I may be asked, 'What does all this reasoning in practice come to? At the present moment how much reserve do you say the Bank of England should keep? state your recommendation clearly (I know it will be said) if you wish to have it attended to.' And I will answer the question plainly, though in so doing there is a great risk that the principles I advocate may be in some degree injured through some mistake I may make in applying them.
I should say that at the present time the mind of the monetary world would become feverish and fearful if the reserve in the Banking department of the Bank of England went below 10,000,000 L. Estimated by the idea of old times, by the idea even of ten years ago, that sum, I know, sounds extremely large. My own nerves were educated to smaller figures, because I was trained in times when the demands on us were less, when neither was so much reserve wanted nor did the public expect so much. But I judge from such observations as I can make of the present state of men's minds, that in fact, and whether justifiably or not, the important and intelligent part of the public which watches the Bank reserve becomes anxious and dissatisfied if that reserve falls below 10,000,000 L. That sum, therefore, I call the 'apprehension minimum' for the present times. Circumstances may change and may make it less or more, but according to the most careful estimate I can make, that is what I should call it now.
It will be said that this estimate is arbitrary and these figures are conjectures. I reply that I only submit them for the judgment of others. The main question is one of fact—Does not the public mind begin to be anxious and timorous just where I have placed the apprehension point? and the deductions from that are comparatively simple questions of mixed fact and reasoning. The final appeal in such cases necessarily is to those who are conversant with and who closely watch the facts.
I shall perhaps be told also that a body like the Court of the Directors of the Bank of England cannot act on estimates like these: that such a body must have a plain rule and keep to it. I say in reply, that if the correct framing of such estimates is necessary for the good guidance of the Bank, we must make a governing body which can correctly frame such estimates. We must not suffer from a dangerous policy because we have inherited an imperfect form of administration. I have before explained in what manner the government of the Bank of England should, I consider, be strengthened, and that government so strengthened would, I believe, be altogether competent to a wise policy.
Then I should say, putting the foregoing reasoning into figures, that the Bank ought never to keep less than 11,000,000 L.. or 11,500,000 L. 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 L., the Bank must begin to take precautions when the reserve is between 14,000,000 L. and 15,000,000 l.; for experience shows that between 2,000,000 L. and 3,000,000 L. 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 L. and 15,000,000 L., and when it begins to be diminished by foreign demand, the Bank of England should, I think, begin to act, and to raise the rate of interest.
CHAPTER XIII
Conclusion.
I know it will be said that in this work I have pointed out a deep malady, and only suggested a superficial remedy. I have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it. I have shown that our system is that of a single bank keeping the whole reserve under no effectual penalty of failure. And yet I propose to retain that system, and only attempt to mend and palliate it.
I can only reply that I propose to retain this system because I am quite sure that it is of no manner of use proposing to alter it. A system of credit which has slowly grown up as years went on, which has suited itself to the course of business, which has forced itself on the habits of men, will not be altered because theorists disapprove of it, or because books are written against it. You might as well, or better, try to alter the English monarchy and substitute a republic, as to alter the present constitution of the English money market, founded on the Bank of England, and substitute for it a system in which each bank shall keep its own reserve. There is no force to be found adequate to so vast a reconstruction, and so vast a destructions and therefore it is useless proposing them.
No one who has not long considered the subject can have a notion how much this dependence on the Bank of England is fixed in our national habits. I have given so many illustrations in this book that I fear I must have exhausted my reader's patience, but I will risk giving another. I suppose almost everyone thinks that our system of savings' banks is sound and good. Almost everyone would be surprised to hear that there is any possible objection to it. Yet see what it amounts to. By the last return the savings' banks—the old and the Post Office together—contain about 60,000,000 L. of deposits, and against this they hold in the funds securities of the best kind. But they hold no cash whatever. They have of course the petty cash about the various branches necessary for daily work. But of cash in ultimate reserve—cash in reserve against a panic—the savings' banks have not a sixpence. These banks depend on being able in a panic to realise their securities. But it has been shown over and over again, that in a panic such securities can only be realised by the help of the Bank of England—that it is only the Bank with the ultimate cash reserve which has at such moments any new money, or any power to lend and act. If in a general panic there were a run on the savings' banks, those banks could not sell 100,000 L. of Consols without the help of the Bank of England; not holding themselves a cash reserve for times of panic, they are entirely dependent on the one Bank which does hold that reserve.
This is only a single additional instance beyond the innumerable ones given, which shows how deeply our system of banking is fixed in our ways of thinking. The Government keeps the money of the poor upon it, and the nation fully approves of their doing so. No one hears a syllable of objection. And every practical man—every man who knows the scene of action—will agree that our system of banking, based on a single reserve in the Bank of England, cannot be altered, or a system of many banks, each keeping its own reserve, be substituted for it. Nothing but a revolution would effect it, and there is nothing to cause a revolution.
This being so, there is nothing for it but to make the best of our banking system, and to work it in the best way that it is capable of. We can only use palliatives, and the point is to get the best palliative we can. I have endeavoured to show why it seems to me that the palliatives which I have suggested are the best that are at our disposal.
I have explained why the French plan will not suit our English world. The direct appointment of the Governor and Deputy-Governor of the Bank of England by the executive Government would not lessen our evils or help our difficulties. I fear it would rather make both worse. But possibly it may be suggested that I ought to explain why the American system, or some modification, would not or might not be suitable to us. The American law says that each national bank shall have a fixed proportion of cash to its liabilities (there are two classes of banks, and two different proportions; but that is not to the present purpose), and it ascertains by inspectors, who inspect at their own times, whether the required amount of cash is in the bank or not. It may be asked, could nothing like this be attempted in England? could not it, or some modification, help us out of our difficulties? As far as the American banking system is one of many reserves, I have said why I think it is of no use considering whether we should adopt it or not. We cannot adopt it if we would. The one-reserve system is fixed upon us. The only practical imitation of the American system would be to enact that the Banking department of the Bank of England should always keep a fixed proportion—say one-third of its liabilities—in reserve. But, as we have seen before, a fixed proportion of the liabilities, even when that proportion is voluntarily chosen by the directors, and not imposed by law, is not the proper standard for a bank reserve. Liabilities may be imminent or distant, and a fixed rule which imposes the same reserve for both will sometimes err by excess, and sometimes by defect. It will waste profits by over-provision against ordinary danger, and yet it may not always save the bank; for this provision is often likely enough to be insufficient against rare and unusual dangers. But bad as is this system when voluntarily chosen, it becomes far worse when legally and compulsorily imposed. In a sensitive state of the English money market the near approach to the legal limit of reserve would be a sure incentive to panic; if one-third were fixed by law, the moment the banks were close to one-third, alarm would begin, and would run like magic. And the fear would be worse because it would not be unfounded—at least, not wholly. If you say that the Bank shall always hold one-third of its liabilities as a reserve, you say in fact that this one-third shall always be useless, for out of it the Bank cannot make advances, cannot give extra help, cannot do what we have seen the holders of the ultimate reserve ought to do and must do. There is no help for us in the American system; its very essence and principle are faulty.
We must therefore, I think, have recourse to feeble and humble palliatives such as I have suggested. With good sense, good judgment, and good care, I have no doubt that they may be enough. But I have written in vain if I require to say now that the problem is delicate, that the solution is varying and difficult, and that the result is inestimable to us all.
APPENDIX
Note A.
Liabilities and Cash Reserve of the Chief Banking Systems.
The following is a comparison of the liabilities to the public, and of the cash reserve, of the banking systems of the United Kingdom, France, Germany, and the United States. For the United Kingdom the figures are the most defective, as they only include the deposits of the Bank of England, and of the London joint stock banks, and the banking reserve of the Bank of England, which is the only cash available against these liabilities is also the only cash reserve against the similar liabilities of the London private banks, the provincial English banks, and the Scotch and Irish banks. In the case of England, therefore, the method of comparison exhibits a larger proportion of cash to liabilities than what really exists.
(1) ENGLISH BANKING.
Liabilities.
Deposits of Bank of England, less
estimated Joint Stock Bank balances, at December 31, 1872 L 29,000,000
Deposits of London Joint Stock Banks
at December 31 1872 (see 'Economist,' February 8, 1873) L 91,000,000
—–
Total liabilities L 120,000,000
=============
Reserve of Cash
Banking Reserve in Bank of England. L 13,500,000
=============
Making proportion of cash reserve to liabilities to the public about 11'2 per cent.
(2) BANK of FRANCE (FEBRUARY, 1873).
Liabilities
Circulation L 110,000,000
Deposits L 15,000,000
—–
Total liabilities L 125,000,000
=============
Reserve of Cash.
Coin and bullion in hand L 32,000,000
Making proportion of cash reserve to liabilities to the public about 25 per cent.
(3) BANKS OF GERMANY (JANUARY, 1873).
Liabilities
Circulation L 63,000,000
Deposits L 8,000,000
Acceptances and Indorsements L 17,000,000
—–
Total liabilities L 88,000,000
============
Reserves of Cash
Cash in Hand L 41,000,000
============
Making proportion of cash reserve to liabilities to the public about per cent.
(4) NATIONAL BANKS OF UNITED STATES (OCTOBER 3, 1872).
Liabilities
Circulation L 67,000,000
Deposits L 145,000,000
—–
Total liabilities L 212,000,000
=============
Reserve of Cash
Coin and legal tenders in hand L 26,000,000
============
Making proportion of cash reserve to liabilities to the public about 12.3 per cent.
SUMMARY
Liabilities Cash held Proportion of cash to the public to liabilities per cent
Bank of England and London
Joint Stock Banks 20,000,000 13,500,000 11.2
Bank of France 125,000,000 32,000,000 25.0
Banks of Germany 88,000,000 41,000,000 47.0
National Banks of
United States 212,000,000 26,000,000 12.3
Note B.
Extract from Evidence Given by Mr. Alderman Salomons before House of
Commons Select Committee in 1858.
1146. [Chairman.] The effect upon yourselves of the pressure in November was, I presume, to induce you to increase your reserve in your own hands, and also to increase your deposits with the Bank of England?—Yes, that was so; but I wish to tell the Committee that that was done almost entirely by allowing the bills of exchange which we held to mature, and not by raising any money, or curtailing our accommodation to our customers. Perhaps it may be interesting to the Committee to know that on the 11th of November we held discounted bills for brokers to the amount of 5,623,000 L. Out of those bills, 2,800,000 L. matured between the 11th of November and the 4th of December, and 2,000,000 L. more between the 4th of December and the 31st. So that about 5,000,000 L. of bills matured between the 11th of November and the 31st of December; consequently we were prepared, merely by the maturing of our bills of exchange, for any demands that might possibly come upon us.
1147. I understand you to say that you did not withdraw your usual accommodation from your own customers, but that you ceased to have in deposit with the bill-brokers so large a sum of money as you had before?—Not exactly that; the bills which we had discounted were allowed to mature, and we discounted less; we kept a large reserve of cash.
1148. That is to say, you withdrew from the commercial world a part of that accommodation which you had previously given, and at the same time you increased your deposits with the Bank of England?—Yes, our deposits with the Bank of England were increased. We did not otherwise withdraw accommodation.
1149. [Mr. Weguelin.] Had you any money at call with the bill-brokers?—A small amount; perhaps about 500,000 L. or less, which we did not call in.
1150. [Chairman.] What I understand you to say is, that the effect of the commercial pressure upon you was to induce you upon the whole to withdraw from commerce an amount of accommodation which in other times you had given, and at the same time to increase your deposits with the Bank of England?—So far only as ceasing to discount with strangers, persons not having current accounts with us.
1151. Or to give the same amount to the bill-broker?—For a while, instead of discounting for brokers and strangers, we allowed our bills to mature, and remained quiescent with a view to enable us to meet any demand that might be made on ourselves.
1152. Except what you felt bound to your own customers to continue to give, you ceased to make advances?—Quite so; perhaps I might say at the same time, that besides a large balance which we kept at the Bank of England, which of course was as available as in our own tills, we increased our notes in our tills at the head office and at all the branches.
1153. I suppose at that time large sales of public securities were made by the London joint stock banks, which securities were purchased by the public?—It is understood that some joint stock and other banks sold, but I believe it is quite certain that the public purchased largely, because they always purchase when the funds fall.
1154. Are you prepared to give the Committee any opinion of your own as to the effect, one way or the other, which the system of the joint stock banks may have produced with regard to aggravating or diminishing the commercial pressure in the autumn of last year?—I should state, generally, that the joint stock banks, as well as all other banks, in London, by collecting money from those who had it to spare, must of necessity have assisted, and could not do otherwise than assist commerce, both then and at all other times.
1155. You say that your discounts, either at your own counter or through the bill-brokers, are ordinarily very large, but that at the time of severest pressure you contracted them so far as you thought was just to your own immediate customers?—Yes; but the capital was still there, because it was at the Bank of England, and it was capable of being used for short periods; if we did not want it, others might have used it.
1156. [Mr. Weguelin.] In fact, it was used by the Bank of England?– Undoubtedly; I should suppose so; there is no question about it.
1157. You, of course, felt quite certain that your deposits in the Bank of England might be had upon demand?—We had no doubt about it.
1158 You did not take into consideration the effect of the law of 1844, which might have placed the Banking Department of the Bank of England in such a position as not to be able to meet the demands of its depositors? I must say that that never gave us the smallest concern.
1159. You therefore considered that, if the time should arrive, the Government would interfere with some measure as they had previously done to enable the Bank to meet the demands upon it?—We should always have thought that if the Bank of England had stopped payment, all the machinery of Government would have stopped with it, and we never could have believed that so formidable a calamity would have arisen if the Government could have prevented it.
1160. [Chairman.] The notion of the convertibility of the note being in danger never crossed your mind?—Never for a moment; nothing of the kind.
1161. [Mr. Weguelin.] I refer not to the convertibility of the note, but to the state of the Banking Department of the Bank of England?—If we had thought that there was any doubt whatever about it, we should have taken our bank-notes and put them in our own strong chest. We could never for a moment believe an event of that kind as likely to happen.
1162. Therefore you think that the measure taken by the Government, of issuing a letter authorising the Bank of England to increase their issues of notes upon securities, was what was generally expected by the commercial world, and what in future the commercial world would look to in such a conjunction of circumstances?—We looked for some measure of that nature. That, no doubt, was the most obvious one. We had great doubts whether it would come when it did, until the very last moment.
1163. Have you ever contemplated the possibility of the Bank refusing to advance, under circumstances similar to those which existed in November, 1857, upon good banking securities?—Of course I have, and it is a very difficult question to answer as to what its effect might be; but the notion appears to me to be so thoroughly ingrained in the minds of the commercial world, that whenever you have good security it ought to be convertible at the Bank in some shape or way, that I have very great doubt indeed whether the Bank can ever take a position to refuse to assist persons who have good commercial securities to offer.
1164. [Mr. Cayley.] When you say that you have come to some fresh arrangement with regard to your allowance of interest upon deposits, do you speak of yourselves as the London and Westminster Bank, or of some of the other banks in combination with yourselves?—I think all the banks have come to an understanding that it is not desirable, either for their proprietors or for the public, to follow closely at all times the alterations of the Bank. I believe it is understood amongst them all that they do not intend following that course in future.
1165. Is that from a feeling that it is rather dangerous under particular circumstances?—I cannot admit as to its being dangerous, but there can be no doubt of this, that there is a notion in the public mind which we ought not to contend against, that when you offer a high rate of interest for money, you rather do it because you want the person's money, than because you are obeying the market rate; and I think it is desirable that we should show that if persons wish to employ their money, and want an excessive rate, they may take it away and employ it themselves.
1166. You think that there is now a general understanding amongst the banks which you have mentioned, to act upon a different principle from that on which they acted during last October and November?—I think I may say that I know that to be the case.
1167. Was not it the fact that this system of giving so high a rate of interest upon money at call commenced very much with the establishment of some banks during the last year or two, which, instead of demanding 10 days' or a month's notice, were willing to allow interest upon only three days' notice; did not that system begin about two years ago?—I do not think it began with the new banks; I think it began with one of the older banks; I know that as regards my own bank, that we were forced into it; I forgot to say, that with regard to ourselves in taking money on deposit, the parties must leave the money a month, or they lose interest. We do not take money from any depositor at interest unless upon the understanding and condition that it remains a month with us; he may withdraw it within the month, but then he forfeits interest; it will not carry interest unless it is with us a month, and then it is removable on demand without notice.
1168. Is it or is it not a fact that some of the banks pay interest upon their current accounts?—Yes, I think most of the new banks do so; and the Union Bank of London does it.
1169. At a smaller rate than upon their deposits, I presume?—I think at a smaller rate, but I believe it is a fixed rate on the minimum balance for some period, either six months or one month, I do not exactly know the period. I think I ought to add (and I believe it is the case with all the banks) that the London and Westminster Bank, from the day of its first institution until the present day, has never re-discounted a bill. No bill has ever left our bank unless it has been for payment.
1170. Is not that generally the case with the London joint stock banks?—I believe it is the case.
1171. [Mr. Weguelin.] But you sometimes lend money upon bills deposited with you by bill-brokers?—Yes.
1172. And you occasionally call in that money and re-deliver those securities?—Yes; but that we do to a very small extent.
1173. Is not that equivalent to a re-discount of bills?—No; the discount of a bill and the lending money on bills are very different things. When we discount a bill, that bill becomes our property; it is in our control, and we keep it and lock it up until it falls due; but when brokers come to us and want to borrow, say 50,000 L. on a deposit of bills, and we let them have the money and afterwards return those bills to them and we get back our money, surely that is not a re-discount.
1174. When you want to employ your money for a short period, do you not frequently take bills of long date, and advance upon them?—But that is not a re-discount on our part. Very often brokers in borrowing money send in bills of long date, and afterwards we call in that loan; but that is no more a re-discount than lending money upon consols and calling in that money again. It is not an advance of ours; we do not seek it; they come to us and borrow our money, and give us a security; when we want our money we call for that money, and return their security. Surely that is not a re-discount.
1175. [Mr. Hankey.] Is there not this clear distinction between returning a bill on which you have made an advance and discounting a bill, that if you have discounted a bill your liability continues upon the bill until that bill has come to maturity?—Yes.
1176. In the other case you have no further liability whatever?—Certainly.
1177. Should you not consider that a very important distinction?—I think it is an important distinction. Take this case: suppose a party comes to us and borrows 50,000 L., and we lend it him, and when the loan becomes due we take our money back again. Surely that is not a discount on our part.
1178. Is there not this distinction, that if you re-discount you may go on pledging the liability of your bank to an almost unlimited amount, whereas in the other case you only get back that money which you have lent?—Undoubtedly.
1179. [Mr. Cayley.] The late Chancellor of the Exchequer stated before the adjournment, in a speech in the House of Commons, that during the Monday, Tuesday, Wednesday, and Thursday of the panic, the Bank was almost, if not entirely, the only body that discounted commercial bills; how can you reconcile that with what you have said, that you gave as much accommodation as usual to your customers?—I am not responsible for what the Chancellor of the Exchequer said; I am responsible for what I am now stating as to the course of our bank, that our advances to our customers on the 31st of December were nearly 500,000 L. higher than they were on the 1st of October. With regard to our not discounting for other parties, it was in consequence of the discredit which prevailed, that it was necessary we should hold a portion of our deposits in order that they should be available in case persons called for them; a certain number of persons did so; in the month of November we had a reduction of our deposits, and if we had gone on discounting for brokers we should have had to go into the market ourselves to raise money on our Government securities, but we avoided that by not discounting, and leaving our money at the Bank of England.
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 between our transactions with our customers, who of course expect us to give accommodation, and discounts for brokers, which is entirely voluntary, depending upon our having money to employ.
1182. How would it have been if the letter had not issued at the last moment? That is a question which I can hardly answer.
1183. What do you mean by that general expression of yours?—It is impossible to predicate what may happen in time of panic and alarm. A great alarm prevailed certainly amongst the commercial world, and it could never have been alleviated, except by some extraordinary means of relief. We might probably have been in the state in which Hamburg was, where they have no bank-notes in circulation.
1184. [Mr. Spooner.] What did you mean by the expression, 'the last moment'? You said that the letter came out at the last moment; the last moment of what?—It was late in the day; it was a day of great distress. For two days there was a great deal of anxiety, and everybody expected that there would be some relief; and it was when expectation, I suppose, was highly excited that the letter came, and it gave relief.
1185. Cannot you tell us what your opinion would have been, if that last moment had happened to have elapsed, and the letter had not come?—It is very difficult to say; it is too much to say that it could not have been got over. There can be no doubt whatever that what created the difficulty existed out of London, and not in it; and therefore it is much more difficult for me to give an opinion. I believe that the banking interest, both private and joint stock, was in a perfectly sound condition, and able to bear any strain which might have been brought upon it in London.
1186. [Mr. 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 proportion, or can you give the Committee any idea of what you would consider about a fair and desirable proportion which should be so kept unemployed?—I think the best idea which I can give upon that subject is to give our annual statement, or balance sheet, for the 31st of December.
1189. Does that show what amount of unemployed money you had on that day?—Yes. I will put in a statement, which perhaps will be the best means of meeting the question, showing the cash in hand on the 30th of June and the 31st of December in every year, as shown by our published accounts, together with our money at call and our Government securities; that will be perhaps the best and most convenient way of giving the information you desire to have. (See Table below.)
1190. Do you consider that when your deposits are materially on the increase it is necessary to keep a larger amount of money in reserve than you would keep at other times?—I may say that, as a general rule, our reserve would always bear some proportion to our deposits.
Total Lodgments with London and Westminster Bank; also Amount of Cash in Hand, Moneys with Bill-Brokers at Call, and Government Securities held by the Bank.
DATE Deposits Cash Money Government TOTAL. in Hand at Call Securities L L L L L 31 December 1845 3,590,014 563,072 628,500 1,039,745 2,231,317 31 December 1846 3,280,864 634,575 423,060 938,717 1,996,352 31 December 1847 2,733,753 7,231,325 350,108 791,899 1,863,332 30 June 1848 3,170,118 588,871 159,724 1,295,047 2,043,642 31 December 1848 3,089,659 645,468 176,824 1,189,213 2,011,505 30 June 1849 3,392,857 552,642 246,494 964,800 1,763,936 31 December 1849 3,680,623 686,761 264,577 973,691 1,224,029 30 June 1850 3,821,022 654,649 258,177 972,055 1,884,881 31 December 1850 3,969,648 566,039 334,982 1,089,794 1,990,815 30 June 1851 4,414,179 691,719 424,195 1,054,018 2,169,932 31 December 1851 4,677,298 653,946 378,337 1,054,018 2,080,301 30 June 1852 5,245,135 861,778 136,687 1,054,018 2,122,483 31 December 1852 5,581,706 855,057 397,087 1,119,477 2,371,621 30 June 1853 6,219,817 904,252 499,467 1,218,852 2,622,571 31 December 1853 6,259,540 791,699 677,392 1,468,902 2,937,993 30 June 1854 6,892,470 827,397 917,557 1,457,415 3,202,369 31 December 1854 7,177,244 694,309 486,400 1,451,074 2,631,783 30 June 1855 8,166,553 722,243 483,890 1,754,074 2,960,207 31 December 1855 8,744,095 847,856 451,575 1,949,074 3,248,505 30 June 1856 11,170,010 906,876 601,800 1,980,489 3,489,165 31 December 1856 11,438,461 1,119,591 432,000 2,922,625 4,474,216 30 June 1857 13,913,058 967,078 687,730 3,353,179 5,007,987 31 December 1857 113,889,021 2,226,441 1,115,883 3,582,797 6,923,121
1191. Do you employ your money in the discounting of bills for other persons than your own customers?—Discount brokers.