in reliance on A ’s demand, and in future
they will stand idle till industry A recovers, because in default of A

there will be no one to buy the commodities which they create. Then
as industry B buys of C, D, &c., the adversity of B tells on C, D, &c.,
and as these buy of E, F, &c., the effect is propagated through the
whole alphabet. And in a certain sense it rebounds. Z feels the want
caused by the diminished custom of A, B, & C, and so it does not
earn so much; in consequence, it cannot lay out as much on the
produce of A, B, & C, and so these do not earn as much either. In
all this money is but an instrument. The same thing would happen
equally well in a trade of barter, if a state of barter on a very large
scale were not practically impossible, on account of the time and
trouble which it would necessarily require. As has been explained,
the fundamental cause is that under a system in which everyone is
dependent on the labour of everyone else, the loss of one spreads and
multiplies through all, and spreads and multiplies the faster the higher
the previous perfection of the system of divided labour, and the more
nice and effectual the mode of interchange. And the entire effect of
a depression in any single large trade requires a considerable time
before it can be produced. It has to be propagated, and to be returned
through a variety of industries, before it is complete. Short depres­
sions, in consequence, have scarcely any discernible consequences;
they are over before we think of their effects. It is only in the case of
continuous and considerable depressions that the cause is in action long
enough to produce discernible effects.
The most common, and by far the most important, case where
the depression in one trade causes depression in all others, is that of
depressed agriculture. When the agriculture of the world is ill off,
food is dear. And as the amount of absolute necessaries which a
people consumes cannot be much diminished, the additional amount
which has to be spent on them is so much subtracted from what used
to be spent on other things. All the industries, A, B, C, D, up to Z,
are somewhat affected by an augmentation in the price of com, and
the most affected are the large ones, which produce the objects in
ordinary times most consumed by the working classes. The clothing
trades feel the difference at once, and in this country the liquor trade
(a great source of English revenue) feels it almost equally soon. Espe­
cially when for two or three years harvests have been bad, and corn
has long been dear, every industry is impoverished, and almost every
one, by becoming poorer, makes every other poorer too. All trades
are slack from diminished custom, and the consequence is a vast
stagnant capital, much idle labour, and a greatly retarded production.
It takes two or three years to produce this full calamity, and the



recovery from it takes two or three years also. If corn should long
be cheap, the labouring classes have much to spend on what they like
besides. The producers of those things become prosperous, and have
a greater purchasing power. They exercise it, and that creates in
the class they deal with another purchasing power, and so all through
society. The whole machine of industry is stimulated to its maximum
of energy, just as before much of it was slackened almost to its
A great calamity to any great industry will tend to produce the
same effect, but the fortunes of the industries on which the wages of
labour are expended are much more important than those of all others,
because they act much more quickly upon a larger mass of purchasers.
On principle, if there was a perfect division of labour, every industry
would have to be perfectly prosperous in order that any one might be
so. So far, therefore, from its being at all natural that trade should
develop constantly, steadily, and equably, it is plain, without going
farther, from theory as well as from experience, that there are inevita­
bly periods of rapid dilatation, and as inevitably periods of contrac­
tion and of stagnation.
Nor is this the only changeable element in modem industrial
societies. Credit—the disposition of one man to trust another—is
singularly varying. In England, after a great calamity, everybody is
suspicious of everybody; as soon as that calamity is forgotten, every­
body again confides in everybody. On the Continent there has been
a stiff controversy as to whether credit should or should not be called
‘capital:’ in England, even the little attention once paid to abstract
economics is now diverted, and no one cares in the least for refined
questions of this kind: the material practical point is that, in M.
Chevalier’s language, credit is ‘additive,’ or additional—that is, in times
when credit is good productive power is more efficient, and in times
when credit is bad productive power is less efficient. And the state
of credit is thus influential, because of the two principles which have
just been explained. In a good state of credit, goods lie on hand a
much less time than when credit is bad; sales are quicker; intermediate
dealers borrow easily to augment their trade, and so more and more
goods are more quickly and more easily transmitted from the pro­
ducer to the consumer.
These two variable causes are causes of real prosperity. They
augment trade and production, and so are plainly beneficial, except
where by mistake the wrong things are produced, or where also by
mistake misplaced credit is given, and a man who cannot produce any­



thing which is wanted gets the produce of other people’s labour upon
a false idea that he will produce it. But there is another variable cause
which produces far more of apparent than of real prosperity and of
which the effect is in actual life mostly confused with those of the
In our common speculations we do not enough remember that
interest on money is a refined idea, and not a universal one. So far
indeed is it from being universal, that the majority of saving persons
in most countries would reject it. Most savings in most countries
are held in hoarded specie. In Asia, in Africa, in South America,
largely even in Europe, they are thus held, and it would frighten
most of the owners to let them out of their keeping. An Englishman
—a modem Englishman at least—assumes as a first principle that he
ought to be able to ‘put his money into something safe that will yield
5 per cent;’ but most saving persons in most countries are afraid to
‘put their money’ into anything. Nothing is safe to their minds; in­
deed, in most countries, owing to a bad Government and a backward
industry, no investment, or hardly any, really is safe. In most coun­
tries most men are content to forego interest; but in more advanced
countries, at some times there are more savings seeking investment than
there are known investments for; at other times there is no such super­
abundance. Lord Macaulay has graphically described one of the
periods of excess. He says—‘During the interval between the Restora­
tion and the Revolution the riches of the nation had been rapidly in­
creasing. Thousands of busy men found every Christmas that, after
the expenses of the year’s housekeeping had been defrayed out of the
year’s income, a surplus remained; and how that surplus was to be
employed was a question of some difficulty. In our time, to invest
such a surplus, at something more than three per cent, on the best
security that has ever been known in the world, is the work of a few
minutes. But in the seventeenth century, a lawyer, a physician, a
retired merchant, who had saved some thousands, and who wished
to placc them safely and profitably, was often greatly embarrassed.
Three generations earlier, a man who had accumulated wealth in a
profession generally purchased real property, or lent his savings on
mortgage. But the number of acres in the kingdom had remained
the same; and the value of those acres, though it had greatly increased,
had by no means increased so fast as the quantity of capital which was
seeking for employment. Many too wished to put their money where
they could find it at an hour’s notice, and looked about for some species
of property which could be more readily transferred than a house or



a field. A capitalist might lend on bottomry or on personal security;
but, if he did so, he ran a great risk of losing interest and principal.
There were a few joint stock companies, among which the East India
Company held the foremost place; but the demand for the stock of
such companies was far greater than the supply. Indeed the cry for
a new East India Company was chiefly raised by persons who had
found difficulty in placing their savings at interest on good security.
So great was that difficulty that the practice of hoarding was common.
We are told that the father of Pope, the poet, who retired from busi­
ness in the City about the time of the Revolution, carried to a retreat
in the country a strong box containing near twenty thousand pounds,
and took out from time to time what was required for household ex­
penses; and it is highly probable that this was not a solitary case. At
present the quantity of coin which is hoarded by private persons is
so small, that it would, if brought forth, make no perceptible addition
to the circulation. But, in the earlier part of the reign of William
the Third, all the greatest writers on currency were of opinion that
a very considerable mass of gold and silver was hidden in secret draw­
ers and behind wainscots.
‘The natural effect of this state of things was that a crowd of
projectors, ingenious and absurd, honest and knavish, employed them­
selves in devising new schemes for the employment of redundant
capital. It was about the year 1688 that the word stockjobber was first
heard in London. In the short space of four years a crowd of com­
panies, every one of which confidently held out to subscribers the
hope of immense gains, sprang into existence—the Insurance Company,
the Paper Company, the Lutestring Company, the Pearl Fishery Com­
pany, the Glass Bottle Company, the Alum Company, the Blythe
Coal Company, the Swordblade Company. There was a Tapestry
Company, which would soon furnish pretty hangings for all the
parlours of the middle class, and for all the bedchambers of the higher.
There was a Copper Company, which proposed to explore the mines
of England, and held out a hope that they would prove not less valu­
able than those of Potosi. There was a Diving Company, which
undertook to bring up precious effects from shipwrecked vessels, and
which announced that it had laid in a stock of wonderful machines
resembling complete suits of armour. In front of the helmet was a
huge glass eye like that of a Cyclops; and out of the crest went a pipe
through which the air was to be admitted. The whole process was
exhibited on the Thames. Fine gentlemen and fine ladies were in­
vited to the show, were hospitably regaled, and were delighted by



seeing the divers in their panoply descend into the river and return
laden with old iron and ship's tackle. There was a Greenland Fishing
Company, which could not fail to drive the Dutch whalers and herring
busses out of the Northern Ocean. There was a Tanning Company,
which promised to furnish leather superior to the best that was
brought from Turkey or Russia. There was a society which under­
took the office of giving gentlemen a liberal education on low terms,
and which assumed the sounding name of the Royal Academies Com­
pany. In a pompous advertisement it was announced that the directors
of the Royal Academies Company had engaged the best masters in
every branch of knowledge, and were about to issue twenty thousand
tickets at twenty shillings each. There was to be a lottery—two thou­
sand prizes were to be drawn; and the fortunate holders of the prizes
were to be taught, at the charge of the Company, Latin, Greek, He­
brew, French, Spanish, conic sections, trigonometry, heraldry, japaning, fortification, bookkeeping, and the art of playing the theorbo.'
The panic was forgotten till Lord Macaulay revived the memory
of it. But, in fact, in the South Sea Bubble, which has always been re­
membered, the form was the same, only a little more extravagant; the
companies in that mania were for objects such • as these:— “Wrecks
to be fished for on the Irish Coast—Insurance of Horses and other Cat­
tle (two millions)—Insurance of Losses by Servants—To make Salt
Water Fresh—For building of Hospitals for Bastard Children—For
building of Ships against Pirates—For making of Oil from Sun-flower
Seeds—For improving of Malt Liquors—For recovery of Seamen’s
Wages—For extracting of Silver from Lead—For the transmuting of
Quicksilver into a malleable and fine Metal—For making of Iron with
Pit-coal—For importing a Number of large Jack Asses from Spain—
For trading in Human Hair—For fatting of Hogs—For a Wheel of
Perpetual Motion.” But the most strange of all, perhaps, was “For
an Undertaking which shall in due time be revealed.” Each subscriber
was to pay down two guineas, and hereafter to receive a share of one
hundred, with a disclosure of the object; and so tempting was the
offer, that 1,000 of these subscriptions were paid the same morning,
with which the projector went off in the afternoon.’ In 1825 there
were speculations in companies nearly as wild, and just before 1866
there were some of a like nature, though not equally extravagant.
The fact is, that the owners of savings not finding, in adequate quanti­
ties, their usual kind of investments, rush into anything that promises
• E ditor ’ s N o t e :

Corrected from the original typographically incorrect




speciously, and when they find that these specious investments can
be disposed of at a high profit, they rush into them more and more.
The first taste is for high interest, but that taste soon becomes sec­
ondary. There is a second appetite for large gains to be made by
selling the principal which is to yield the interest. So long as such
sales can be effected the mania continues; when it ceases to be pos­
sible to effect them, ruin begins.
So long as the savings remain in possession of their owners, these
hazardous gamblings in speculative undertakings are almost the whole
effect of an excess of accumulation over tested investment. Little
effect is produced on the general trade of the country. The owners
of the savings are too scattered and far from the market to change
the majority of mercantile transactions. But when these savings come
to be lodged in the hands of bankers, a much wider result is produced.
Bankers are close to mercantile life; they are always ready to lend
on good mercantile securities; they wish to lend on such securities a
large part of the money entrusted to them. When, therefore, the
money so entrusted is unusually large, and when it long continues so,
the general trade of the country is, in the course of time, changed.
Bankers are daily more and more ready to lend money to mercantile
men; more is lent to such men; more bargains are made in consequence;
commodities are more sought after; and, in consequence, prices rise
more and more.
The rise of prices is quickest in an improving state of credit. Prices
in general are mostly determined by wholesale transactions. The re­
tail dealer adds a percentage to the wholesale prices, not, of course,
always the same percentage, but still mostly the same. Given the
wholesale price of most articles, you can commonly tell their retail
price. Now wholesale transactions are commonly not cash transac­
tions, but bill transactions. The duration of the bill varies with the
custom of the trade; it may be two, three months, or six weeks, but
there is always a bill. Times of credit mean times in which the bills
of many people are taken readily; times of bad credit, times when the
bills of much fewer people are taken, and even of those suspiciously.
In times of good credit there are a great number of strong purchasers,
and in times of bad credit only a smaller number of weak ones; and,
therefore, years of improving credit, if there be no disturbing cause,
are years of rising price, and years of decaying qredit, years of falling
This is the meaning of the saying4John Bull can stand many things,
but he cannot stand two per cent:’ it means that the greatest effect of



the three great causes is nearly peculiar to England; here, and here al­
most alone, the excess of savings over investments is deposited in banks;
here, and here only, is it made use of so as to affect trade at large; here,
and here only, are prices gravely affected. In these circumstances, a
low rate of interest, long protracted, is equivalent to a total deprecia­
tion of the precious metals. In his book on the effect of the great gold
discoveries, Professor Jevons showed, and so far as I know, was the
first to show, the necessity of eliminating these temporary changes of
value in gold before you could judge properly of the permanent
depreciation. He proved, that in the years preceding both 1847 and
1857 t^iere was a general rise of prices; and in the years succeeding
these years, a great fall. The same might be shown of the years be­
fore and after 1866, mutatis mutandis.
And at the present moment we have a still more remarkable ex­
ample, which was thus analysed in the Economist of the 30th Decem­
ber, 1871, in an article which I venture to quote as a whole:—
‘ t h e g r e a t r is e i n t h e p r ic e o f c o m m o d it ie s .

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

Wool—South Down hogs .
Cotton—Upland ordinary .
No. 40 mule yam, &c. .
Iron—Bars, British
Pig, No. 1 Clyde .
L e a d ..............................
T i n ..............................
Copper—Sheeting .

( G a z e t te

average) .

. per pack
. per lb.
. per ton
. per qr.

L s. d.
13 0 0
0 0
0 1 l'/z
7 1 6
* »} 3
18 7 6
*37 0 0
2 12 0

L s. d.
21 15 0
0 O 83s
0 1 2Vi
8 17 6
3 16 0
19 2 6
*57 0 0
95 0 0
2 15 8



—and in other cases there is a tendency upwards in price much more
often than there is a tendency downwards.
‘This general rise of price must be due either to a diminution in the
supply of the quoted articles, or to an increased demand for them. In
some cases there has no doubt been a short supply. Thus in wool, the
diminution in the home breed of sheep has had a great effect on the
In 1869 the home stock of sheep was
. . . .
In 1871
. . . .
Equal to 8.1 per cent.

—and in the case of some other articles there may be a similar cause
operating. But taking the whole mass of the supply of commodities
in this country, as shown by the plain test of the quantities imported,
it has not diminished, but augmented. The returns of the Board of
Trade prove this in the most striking manner, and we give below a
table of some of the important articles. The rise in prices must,
therefore, be due to an increased demand, and the first question is, to
what is that demand due?
‘We believe it to be due to the combined operation of three causes
—cheap money, cheap com, and improved credit. As to the first in­
deed, it might be said at first sight that so general an increase must be
due to a depreciation of the precious metals. Certainly in many
controversies facts far less striking have been alleged as proving it.
And indeed there plainly is a diminution in the purchasing power of
money, though that diminution is not general and permanent, but
local and temporary. The peculiarity of the precious metals is that
their value depends for unusually long periods on the quantity of
them which is in the market. In the long run, their value, like that
of all others, is determined by the cost at which they can be brought
to market. But for all temporary purposes, it is the supply in the
market which governs the price, and that supply in this country is
exceedingly variable. After a commercial crisis—1866 for example
—two things happen: first, we call in the debts which are owing to us
in foreign countries; and we require these debts to be paid to us, not
in commodities, but in money. From this cause principally, and
omitting minor causes, the bullion in the Bank of England, which was
13,156,000/. in May 1866, rose to 19,413,000/. in January 1867, being an
increase of over 6,000,000/. And then there comes also a second cause,
tending in the same direction. During a depressed period the savings
of die country increase considerably faster than the outlet for them.



A person who has made savings does not know what to do with them.
And this new unemployed saving means additional money. Till a
saving is invested or employed it exists only in the form of money: a
farmer who has sold his wheat and has lool. ‘to the good/ holds that
100/. in money, or some equivalent for money, till he sees some ad­
vantageous use to be made of it. Probably he places it in a bank, and
this enables it to do more work. If 3,000,000/. of coin be deposited in
a bank, and it need only keep 1,000,000/. as a reserve, that sets 2,000,000/. free, and is for the time equivalent to an increase of so much coin.
As a principle it may be laid down that all new unemployed savings
require either an increased stock of the precious metals, or an increase
in the efficiency of the banking expedients by which these metals are
economised. In other words, in a saving and uninvesting period of
the national industry, we accumulate gold, and augment the efficiency
of our gold. If therefore such a saving period follows close upon an
occasion when foreign credits have been diminished and foreign debts
called in, the augmentation in the effective quantity of gold in the
country is extremely great. The old money called in from abroad
and the new money representing the new saving co-operate with one
another. And their natural tendency is to cause a general rise in price,
and what is the same thing, a diffused diminution in the purchasing
power of money.
‘Up to this point there is nothing special in the recent history of
the money market. Similar events happened both after the panic of
1847, and after that of 1857. But there is another cause of the same
kind, and acting in the same direction, which is peculiar to the present
time; this cause is the amount of the foreign money, and especially
of the money of foreign Governments, now in London. No Gov­
ernment probably ever had nearly as much at its command as the
German Government now has. Speaking broadly, two things hap­
pened: during the war England was the best place of shelter for for­
eign money, and this made money more cheap here than it would
otherwise have been; after the war England became the most con­
venient paying place, and the most convenient resting place for money,
and this again has made money cheaper. The commercial causes, for
which there are many precedents, have been aided by a political cause
for the efficacy of which there is no precedent.
‘But though plentiful money is necessary to high prices, and though
it has a natural tendency to produce these prices, yet it is not of itself
sufficient to produce them. In the cases we are dealing with, in
order to lower prices there must not only be additional money, but



a satisfactory mode of employing that additional money. This is
obvious if we remember whence that augmented money is derived.
It is derived from the savings of the people, and will only be invested
in die manner which the holders for the time being consider suitable
to such savings. It will not be used in mere expenditure; it would be
contrary to the very nature of it so to use it. A new channel of de­
mand is required to take off the new money, or that new money will
not raise prices. It will lie idle in the banks, as we have often seen
it. We should still see the frequent, the common phenomenon of
dull trade and cheap money existing side by side.
‘The demand in this case arose in the most effective of all ways.
In 1867 and the first half of 1868 corn was dear, as the following figures
G a z e t t e A v e r a g e P r ic e o f W h e a t .

December, 1866
September n




S. d.
60 3 October,
6l 4 November tt
60 10 December
59 9 January,
6l 6 February
64 8 March
65 4 April
65 0 May
67 8 June
62 8 July




S. d.
66 6
69 5
67 4
70 3
73 0
73 0



. 65


67 11

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











—that is to say, cheap com operating throughout the world, created
a new demand for many kinds of articles; the production of a large
number of such articles being aided by iron in some one of its many
forms, iron to that extent was exported. And the effect is cumula­
tive. The manufacture of iron being stimulated, all persons concerned
in that great manufacture are well off, have more to spend, and by
spending it encourage other branches of manufacture, which again
propagate the demand; they receive and so encourage industries in
a third degree dependent and removed.
‘It is quite true that corn has not been quite so cheap during the
present year. But even if it had been dearer than it is, it would not
all at once arrest the great trade which former cheapness had created.
The “ball,” if we may so say, “was set rolling” in 1869 anc* 1870, and
a great increase of demand was then created in certain trades and
propagated through all trades. A continuance of very high prices
would produce the reverse effect; it would slacken demand in certain
trades, and the effect would be gradually diffused through all trades.
But a slight rise such as that of this year has no perceptible effect.
‘When the stimulus of cheap com is added to that of cheap money,
the full conditions of a great and diffused rise of prices are satisfied.
This new employment supplies a mode in which money can be in­
vested. Bills are drawn of greater number and greater magnitude, and
through the agencies of banks and discount houses, the savings of the
country are invested in such bills. There is thus a new want and a
new purchase-money to supply that want, and the consequence is the
diffused and remarkable rise of price which the figures show to have
‘The rise has also been aided by the revival of credit. This, as need
not be at length explained, is a great aid to buying, and consequently
a great aid to a rise of price. Since 1866, credit has been gradually,
though very slowly, recovering, and it is probably as good as it is
reasonable or proper that it should be. We are now trusting as many
people as we ought to trust, and as yet there is no wild excess of mis­
placed confidence which would make us trust those whom we ought
not to trust.*
The process thus explained is the common process. The surplus
of loanable capital which lies in the hands of bankers is not employed
by them in any original way; it is almost always lent to a trade already
growing and already improving. The use of it develops that trade yet
farther, and this again augments and stimulates other trades. Capital



may long lie idle in a stagnant condition of industry; the mercantile
securities which experienced bankers know to be good do not aug­
ment, and they will not invent other securities, or take bad ones.
In most great periods of expanding industry, the three great causes
—much loanable capital, good credit, and the increased profits derived
from better-used labour and better-used capital—have acted simul­
taneously; and though either may act by itself, there is a permanent
reason why mostly they will act together. They both tend to grow
together, if you begin from a period of depression. In such periods
credit is bad, and industry unemployed; very generally provisions
are high in price, and their dearness was one of the causes which made
the times bad. Whether there was or was not too much loanable
capital when that period begins, there soon comes to be too much.
Quiet people continue to save part of their incomes in bad times as
well as in good; indeed, of the two, people of slightly-varying and
fixed incomes have better means of saving in bad times because prices
are lower. Quiescent trade affords no new securities in which the new
saving can be invested, and therefore there comes soon to be an excess
of loanable capital. In a year or two after a crisis credit usually im­
proves, as the remembrance of the disasters which at the crisis im­
paired credit is becoming fainter and fainter. Provisions get back to
their usual price, or some great industry makes, from some temporary
cause, a quick step forward. At these moments, therefore, the three
agencies which, as has been explained, greatly develope trade, com­
bine to develope it simultaneously.
The certain result is a bound of national prosperity; the country
leaps forward as if by magic. But only part of that prosperity has a
solid reason. As far as prosperity is based on a greater quantity of
production, and that of the right articles—as far as it is based on the
increased rapidity with which commodities of every kind reach those
who want them—its basis is good. Human industry is more efficient,
and therefore there is more to be divided among mankind. But in so
far as that prosperity is based on a general rise of prices, it is only
imaginary. A general rise of prices is a rise only in name; whatever
anyone gains on the article which he has to sell he loses on the articles
which he has to buy, and so he is just where he was. The only
real effects of a general rise of prices are these: first, it straitens people
of fixed incomes, who suffer as purchasers, but who have no gain to
correspond; and secondly, it gives an extra profit to fixed capital
created before the rise happened. Here the sellers gain, but without
any equivalent loss as buyers. Thirdly, this gain on fixed capital is



greatest in what may be called the industrial ‘implements,’ such as
coal and iron. These are wanted in all industries, and in any general
increase of prices, they are sure to rise much more than other things.
Everybody wants them; the supply of them cannot be rapidly aug­
mented, and therefore their price rises very quickly. But to the coun­
try as a whole, the general rise of prices is no benefit at all; it is simply
a change of nomenclature for an identical relative value in the same
commodities. Nevertheless, most people are happier for it; they
think they are getting richer, though they are not. And as the rise
does not happen on all articles at the same moment, but is propagated
gradually through society, those to whom it first comes gain really;
and as at first every one believes that he will gain when his own article
is rising, a buoyant cheerfulness overflows the mercantile world.
This prosperity is precarious as far as it is real, and transitory in so
far as it is fictitious. The augmented production, which is the reason
of the real prosperity, depends on the full working of the whole in­
dustrial organisation—of all capitalists and labourers; that prosperity
was caused by that full working, and will cease with it. But that
full working is liable to be destroyed by the occurrence of any great
misfortune to any considerable industry. This would cause mis­
fortune to the industries dependent on that one, and, as has been ex­
plained, all through society and back again. But every such industry
is liable to grave fluctuations, and the most important—the provisionindustries—to the gravest and the suddenest. They are dependent on
the casualties of the seasons. A single bad harvest diffused over
the world, a succession of two or three bad harvests, even in England
only, will raise the price of com exceedingly, and will keep it high.
And a great and protracted rise in the price of com will at once de­
stroy all the real part of the unusual prosperity of previous good times.
It will change the full working of the industrial machine into an im­
perfect working; it will make the produce of that machine less than
usual instead of more than usual; instead of there being more than the
average of general dividend to be distributed between the producers,
there will immediately be less than the average.
And in so far as the apparent prosperity is caused by an unusual
plentifulness of loanable capital and a consequent rise in prices, that
prosperity is not only liable to reaction, but certain to be exposed to
reaction. The same causes which generate this prosperity will, after
they have been acting a little longer, generate an equivalent adversity.
The process is this: the plentifulness of loanable capital causes a rise
of prices; that rise of prices makes it necessary to have more loanable



capital to carry on the same trade. 100,000J. will not buy as much
when prices are high as it will when prices are low, it will not be so
effectual for carrying on business; more money is necessary in dear
times than in cheap times to produce the same changes in the same
commodities. Even supposing trade to have remained stationary, a
greater capital would be required to carry it on after such a rise of
prices as has been described than was necessary before that rise. But
in this case the trade will not have remained stationary; it will have
increased—certainly to some extent, probably to a great extent. The
loanable capital,’ the lending of which caused the rise of prices, was
lent to enable it to augment. The loanable capital lay idle in the banks
till some trade started into prosperity, and then was lent in order to
develope that trade; that trade caused other secondary developments;
those secondary developments enabled more loanable capital to be
lent; and that lending caused a tertiary development of trade; and
so on through society.
In consequence, a long-continued low rate of interest is almost
always followed by a rapid rise in that rate. Till the available trade
is found it lies idle, and can scarcely be lent at all; some of it is not
lent. But the moment the available trade is discovered—the moment
that prices have risen—the demand for loanable capital becomes keen.
For the most part, men of business must carry on their regular trade;
if it cannot be carried on without borrowing 10 per cent more capital,
10 per cent more capital they must borrow. Very often they have
incurred obligations which must be met; and if that is so the rate of
interest which they pay is comparatively indifferent. What is neces­
sary to meet their acceptances they will borrow, pay for it what they
may; they had better pay any price than permit those acceptances to
be dishonoured. And in less extreme cases men of business have a fixed
capital, which cannot lie idle except at a great loss; a set of labourers
which must be, if possible, kept together; a steady connection of
customers, which they would very unwillingly lose. To keep all
these, they borrow; and in a period of high prices many merchants are
peculiarly anxious to borrow, because the augmentation of the price
of the article in which they deal makes them really see, or imagine
that they see, peculiar opportunities of profit. An immense new
borrowing soon follows upon the new and great trade, and the rate
of interest rises at once, and generally rises rapidly.
This is the surer to happen that Lombard Street is, as has been
shown before, a very delicate market. A large amount of money is
held there by bankers and by bill-brokers at interest: this they must



employ, or they will be ruined. It is better for them to reduce the rate
they charge, and compensate themselves by reducing the rate they
pay, rather than to keep up the rate of charge, if by so doing they
cannot employ all their money. It is vital to them to employ all the
money on which they pay interest. A little excess therefore forces
down the rate of interest very much. But if that low rate of interest
should cause, or should aid in causing, a great growth of trade, the
rise is sure to be quick, and is apt to be violent. The figures of trade
are reckoned by hundreds of millions, where those of loanable capital
count only by millions. A great increase in the borrowing demands
of English commerce almost always changes an excess of loanable
capital above the demand to a greater deficiency below' the demand.
That deficiency causes adversity, or apparent adversity, in trade, just
as, and in the same manner, that the previous excess caused prosperity,
or apparent prosperity. It causes a fall of price that runs through
society; that fall causes a decline of activity and a diminution of
profits—a painful contraction instead of the previous pleasant ex­
The change is generally quicker because some check to credit hap­
pens at an early stage of it. The mercantile community will have
been unusually fortunate if during the period of rising prices it has
not made great mistakes. Such a period naturally excites the sanguine
and the ardent; they fancy that the prosperity they see will last al­
ways, that it is only the beginning of a greater prosperity. They al­
together over-estimate the demand for the article they deal in, or the
work they do. They all in their degree—and the ablest and the clever­
est the most—work much more than they should, and trade far above
their means. Every great crisis reveals the excessive speculations of
many houses which no one before suspected, and which commonly
indeed had not begun or had not carried very far those speculations,
till they were tempted by the daily rise of price and the surrounding
The case is worse, because at most periods of great commercial
excitement there is some mixture of the older and simpler kind of
investing mania. Though the money of saving persons is in the hands
of banks, and though, by offering interest, banks retain the command
of much of it, yet they do not retain the command of the whole, or
anything near the whole; all of it can be used, and much of it is used,
by its owners. They speculate with it in bubble companies and in
worthless shares, just as they did in the time of the South Sea mania,
when there were no banks, and as they would again in England sup­



posing that banks ceased to exist. The mania of 1825 and the mania
of 1866 were striking examples of this; in their case to a great extent,
as in most similar modern periods to a less extent, the delirium of
ancient gambling co-operated with the milder madness of modem
overtrading. At the very beginning of adversity, the counters in the
gamblingmania, the shares in the companies created to feed the mania,
are discovered to be worthless; down they all go, and with them much
of credit.
The good times too of high price almost always engender much
fraud. All people are most credulous when they are most happy;
and when much money has just been made, when some people are
really making it, when most people think they are making it, there
is a happy opportunity for ingenious mendacity. Almost everything
will be believed for a little while, and long before discovery the worst
and most adroit deceivers are geographically or legally beyond the
reach of punishment. But the harm they have done diffuses harm, for
it weakens credit still farther.
When we understand that Lombard Street is subject to severe
alternations of opposite causes, we should cease to be surprised at its
seeming cycles. We should cease too to be surprised at the sudden
panics. During the period of reaction and adversity, just even at the
last instant of prosperity, the whole structure is delicate. The peculiar
essence of our banking system is an unprecedented trust between man
and man: and when that trust is much weakened by hidden causes, a
small accident may greatly hurt it, and a great accident for a moment
may almost destroy it
Now too that we comprehend the inevitable vicissitudes of Lom­
bard Street, we can also thoroughly comprehend the cardinal im­
portance of always retaining a great banking reserve. Whether the
times of adversity are well met or ill met depends far more on this than
on any other single circumstance. If the reserve be large, its mag­
nitude sustains credit; and if it be small, its diminution stimulates the
gravest apprehensions. And the better we comprehend the impor­
tance of the banking reserve, the higher we shall estimate the re­
sponsibility of those who keep it.


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.
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 re­
sponsibility, we shall be struck by three things: first, as has been said
before, the Bank has never by any corporate act or authorised ut­
terance 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 re­
membered speech of a responsible statesman, has assigned or en­
forced 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 responsi­
bility should be unimposed, unacknowledged, and denied; but the
explanation is this. We are living amid the vestiges of old contro­
versies, and we speak their language, though we are dealing with dif­
ferent 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 cur­
rency, and on that account many expected much good from it; others
said it did great harm; others again that it could do neither good nor
harm. But for the whole period there was an incessant and fierce
discussion. That discussion was terminated by the Act of 1844. By
that Act the currency manages itself; the entire working is automatic.
The Bank of England plainly does not manage—cannot even be said
to manage—the currency any more. And naturally, but rashly, the
T he




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 ac­
knowledged by the Bank of England is best illustrated by what has
been said by the Bank directors themselves as to the panic of 1866.
The panic of that year, it will be remembered, happened, contrary to
precedent, in the spring, and at the next meeting of the Court of
Bank proprietors—the September meeting—there was a very remark­
able discussion, which I give at length below,* and of which all that
is most material was thus described in the ‘Economist’:—
‘ t h e g r e a t im p o r t a n c e o f t h e l a t e m e e t i n g

‘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 mem­
ories, 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
formd 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 coun­
try. We do not now mix up this matter with the country circula­
tion, or the question whether there should be many issuers of notes
or only one. We speak not of the currency reserve, but of the bank­
ing 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 uni­
versal agreement about it. Great authorities have been unwilling to
admit it. They have not, indeed, formally and explicitly contended
against it. I f they had, they must have pointed out some other great
* See Note D in the Appendix.



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 establish­
ments 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 un­
natural 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 accom­



modation could not be afforded to the full extent which was de­
manded, 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 o f 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, be­
cause 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 be­
cause 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 ad­
vances. 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 al­
luded 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 un­
limited advances on proper security to anyone who applies for it.
On the present occasion 45,000,000/. 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 com­
menting 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 experi­
enced 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 un­
available. 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.” * 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 im­
practicable, 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 bank­
ing or commercial distress, should ever have acted in a way to en­
courage such an opinion. The more the conduct of the affairs of
the Bank is made to assimilate to the conduct of every other wellmanaged 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 30,000,000/.; and the private deposits of the Bank of Eng­
land are 18,000,000/. 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 Eng­
land 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
• Vide Economist of September 22, 1866.



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 1866,50,000/. ‘fresh money’
could not be borrowed, even on the best security—even on Consols—
except at the Bank of England. There was no other lender to new
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. Air. Hankey’s is the last explana­
tion we have had of the policy of the Bank. He is a very experi­
enced 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 ‘Econo­
mist’) was clear and excellent, Mr. Hankey leaves us in doubt al­
together 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 ex­
pect 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.
I f we refer to history, and examine what in fact has been the con­
duct of the Bank directors, we find that they have acted exactly as
persons of their type, character, and position might have been ex­
pected to act. They are a board of plain, sensible, prosperous Eng­
lish 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 improve­
ments, 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 up­
right 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 direc­
tors 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 tempta­
tion 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 com­
parison 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 dis­
counts 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 bank­
notes to be issued, always undemanding 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
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 mer­
cantile 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 be­
lieved 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 manage­
ment 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 dis­
cover 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 die consequence was a panic so tremendous that its results are
well remembered after nearly fifty years. In the next period of
extreme trial—in 1837-9—the Bank was compelled to draw for
2,000,000/. 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 2,404,000/.: a great alarm
pervaded society, and generated an eager controversy, out of which
ultimately emerged the Act of 1844. The next trial came in 1847,
and then the Bank permitted its banking reserve (which the law had
now distinctly separated) to fall to 1,176,000/.; 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 neces­
sary, 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:

1 0 * ................................................................... 4,024,000
1 7 ................................................................... 3,217,000
* 4 ................................................................... 3485,000
3 1 ................................................................... 2,258,000
................................................................... 2,155,000
* 3 ....................................................

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
E d ito r's N o te : This date is corrected in later editions as shown above. The
original text said “Oct. 30.”



trained to see that a large banking reserve is necessary, and to under­
stand 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 for­
gotten that,—the interest being taken at a percentage calculated per
annum, and the probable profit having, when an operation in threemonth 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 yz per cent, there must be a profit of 2 per cent in the rate
of interest, or /2 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 /2 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 Eng­
land 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 i860 onward, have acted upon that prin­
ciple. Before that time they used to raise their rate almost always
by steps of l/2 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 oc­
casion, 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 1862-1865. 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 1864—the drain of silver in 1864 and the pre­
ceding 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, pre­
served 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 ex­
ceedingly good reserve according to the estimate of that time—a suffi­
cient 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 Eng­
land 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 in­
cessant, 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 De­
partment 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 main­
tained 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 con­
tinues 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 cau­
tious 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 in­
evitable. 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, con­
siders ‘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.
But, as has been explained, the Bank of England is bound, accord­
ing 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 im­
mediately, 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 dis­



counts; that the bilk 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 dis­
counted 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 be­
fore, the Bank had 5,812,000/. in its reserve; in fact, it advanced
13,000,000/. 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
50,000/. 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 secu­
rities, 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 bank­
notes.’ And if he does say so, the debtor must go to his bank, and draw



out the 50,000/. 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 dis­
credited as well as other people; their cheques would not be taken
any more than those of others; they would have to draw out bank­
notes, and the Bank reserve would not be enough for a tithe of such
The matter would come shortly to this: a great number of brokers
and dealers are under obligations to pay immense sums, and in com­
mon times they obtain these sums by the transfer of certain secu­
rities. If, as we said just now, No. 1 has borrowed 50,000/. of No. 2
on Exchequer bills, he, for the most part, cannot pay No. 2 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. i ’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 de­
mands 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 Govern­
ment 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 bank­
notes. 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 pay­
ments, 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 Bank­
ing 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 there­
fore 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 ful­
filled 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 im­
portant 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 Opposi­
tion, 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 there­
fore the intervention of the Bank was in any event absolutely neces­
sary, and as its intervention would be chiefly useful by the effect
which it would have in increasing the circulating medium, we ad­
vised 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 embar­
rassing 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 com­
pletely. 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 ad­
vances 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 direc­
tors 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 mak­
ing 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 sus­
pended; and that, rightly or wrongly, the world confidently expects
and relies that in all similar cases it will be suspended again. What­
ever 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 re­
serve 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 Bank­
ing 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 unfore­
seen 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 com­
monly 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 ordi­
nary 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
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 secu­
rity 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 understand­
ing with the Bank of England, both our liability to crises and our
terror at crises will always be greater than they would otherwise be.


The Government of the Bank of England.
T he 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 DeputyGovemor are given in rotation. The Deputy-Governor always suc­
ceeds the Governor, and usually the oldest director who has not been
in office becomes Deputy-Governor. Sometimes, from personal rea­
sons, such as ill-health or special temporary occupation, the time
at which a director becomes Deputy-Governor may be a little de­
ferred, 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 elec­
tion that he arrives, as it is called, at the chair. And as the offices
of Governor and Deputy-Govemor 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 Eng­
land. 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 dan­
gerous. 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 re­
main. 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 change­
ableness 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 de­
scription 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 execu­
tive; 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 at­
tained a much fuller development than theirs. Messrs. Rothschild
are immense capitalists, having, doubtless, much borrowed money in
their hands. But they do not take loot, payable on demand, and pay
it back in cheques of 5/. 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 de­
mand. 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 mer­
chants. 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
The mass of the Bank directors are merchants of experience, em­
ploying 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 some­
thing wrong. Either he is working at detail, which subordinates
would do better, and which he had better leave alone, or he is en­
gaged in too many speculations, is incurring more liabilities than his
capital will bear, and so may be ruined. In consequence, every com­
mercial 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 busi­
ness 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 experi­
ence in the management, and a good board of directors ensures general
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 DeputyGovemor 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-Govemor
of the Bank cannot well be shadows. They are expected to be con­
stantly 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 nec­
essary 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-Govemor—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 com­
mon result; and no trained bankers anywhere.
Even if the Bank of England were an ordinary bank, such a con­
stitution 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 re­
serve 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 func­
tions 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 oldfashioned, 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 re­
spectability 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 fre­
quently been deplorable, and at such times the defects of its govern­
ment 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 DeputyGovemor, 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 administra­
tion. 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
In answer, it may be said that the duties which press on the Gover­
nor 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 diffi­
culty 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, in­
deed, the most natural mode of forming a company in the minds
of those to whom companies are new. Such persons will have al­
ways 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 ‘chair­
man’ at the Bank of England is strongly supported by much modern
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 un­
popular 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 dan­
gerous. 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 impor­
tant 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 ex­
perience, 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, in 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 elec­
tion of the ‘chief of the City.’ TTie 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 Bankiwill 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.
TTie 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 un­
naturally they would much dislike to elevate to the headship of the
City, one who was much less in the estimation of the City than them­
selves. 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
An election so liable to be disturbed by powerful vitiating.causes
would rarely end in a good choice. The best candidate would al­
most 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 likeli­
hood, 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 mis­
conduct’ 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 advan­
tages which have led us to frame our principal offices of state in the
present fashion.
Such a Deputy-Govemor would not be at all a ‘king’ in the Gty.
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 elec­
tioneering. The office would be essentially subordinate in its char­
acter, 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 Governor­
ship 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 ran much less risk in banking than in
commerce, and you must take much greater precautions. In com­
mon 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 5 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 manage­
ment of its reserve till after 1857, would have been possible if die

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 mer­
cantile 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 apprehen­
siveness, 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 busi­
ness of the Bank. He ought to be forbidden to engage in any other
concern. All the present directors, including the Governor and Deputy-Govemor, 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 oc­
cupy 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 in­
fluential 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 pres­
ent directors must be incessantly thinking of their own affairs and
unable to banish them from their minds.
The permanent Deputy-Govemor 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 su­
perior. And he still more rarely states his case effectually; he pauses,
hesitates, does not use the best word or the most apt illustration, per­
haps 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 die Bank to think of.
The formal duties of such a permanent officer could only be de­
fined 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 experi­
ence; 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-Govemor, 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 con­
stitution 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 G ty; 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 responsi­
bility:’ and so a Governor who incurred disaster by disregarding his
skilled counsellor would be thought a fool in the G ty for ever. In

ii 6


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 in 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 an­
other 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 de­
pend on it. And they can bring to the court of directors an experi­
ence 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 bank­
ers. 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 de­
fine 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 Eng­
lish 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 DeputyGovernor 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 objec­
tions 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 manage­
ment 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-Govemor,
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
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 dif­
ferent 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 die 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.


The Joint Stock Banks.
T he Joint Stock Banks of this country are a most remarkable success.

Generally speaking the career of Joint Stock Companies in this coun­
try 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 sug­
gests, I think, little to be added to it.
‘The main classes of joint stock companies which have answered
are three:—ist. 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 re­
ceived 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 con­
cern. 2ndly. Those companies have answered which have an exclu­
sive 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 opera­
tions 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. In­
deed, all the favouring conditions just mentioned concur in many
banks. An old-established bank has a “p re s tig e 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 bank­
ing 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




Above 20 per cent.....................................
Between 15 and 20 per cent . . . .
” 10 and 15 per cent . . . .
5 and 10 per cent . . . .
Under 5 per c e n t ......................................

No. of

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 busi­
ness, and in part the advantage of being a monopoly business. Com­
petition 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 in­
fluence. Although, therefore, a banker deals only with the most sure
securities, and with those which yield the least interest, he can never­
theless gain and divide a very large profit upon his own capital, be­
cause 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 1 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 re­
sult of these banks, as regards the dividends they pay, is—





1 ,350,000






—that is to say, above 25 per cent of the capital employed in these
banks pays over 15 per cent, and 62 Vi 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 13,000,000/., or nearly } 4rd 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 be­
tween 15 and 20 per cent were old banks too. The “privileged op­
portunity” 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 at­
tempting to do so, it would simply ruin itself. Not possessing the
accumulated credit of years, it would have to wind up before it at­
tained 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:—
Bank of Scotland . . . .
British Linen Company
Commercial Bank of Scotland .
National Bank of Scotland .
North of Scotland
Union Bank of Scotland
City of Glasgow . . . .

. 1,000,000





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 Eng­
land 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 Eng­
land 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 im­
mediate 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 spe­
cial 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 ref­
erence to the circumstances, favourable or unfavourable, of each
‘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 ex­
ceptional difficulty. Under the Act of 1845, which he proposed, no
such companies could be founded except with shares of 100/. with 50/.
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 pre­
vented 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 fi rst, 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, en­
grossed 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 of­
ficial 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 1844, a°d all their replies were published. In his, Mr.
Weguelin says:—
‘If the amount of the reserve kept by the Bank of England be con­
trasted 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 30,000,000/. Their
capital is not more than 3,000,000/., and they have on an average 31,000,000/., invested in one way or another, leaving only 2,000,000/. 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 govern­
ment. 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 busi­
ness 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 experi­
enced 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 narra­
ting 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 gov­
erning 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 in­
come 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 investi­
gate every large transaction, must be acquainted with the means and
standing of every large borrower, and must be in such incessant com­
munication with the manager that it will be impossible for him to en­
gage 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 com­
mittee 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 deliber­
ations 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
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 en­
gagements 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 con­
fidence 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 responsi­
bility. The transactions which were agreed to by one set of di­
rectors present on the Monday might be exactly those which would be
much disapproved by directors present on the Wednesday. It is es­
sential 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 con­
cealing 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 pos­
sibility 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 govern­
ment of any one; in no case has that government been described on
authority; and the fall of one by grave misgovemment 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 lia­
bilities; we have seen that the greatest strain on the banking reserve is
a ‘panic.’ Now, no cause is more capable of producing a panic, per­
haps 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 con­
stitution of our banking system the government of these great banks
is of primary importance to us all.


The Private Banks.
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 prac­
tice than private banks as they were in the beginning. A man of
known wealth, known integrity, and known ability is largely en­
trusted 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 re­
finement. 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
P erh aps


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 13. 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 con­

*3 *


spicuous banks in Lombard Street. They have a large paid-up capital
and intelligible published accounts; they use these as an incessant ad­
vertisement, 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 ac­
cording 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 superi­
ority 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 else­
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 ourserves 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 com­
mon 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 par­
ticular calling) could well be found than the founders and first man­
agers 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 inca­
pacity. 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 de­
gree of trained and sober judgment. That which happened so marvel­
ously 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; in­
deed, 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 busi­
ness: 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 noth­
ing; 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 con­
tinued 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 fail­
ure 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



die 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 propa­
gating 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 post­
poned 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 pay­
ments 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 col­
lect their incomes for them. Many persons live entirely on the in­
come of shares, or debentures, or foreign bonds, which is paid in
coupons, and these are handed iir 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 dis­
tracted 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.


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 se­
curities 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 repre­
sentation 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 1866 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
U nd er


i 38


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 im­
mense 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 an­
swering to what we now call bill-broking in London. Mr. Richard­
son, the principal ‘bill-broker’ of the time, as the term was then under­
stood, thus described his business to the ‘Bullion Committee:—’
‘What is the nature of the agency for country banks?—It is two­
fold: 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 bor­
rowed 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 be discounted?—Yes, to a very considerable amount, from
particular parts of the country.
‘Are not both sets of bills by this means under discount?—No, the
bills received from one part 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 con­
siderable 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 dis­
counted?—Yes, for selecting of the bills, writing letters, and other
‘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 re­
sponsible 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 man­



age our business well, we retain our friends; if we do not, we lose
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
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 Somer­
setshire is deposited with the London bill-brokers, who use it to dis­
count 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 borrow­
ing again immediately enables them to turn their capital very fre­
quently, and on a few thousand pounds of capital to discount hundreds
of thousands of bills; as the transactions are so many, xhey can be
content with a smaller profit on each. In other cases, these nonguaranteeing 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 trans­
action 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 bili-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 onethousandth 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. Noth­
ing 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 with­
out 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 dis­
count too many bills, and must keep a good reserve. But the modem
practice introduces more complex considerations. In the trade of billbroking, 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 bar­
ren 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 de­
pendent 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 de­
pendent 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 in danger
of perishing. The many holders of the banking reserve would under
the natural system of banking be obliged to advance out of that re­
serve 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 bank­
ers 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 owe-reserve system of banking, the position of the billbrokers 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 Scot­
land, 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 West­
minster 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 5,62 3,0001. Out of these bills 2,800,000/. matured between Novem­
ber 11 and December 4; 2,000,000/. more between December 11 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 5,000,000/. more to the bill-brokers
than they had at the end of it; and that 5,000,000/. the bank had added
to its reserve against a time of difficulty.
The intensity of the demand on the bill-broker is aggravated there­
fore 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, un­
doubtedly 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 sys­
tem 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 sys­
tem 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 them­
selves 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 ordi­
nary 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


»4 5

itself a large discount business, as it considers that it is itself com­
petent 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 consti­
tution 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 9,000,000/., though
their advances to bankers, whether London or country, were only
8,000,000/.; 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 excep­
tional, 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 sup­
posed, 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 3,000,000/., 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 Eng­
land 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 every­
one disliked them for doing so. But though this ill-conceived at­
tempt failed as it deserved, the rule itself could not be maintained.
The Bank does, in fact, at every period of pressure, advance to the
bill-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, bill-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 bill-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.


The Principles Which Should Regulate the
Amount of the Banking Reserve to Be Kept
by the Bank of England.
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 con­
sidered, 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 neces­
sary to be kept against deposits unless you know something as to the
nature of these deposits. If out of 3,000,000/. of money, one depositor
has 1,000,000/. to his credit, and may draw it out when he pleases, a
much larger reserve will be necessary against that liability of 1,000,000/. than against the remaining 2,000,000/. The intensity of the
liability, so to say, is much 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 re­
serve than that of an equal amount of ordinary liabilities. The danger

T h ere




that it will 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 pay­
ment cannot be determined.
These are general truths as to all banks, and they have a very par­
ticular application to the Bank of England. The first application is
favourable to the Bank; for it shows the danger of one of the prin­
cipal liabilities to be much smaller than it seems. The largest account
at the Bank of England is that of the English Government; and prob­
ably 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 ac­
count 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 incalcu­
lable. 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 credi­
tors of the nation. The payment of the dividends for the Govern­
ment 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 will 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 un­
known. The Secretary for India is a large lender on its account. If
any one proposed to give such power to the Chancellor of the Ex­
chequer, 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 inde­
pendence from the old Board of the Company, which, being mer­
cantile 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, un­
happily 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 com­
mon account. We know the laws of its changes peculiarly well:
we can tell when its principal changes will happen with great ac­
curacy; 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 will 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 im­
portant transactions in the country are settled by cheques; these
cheques are paid in to the ‘clearing-house,’ and the balances result­
ing 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 Eng­
land. 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 propor­
tion 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 en­
tirely 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 ob­
tained 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 in­
creased 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 dis­
count 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 more—that sum might at once be
withdrawn from the Bank of England. In this case the Bank of Eng­
land 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 ac­
count 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 Govern­
ment 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 Ger­
man 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 bilk 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 100,000/. cannot
afford to reduce his balance at the Bank of England 100,000/.; sup­
pose that his liabilities are 2,000,000/., and that as a rule he finds it
necessary to keep at the Bank one-tenth of these liabilities, or 200,000/.,
the payment of 100,000/. would reduce his reserve to 100,000/.; but
his liabilities would be still 1,900,000/., and therefore to keep up his
tenth he would have 90,000/. to find. His process for finding it is
this: he calls in, say, a loan to the bill-broken; and if no equal addi­
tional 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 exporta­
tion 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 bank­
ing 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 Eng­
land lends money to keep up the bankers’ balances, at their usual
amount, and as by means of that usual amount whatever sum for­
eigners 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 Jong his­
tory, 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 be­
comes the keeper of the final cash reserve.
Some persons have been so much impressed with such considera­
tions 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 approxima­
tions 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 secu­
rities; 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 divi­
dends, 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 impor­
tant 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 Govern­
ment is only a conspicuous example of a foreign power which hap­
pens 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 dis­
closed by the figures of the account, that no simple and easy calcula­
tion 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 al­
ways 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 danger­
ous is the rule that the Bank rate of discount should conform to the
market rate. In former quiet times the influence, or the partial influ­
ence, 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 inces­
sant changes in the reserve would terrify and harass the public mind.
An old banker once told me: ‘Sir, I was on Lord Althorp’s commit­
tee 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 pub­
lication has given the money market a greater sense of security than
anything else which has happened in my time.’ The diffusion of con­
fidence 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 with­
out 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 ap­
proach 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 mini­
mum’: 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 circum­
stances. 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
in those years.
And the observance of this maxim is the more necessary because
die ‘apprehension minimum’ is not always the same. On the contrary,
in times when the public has recently seen the Bank of England ex­
posed 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 die
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 mini­
mum. 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 ‘re­
serve’ 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 ‘appre­
hension’ 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 appre­
hension may arise, and then any unlucky accident may cause many
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 Bank­
ing department of the Bank of England went below 10,000,00ol.
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 edu­
cated 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 observa­
tions 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 dis­
satisfied if that reserve falls below 10,000,000/. That sum, therefore,
I call the ‘apprehension minimum’ for the present times. Circum­
stances 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 appre­
hension point? and the deductions from that are comparatively sim­
ple 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 Direc­
tors 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 danger­
ous policy because we have inherited an imperfect form of adminis­
tration. 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 11,000,000/. or 11,500,000/.,
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
11,500,000/., the Bank must begin to take precautions when the re­
serve is between 14,000,000/. and 15,000,000/.; for experience shows
that between 2,000,000/. and 3,000,000/. may, probably enough, be
withdrawn from the Bank store before the right rate of interest is
found which will attract money from abroad, and before that rate
has had time to attract it. When the reserve is between 14,000,000/.
and 15,000,000/., and when it begins to be diminished by foreign de­
mand, the Bank of England should, I think, begin to act, and to raise
the rate of interest.


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 sys­
tem 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 destruction,
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 60,000,000/. of deposits, and against this they
hold in the funds securities of the best kind. But they hold no cash
whatever. They have of 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 secu­
rities 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 100,000/. of Consols without the help of the Bank of
England; not holding themselves a cash reserve for times of panic,
they are entirely dependent on the one Bank which does hold that
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 DeputyGovernor 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 propor­
tions; but that is not to the present purpose), and it ascertains by in­
spectors, 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 consider­
ing 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 Bank­
ing 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 dan­
ger, 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 be­
cause 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 judg­
ment, 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.


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 liabili­
ties 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.
( i) E nglish B anking .

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




Making proportion of cash reserve to liabilities to thepublic about 11*2
per cent.
(2) B ank of F rance (F ebruary , 1873).

C ircu latio n ............................................................ 110,000,000
Total liabilities......................................125,000,000
Reserve of Cash.
Coin and bullion in h a n d ......................................32,000,000
Making proportion of cash reserve to liabilities to the public about 25
per cent.




(3) B anks of G erm an y ( J anuary , 1873).

C ircu latio n ............................................................ 63,000,000
Acceptances and Indorsements.............................. 17,000,000
Total liabilities......................................88,000,000
Reserve of Cash.
Cash in h an d ............................................................ 41,000,000

Making proportion of cash reserve to liabilities to the public about 47
per cent.
(4) N ational B anks of U nited States (O ctober 3,1872).

C ircu latio n ............................................................ 67,000,000
............................................................ 145,000,000
Total liabilities......................................212,000,000
Reserve of Cash.
Coin and legal tenders in h a n d .............................. 26,000,000

Making proportion of cash reserve to liabilities to the public about 12*3
per cent.
su m m a ry .

Bank of England and
London Joint Stock
Bank of France .
Banks of Germany
National Banks of
United States .


of cash to
per cent.

Liabilities to the

Cash held.












Note B.

Extract from Evidence Given by Mr. Alderman
Salomons before House of Commons Select Com­
mittee in 1858.
1146. Chairman.'] The effect upon yourselves of the pressure in No­
vember 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 cus­
tomers. Perhaps it may be interesting to the Committee to know that on
the nth of November we held discounted bills for brokers to the amount
of 5,623,000/. Out of those bills, 2,800,000/. matured between the nth of
November and the 4th of December, and 2,000,000/. more between the 4th
of December and the 31st. So that about 5,000,000/. of bills matured
between the nth of November and the 31st of December; consequently
we were prepared, merely by the maturing of our bills of exchange, for
any demands that might possibly come upon us.
n 47. 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 exacdy 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. W e did not otherwise
withdraw accommodation.
1149. Mr. Weguelin.'] Had you any money at call with the billbrokers?—A small amount; perhaps about 500,000/. 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
1 believe it is quite certain that the public purchased largely, because they
always purchase when die 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, gen­
erally, 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.
1 155. You say that your discounts, either at your own counter or
through die bill-brokers, are ordinarily veiy 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, be­
cause 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 nave 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 hiad 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 tne
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

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 commer­
cial 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 Novem­
ber, 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.
1 165. 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 understand •
ing 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
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 1 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
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 50,000/. 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 return­
ing 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?—Cer­
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 50,000/., 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
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
1179. Mr. Cayley.} The late Chancellor of the Exchequer stated be­
fore 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 500,000/. higher than they
were on the 31st 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.



1180. 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 be­
tween our transactions with our customers, who of course expect us to
give accommodation, and discounts for brokers, which is entirely volun­
tary, 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 m 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. Hankey.] 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 pro­
portion, 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
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
together with our money at call and our Government securities;
Digitized accounts,



that will be perhaps the best and most convenient way of giving the in­
formation you desire to have. (See Table below.)
1 190.
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.


31 December 1845
W W 1846
30 June
31 December »
30 June
31 December »
30 June
31 December ft
30 June
31 December It
30 June

»2 . i

3 1 December
30 June
3 1 December
30 June

31 December
31 December
30 June
31 December n
30 June
31 December »

2 733*753
3 70»**8

44 4»*79
5 45 35

7 177.244


114 38 4 6 1

Cash in



Money at













1 119,591









*.3 *7


397.087 *,**9477
499467 1,218,852
2 937*993
9 *7.557 *4574*5
45**575 *,949,074 3.248*505



3 353**79
3 582,797


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 nave 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
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.
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 Eng­
land 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 some­
thing more than an ordinary joint stock bank. 1 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.







4 1,118






• The Bank did not begin to receive deposits until 1792, in which year they
to 35,944/.



Note D.
Meeting of the Proprietors of the Bank of
September 13, 1866.
(From ‘Econom istSeptember 22, 1866.)
A General Court of the Bank of England was held at the Bank at twelve
o’clock on the 13th 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 ap­
pears that the net profits of the Bank for the half-year ending on the 31st
of August last amounted to 970,014/. 175. 10d.\ making the amount of the
rest on that day, 3,981,783/. 18*. 1 id.; and after providing for a dividend
at the rate of 61. 10s. per cent, the rest will stand at 3,035,838/. 18*. 11 d.
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 bank­
ing community of London; and I think I am entitled to say that not only
this house but the entire banking body acquitted themselves most honour­
ably 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 gen­
erally of London met the demands made upon them during the greater
portion of the past half-year affords a most satisfactory proof of the sound­
ness 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. W e 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
that in this state of things a certain degree of alarm should have



taken possession of the public mind, and that those who required accom­
modation from the Bank should have gone to the Chancellor of the Ex­
chequer 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 gentle­
man 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 inter­
esting, 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 gendemen 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 i ith 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 61. 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 Chancel­
lor 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 ap­
proval 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
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 nad bought 275,000,000/. worth of foreign produce in the
year 1865, the value of our exports had only been 165,000,000/., so that we
had a balance against us to the amount of 110,000,000/. 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 die directors had between
3,000,000/. and 4,000,000/. 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 un­
able 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 im­
portant 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 fully 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 con­
sideration 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 them­
selves and to the public; and he would recommend that they should un­
dertake 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 entided to vote from the smallness of their stock, or from the short­
ness 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
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. Body said he wished to see the directors taking into their con­
sideration 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 man­
agers 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 mani­
festly desirable that the joint stock banks and the banking interest gen­
erally 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 mone­
tary 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 oc­
casion. The most prominent topic brought under our notice is the ex­
pediency 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 prac­
tice 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 pres­
sure arrived.
Mr. Body 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 pav interest on de­
posits, 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 wnich 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 ad­
vanced by the Bank. It must, however, be remembered that we did not
make our advances without ample security, and the best proof of that is
the marvellously small amount of bad debts which we contracted. It has
never been a feature of the Bank to state what was the 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 con­
vinced that our present dividend has been as honestly and as hardly earned
as any that we nave 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
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 14,000,000/. on our hands,
we must necessarily invest it in a variety of securities; but there is no
ground for imagining that our money is locked up and is not available for
the purpose of making commercial advances. We advanced in the space
of three months the sum of 45,000,000/.; 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 nave no debentures except those of first-class
railway companies and companies which we know are acting within their
Parliamentaiy 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
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 suc­
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
Mr. Alderman Salomons said that he, too, was of the same opinion.
On the motion of Mr. Alderman Salomons, seconded by Mr. Body, 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.