, LOMBARD STREET A DESCRIPTION OF THE MONEY MARKET ,. * WALTER BAGEHOT NEW YORK CHARLES SCRIBNER'S SONS 1897 ADVERTISEMENT THE COMPOSITION of this little book has occupied a much longer time than, perhaps, my readers may think its length or its importance deserves. 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, i 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 chang- ing 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 Vi AD VER TISEMENT. sets of persons the Bank of England, Joint Stock Banks other than that Bank, private bankers, and bill-brokers ; 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 criticism. 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 re- vising. If it had not been for his kind assistance, the publication of the book must have been post-' poned till the autumn, which, as its production has already been so slow, would have been very annoying to me. WALTER BAGEHOT. THE POPLARS, WIMBLEDON. April 26,1873. CONTENTS CHAT. r*Gi I. INTRODUCTORY I II. A GENERAL VIEW OF LOMBARD STREET . . .21 III. HOW LOMBARD STREET CAME TO EXIST, AND WHY IT ASSUMED ITS PRESENT FORM . . . .7$ IV. THE POSITION OF THE CHANCELLOR OF THE EXCHE- QUER IN THE MONEY MARKET . . . . IOI V. THE MODE IN WHICH THE VALUE OF MONEY IS SETTLED IN LOMBARD STREET . . . "3 VI. WHY LOMBARD STREET IS OFTEN VERY DULL, AND SOMETIMES EXTREMELY EXCITED . . . .122 VII. A MORE EXACT ACCOUNT OF THE MODE IN WHICH THE BANK OF ENGLAND HAS DISCHARGED ITS DUTY OF RETAINING A GOOD BANK RESERVE, AND OF ADMINISTERING IT EFFECTUALLY . . . l6o VIII. THE GOVERNMENT OF THE BANK OF ENGLAND . . 2O8 IX THE JOINT STOCK BANKS 243 viii CONTENTS. CHAP* fAGB X. THE PR.HATE BANKS . . . ... . 267 XI. THE BILL-BROKERS 28 1 C XII. THE PRINCIPLES WHICH SHOULD REGULATE THE AMOUNT OF THE BANKING RESERVE TO BE KEPT BY THE BANK OF ENGLAND . . .- . . .30! XIII. CONCLUSION . . . , . . . ' . .329 APPENDIX. . NOTE A. LIABILITIES AND CASH RESERVE OF THE CHIEF BANKING SYSTEMS . . . V . . ' . .33$ NOTE B. EXTRACT FROM EVIDENCE GIVEN BY MR. ALDER- MAN SALOMONS BEFORE THE HOUSE OF COM- MONS SELECT COMMITTEE IN 1858 . . . 337 rfOTE C. STATEMENT OF CIRCULATION AND DEPOSITS OF THE BANK OF DUNDEE AT INTERVALS OF TEN YEARS, BETWEEN 1764 AND 1864 . .' . 349 NOTE D. MEETING OF THE PROPRIETORS OF THE BANK OF ENGLAND, SEPTEMBER 13, 1 866 . . .350 LOMBARD STREET CHAPTER I. INTRODUCTORY. I VENTURE to call this Essay ' Lombard Street,' and not the ' Money Market/ or any such phrase, because I wish to deal, and to show that I mean to deal, with concrete realities. A notion prevails that the Money Market is some- thing 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 per- haps an unfair advantage. Half, and more than half, of the supposed ' difficulty ' of the -Money i 2 INTRODUCTORY. 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 exclu- sively 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 con- troversy as to this Act of Parliament and there is still so much animosity that a single sentence respecting it is far more interesting to very many than a whole book on any other part of the subject. Two hosts of eager disputants on this subject ask of every new writer the one question Are you with us or against us ? and they care for little else. Of course if the Act of 1844 really were, as is commonly thought, the primum mobile of the English Money Market, the source of all good according to some, and the source of all harm according to others, the extreme irritation excited by an opinion on it would be no reason for not INTRODUCTORY. 3 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 magni- fied into greater relative importance than they at all deserve. We must never forget that a quarter of a century has passed since 1844, a period singularly remarkable for its material progress, and almost marvellous in its banking development. Even, therefore, if the facts so much referred to in 1844 had the importance then ascribed to them, and I believe that in some respects they were even then overstated, there would be nothing surprising in finding that in a new world new phenomena had arisen which now are larger and stronger. In my opinion this is the truth : since 1844, Lombard Street is so changed that we cannot judge of it without describing and discussing a most vigorous adult world which then was small and weak. On this account I wish to say as little as is fairly possible of the Act of 1844, and, as far as I can, to isolate and dwell exclusively on the * Post-Peel ' agencies, so that those who have had enough of that well* 4 INTR OD UC TOR Y. worn theme (and they are very many) may not be wearied, and that the new and neglected parts o' tiie subject may be seen as they really are. The briefest and truest way of describing Lom- ] bard Street is to say that it is by far the greatest combination of economical power and economical delicacy that the world has ever seen. Of the greatness of the power there will be no doubt. Money is economical power. Everyone is aware that England is the greatest moneyed country in the world ; everyone admits that it has much more immediately disposable and ready cash than any other country. But very few persons are aware how much greater the ready balance the floating loan-fund which can be lent to anyone or for any purpose is in England than it is any- where 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 (3ist December, 1872) . . . 120,000,000 Pins (2yth February, 1873) .... 13,000,000 New York (February, 1873) .... 40,000,000 German Empire (3ist January, 1873) . . 8,000,000 And the unknown deposits the deposits in bank* which do not publish their accounts are in Londor INTRODUCTORY. 5 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 devel oped. But that cash is not, so to speak, * money- market money : ' it is not attainable. Nothing but their immense misfortunes, nothing but a vast loan in their own securities, could have extracted the hoards of France from the custody of the French people. The offer of no other securities would have tempted them, for they had confidence in no other securities. For all other purposes the money hoarded was useless and might as well not have been hoarded. But the English money is ' borrow- able ' 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 6 :NTR ODUC TOR Y. 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. Concen- tration 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 Lom- bard Street at a price : some countries can bor- row much cheaper than others ; but all, it is said, can have some money if they choose to pay enough for it. Perhaps this is an exaggeration ; but confined, as of course it was meant to be, to civilised Governments, it is not much of an exaggeration. There are very few civilised Gov- ernments that could not borrow considerable sums cf us if they choose, and most of them seem more and more likely to choose. If any nation v ants 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 INTRO D UCTOX Y. y very great lenders to foreign states. But they are great lenders to those who lend. They advance on foreign stocks, as the phrase is, with ' a margin ; ' that is, they find eighty per cent, of the money, and the nominal lender finds the rest. And it is in this way that vast works are achieved with English aid which but for that aid would never have been planned. In domestic enterprises it is the same. We have entirely lost the idea that any undertaking likely to pay, and seen to be likely, can perish for want of money ; yet no idea was more familiar to our ancestors, or is more common now in most countries. A citizen of London in Queen Elizabeth's time could not have imagined our state of mind. He would have thought that it was of no use inventing railways (if he could have understood what a railway meant), for you would not have been able to collect the capital with which to make them. At this moment, in colonies and all rude countries, there is no large sum of transferable money ; there is no fund fiom 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 g INTRODUCTORY. 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 proba- ble gain, is a luxury which no country has ever enjoyed with even comparable equality before. But though these occasional loans to new en- terprises and foreign States are the most conspic- uous instances of the power of Lombard Street, they are not by any means the most remarkable or the most important use of that power. English trade is carried on upon borrowed capital to an extent of which few foreigners have an idea, and none of our ancestors could have conceived. Ir every district small traders have arisen, who ' dis- count their bills ' largely, and with the capital so borrowed, harass and press upon, if they do not eradicate, the old capitalist. The new trader has obviously an immense advantage in the struggle of trade. If a merchant have 5o,ooo/. all his own, to gain 10 per cent, on it he must make 5,ooo/. a year, and must charge for his goods accordingly ; but if another has only io,ooo/., and borrows 40,000/1 by discounts (no extreme instance in our modern trade), he has the same capital of 50,000^ INTRODUCTOR V. g to use, and can sell much cheaper. If the rate at which he borrows be 5 per cent., he will have to pay 2,ooo/. a year ; and if, like the old trader, he make 5,ooo/. a year, he will still, after paying his interest, obtain 3,ooo/. a year, or 30 per cent., on his own io,ooo/. As most merchants are content with much less than 30 per cent., he will be able, if he wishes, to forego some of that profit, lower the price, of* the commodity, and drive the old- fashioned trader the man who trades on his own capital out of the market. In 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 trad- ing with borrowed capital, and a constant dis- couragement 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 exceedingly mixed. On the one hand, it prevents the long duration of great families of merchant princes, such as those of Venice and^Genoa, who inherited nice cultivation as well as great wealth, and who, to some extent, com- bined 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 r O INTR OD UC TOR Y. a generation or two they retire into idk luxury, Upon their immense capital they can only obtain low profits, and these they do not think enough to compensate them for the rough companions and rude manners they must meet in business. Thi? constant levelling of our commercial houses is, too, unfavourable to commercial morality. Great firms, with a reputation which they have re- ceived 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 lit- tle money of their own, created by bank 'dis- counts.' These men want business at once, and they produce an inferior article to get it. They rely on cheapness, and rely successfully. But these defects and others in the democratic structure of commerce are compensated by one great excellence. No country of great hereditary trade, no European country at least, was ever so little ' sleepy/ to use the only fit word, as England ; no other was ever so prompt at once to seize ne\\ advantages. A country dependent mainly on great ' merchant princes ' will never be so prompt ; their commerce perpetually slips more and more into a INTROD UCTOR Y. 1 \ commerce of routine. A man of large wealth, how- ever intelligent, always thinks, more or less ' I have a great income, and I want to keep it. li things go on as they are I shall certainly keep it; but if they change I may not keep it.' Conse- quently 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 op- portunities ; 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, Lom- bard Street is the great go-between. It is a sort of standing broker between quiet saving districts of the country and the active employing districts. Why particular trades settled in particular places it is often difficult to say ; but one thing is certain, that when a trade has settled in any one spot, it is very difficult for another to oust it impossible unless the second place possesses some very great intrinsic advantage. Commerce is curiously con servative in its homes, unless it is imperiously I2 INTRODUCTORY. obliged to migrate. Partly from this cause, and partly from others, there are whole districts in England which cannot and do not employ theii own money. No purely agricultural county doer so. The savings of a county with good land but no manufactures and no trade much exceed what can be safely lent in the county. These savings are first lodged in the local banks, are by them sent to London, and are deposited with London bankers, or with the bill brokers. In either case the result is the same. The money thus sent up from the accumulating districts is employed in discounting the bills of the industrial districts. Deposits are made with the bankers and bill brokers in Lombard Street by the bankers of such counties as Somersetshire and Hampshire, and those bill brokers and bankers employ them in the discount of bills from Yorkshire and Lancashire. Lombard Street is thus a perpetual agent between the two great divisions of Eng- land, between the rapidly-growing districts, where almost any amount of money can be well and easily employed, and the stationary and the declining districts, where there is more money than can be used. This organisation is so useful because it is so easily adjusted. Political economists say that INTR OD UCTOR Y. 1 3 capital sets towards the most profitable trades, and that it rapidly leaves the less profitable, and non-paying trades. But in ordinary countries tliis is a slow process, and some persons who want to have ocular demonstration of abstract truths have been inclined to doubt it because they could not see it. In England, however, the process would be visible enough if you could only see the books of the bill brokers and the bankers. Their bill cases as a rule are full of the bills drawn in the most profitable trades, and c ooo,ooo/. will be kept in the till. In conse- quence, that 2,ooo,ooo/. 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,ooo,ooo/. 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. A* We see then that the banking reserve of the Bank of England some io,ooo,ooo/. on an aver- age of years now, and formerly much less is all which is held against the liabilities of Lombard Street ; and if that were all, we might well be amazed at the immense development of our credit system in plain English, at the immense amount of our debts payable on demand, and the small - ness 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 requir- ing to keep a reserve, it is itself a place where re- serves are kept. All country bankers keep their re- serve in London. They only retain in each country town the minimum of cash necessary to the trans- action of the current business of that country town A GEN'ERAL VIEW OF LOMBARD STREET. 31 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 reserve also. Deposit Banking is indeed so small on the Continent, that no large reserve need be held on account of it. A reserve of the same sort which is needed in England and Scotland is not needed abroad. But all great commu- nities have at times to pay large sums in casru 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 32 A GENERAL VIEW OF LOMBARD STREET. 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 inter- national payments in cash is thrown on the Bank of England. No doubt foreigners cannot take from us our own money ; they must send here ' value ' in some shape or other for all they take away. But they need not send ' cash ; ' they may send good bills and discount them in Lombard Street and take away any part of the produce, or all the produce, in bullion. It is only putting the same point in other words to say that all exchange operations are centering more and more in London. Formerly for many purposes Paris was a European settling-house, but now it has ceased to be so. The note of the Bank of France has not indeed been depreciated enough to disorder ordinary transactions. But any de- preciation, however small even the liability to depreciation without its reality is enough to disorder exchange transactions. They are cal- culated 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 A GENERAL VIEW OF LOMBARD STREET. 33 transactions in Europe, instead of being formerly one of two. And this pre-eminence London will probably maintain, for it is a natural pre-emi- nence. The number of mercantile bills drawn upon London incalculably surpasses those drawn on any other European city ; London is the place which receives more than any other place, and pays more than any other place, and therefore it is the natural 'clearing house.' The pre-eminence of Paris partly arose from a distribution of political power, which is already disturbed ; but that oi London depends on the regular course of com- merce, which is singularly stable and hard to change. Now that London is the clearing-house to foreign countries, London has a new liability to foreign countries. At whatever place many peo- ple have to make payments, at that place those people must keep money. A large deposit of foreign money in London is now necessary for the business of the world. During the immense pay- ments 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 34 A GENERAL VIEW OF LOMBARD STREET. persons ; for the deposit at a clearing-house nec- essary to settle the balance of commerce must tend to increase as that commerce itself increases. And this foreign deposit is evidently of a deli- cate and peculiar nature. It depends on the good opinion of foreigners, and that opinion may di- minish or may change into a bad opinion. After the panic of 1866, especially after the suspension of Peel's Act (which many foreigners confound with a suspension of cash payments), a large amount of foreign money was withdrawn from London. And we may reasonably presume that in proportion as we augment the deposits of cash by foreigners in London, we augment both the chances and the disasters of a ' run ' upon Eng- land. And if that run should happen, the bullion to meet it must be taken from the Bank. There is no ether large store in the country. The great exchange dealers may have a little for their own purposes, but they have no store worth mention- ing 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 A GENERAL VIEW OF LOMBARD STREET. 35 afraid. But a creditor who takes fright will not wait, and if he wants bullion in a hurry he must come to the Bank of England. In consequence all our credit system depends on the Bank of England for its security. On the wisdom of the directors of that one Joint Stock Company, it depends whether England shall be solvent or insolvent. This may seem too strong, but it is not. All banks depend on the Bank of England, and all merchants depend on some banker. If a merchant have io,ooo/. at his bankers, and wants to pay it to some one in Germany, he will not be able to pay it unless his banker can pay him, and the banker will not be able to pay if the Bank of England should be in difficulties and cannot produce his ' reserve.' The directors of the Bank are, therefore, in fact, if not in name, trustees for the public, to keep a banking reserve on their behalf; and it would naturally be expected either that they distinctly recognized this -duty and engaged to perform it, or that their own self-interest was so strong in the matter that no engagement was needed. But so far from there being a distinct undertaking on the part of the Bank directors to perform this duty, many of them would scarcely acknowledge it, and some altogether deny it. Mr. Hankey, one of the 3$ A GENERAL VIE IV OF LOMBARD STREET. 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 tc enter at any length on the subject of the general management of the Bank, meaning the Banking Department, as the principle upon which the business is conducted does not differ, as far as I am aware, from that of any well-conducted 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 differ- ence 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 Ba*nks in Lombard Street. They keep an altogether different kind and quantity of reserve ; but though the practice is mended the theory is not. There has never been a distinct resolution passed by the Directors of the Bank of England, and communicated by them to the public, stating even in the mosf ^ GENERAL VIEW OF LOMBARD STREET. 37 general manner, how much reserve they mean to keep or how much they do not mean, or by what principle in this important matter they will be guided. The position of the Bank directors is indeed most singular. On the one side a great city opinion a great national opinion, I may say, for the nation has learnt much from many panics requires the directors to keep a large reserve. The newspapers, on behalf of the nation, are always warning the directors to keep it, and watching that they do keep it ; but, on the other hand, another less visible but equally constant pressure pushes the directors in exactly the reverse way, and inclines them to diminish the reserve. This is the natural desire of all directors to make a good dividend for their shareholders. The more money lying idle the less, cczteris paribuSy is the dividend ; the less money lying idle the greater is the dividend. And at almost every meeting of the proprietors of the Bank ol 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 divi- dend ought to be more. Indeed, it cannot be wondered at that the Bank proprietors do not quite like their positioa 38 A GENERAL VIEW OF LCMBARD STREET. Theirs is the oldest bank in the City, but theh 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, ;md the price of the stock itself 212 ; the dividend now is 9 per cent., and the price of the stock 232. But in the same time the shares of the London and Westminster Bank, in spite of an addition of 100 per cent, to the capital, have risen from 27 to 66, and the dividend from 6 per cent, to 20 per cent. That the Bank proprietors should not like to see other companies getting richer than their company is only natural. Some part of the lowness of the Bank dividend, and of the consequent small value of Bank stock, is undoubtedly caused by the magnitude of the Bank capital ; but much of it is also due to the great amount of unproductive cash of cash which yields no interest that the Banking Department of the Bank of England keeps lying idle. If we compare 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 A GENERAL VIEW OF LOMBARD STREET. 39 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 1 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 far as possible their own dividend. In most banks there would be a wholesome dread restraining the desire of the shareholders to reduce the reserve ; they would fear to impair the credit of the bank. But fortunately or unfortunately, no one has any fear about the Bank of England. The English world at least believes that it will not, almost that it cannot, fail. Three times since 1844 the Banking Department has received assistance, and would have failed without it. In 1825, the entire concern almost suspended payment ; in 1 797, 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 die condition of the Bank, divided or undivided, was in a certain sense most sound ; it could ultimately have paid all its creditors all it owed, and returned to its shareholders all their own capital. But ultimate, payment is not what the 40 A GENERAL VIEW OF LOMBARD STREET. 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 question- ing the credit of the Bank, and the Bank never, dreams that its own credit is in danger. Somehow everybody feels the Bank is sure to come right. In 1797, when it had scarcely any money left, the Government said not only that it need not pay away what remained, but that it must not. The ' effect of letters of licence ' to break Peel's Act has confirmed the popular conviction that the Government is close behind the Bank, and will help it when wanted. Neither the Bank nor the Banking Department have ever had an idea of being put ' into liquidation ; ' most men would think as soon of ' winding up ' the English nation. Since then the Bank of England, as a bank, is exempted from the perpetual apprehension that makes other bankers keep a large reserve the apprehension of discredit it would seem particu- larly necessary that its managers should be themselves specially interested in keeping that A GENERAL VIEW OF LOMBARD STREET. 41 reserve, and specially competent to keep it. But I need not say that the Bank directors have not thdr personal fortune at stake in the management of the Bank. They are rich City merchants, and their stake in the Bank is trifling in comparison with the rest of their wealth. If the Bank were wound up, most of them would hardly in their income feel the difference. And Avhat is more, the Bank directors are not trained bankers ; they were, not bred to the trade, and do not in general give the main power of their minds to it. They are merchants, most of whose time and most of whose real mind are occupied in making money in their own business and for themselves. It might be expected that as this great public duty was cast upon the Banking Department of the Bank, the principal statesmen (if not Parliament itself) would have enjoined on them to perform it. But no distinct resolution of Parliament has ever enjoined it ; scarcely any stray word of any influ- ential 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 42 A GENERAL VIEW OF LOMBARD STREET. 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 ol 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 particu- larly trained for the duty who might be called ' amateurs/ who have no particular interest above other people in keeping it undiminished who acknowledge no obligation to keep it undi- minished who have never been told by any great statesman or public authority that they are so to keep it or that they have anything to do with it who are named by and are agents for a proprietary which would have a greater income if it was diminished, who do not fear, and who need not fear, ruin, even if it were all gone and wasted. -^ That such an arrangement is strange must be plain ; but its strangeness can only be compre- hended when we know what the custody of a national banking reserve means, and how delicate and difficult it is. A GENERAL VIEW OF LOMBARD STREET. 43 II. Such a i eserve as we have s ten is kept to meet sudden and unexpected demands. If the bankers of a country are asked for much more than is commonly wanted, then this reserve must be resorted to. What then are these extra de- mands ? and how is this extra reserve to be used? Speaking broadly, these extra demands are of two kinds -one from abroad to meet for- eign payments requisite to pay large and unusual foreign debts, and the other from at home to meet sudden apprehension or panic arising in any manner, rational or irrational. No country has ever been so exposed as England to a foreign demand on its banking reserve, not only because at present England is a large borrower from foreign nations, but also (and much more) because no nation has ever had a foreign trade of such magnitude, in such varied objects, or so ramified through the world. The ordinary foreign trade of a country requires no cash ; the exports on one side balance the imports on the other. But a sudden trade of import like the import of foreign corn after a bad harves* 44 A GENERAL VIEW OF LOMBARD STREET. 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 withdrawn in countries where bank- ing is at all developed, is a ' bank reserve/ In England especially, except a few sums of no very considerable amount held by bullion dealers in the course of their business, there are no sums worth mentioning in cash out of the banks ; an ordinary person could hardly pay a serious sum without going to some bank, even if he spent a month in trying. All persons who wish to pay a large sum in cash trench of necessity on the banking reserve. But then what is ' cash ? ' Within a country the action of a Government can settle the quantity, and therefore the value, of its currency ; but outside its own country, no Government can do so. Bullion is the ' cash ' of international trade ; paper currencies are of no use there, and coins pass only as they contain more or less bullion. When then the legal tender of a country is purely metallic, all that is necessary is that banks should keep a sufficient store of that ' legal tender/ But when the ' legal tendc r ' is partly metal and A GENERAL VIEW OF LOMBARD STREET. 45 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 oi the local legal tender into the universally accepta- ble 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 Civil War took many millions from this country for a series of years. A bad harvest must take millions in a single year. In order to find such great sums, the Bank of England requires the steady use of an effectual instrument. That instrument is the elevation of the rate of interest. If the interest of money be raised, it is proved by experience that money does come to Lombard Street, and theory shows that it ought to 46 A GENERAL VIEW OF LOMBARD STREET. come. To fully explain the matter I must go deep into the theory of the exchanges, but the general notion is plain enough. Loanable capita], 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 profita- bly. While English credit is good, a rise of the value of money in Lombard Street immediately by a banking operation brings money to Lombard Street. And there is also a slower mercantile operation. The rise in the rate of discount acts immediately on the trade of this country. Prices fall here ; in consequence imports are diminished, exports are increased, and, therefore, there is more likelihood of a balance in bullion coming to this country after the rise in the rate than there was before. Whatever persons one bank or many banks in any country hold the banking reserve of that country, ought at the very beginning of an unfa- vourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve fron.? being diminished farther, and so as to replenish it by imports of bullion. This duty, up to about the year 1860, the Bank of England did not perform at all, as I shall sho^v A GENERAL VIEW OF LOMBARD STREET. 4; 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 modern Money Market may be said to begin) and the year 1857. The panic of that year for the first time taught the Bank directors wisdom, and converted them to sound principles. The present policy of the Bank is an infinite improvement on the policy before 1857: the two must not be for an instant confounded ; but nevertheless, as I shall hereafter show, the present policy is now still most defective, and much discussion and much effort will be wanted before that policy becomes what it ought to be. A domestic drain is very different. Such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain. Times without number the public have been alarmed mainly because they saw that the Banking reserve was already low, and that it was daily getting lower. The two maladies an external drain and an internal often attack the money market at once. What then ought to be done ? 48 A GENERAL VIEW OF LOMBARD STREET. 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 con- trary. 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 extra- ordinary times. Ordinarily discredit does not at first settle on any particular bank, still less does it at first con- centrate 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 A GENERAL VIEW OF LOMBARD STREET. 49 any others. At first, incipient panic amounts to a kind of vague conversation : Is A. B. as good as he used to be ? Has not C. D. lost money ? and a thousand such questions. A hundred people are talked about ; and a thousand think, ' Am I talked about, or am I not ? ' 'Is my credit as good as it used to be, or is it less ? ' And every day, as a panic grows, this floating suspicion becomes both more intense and more diffused ; it attacks more persons, and attacks them all more virulently than at first. All men of experi- ence, 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 com- monly they would not have offered for days or weeks to come. And if the merchant be a reg- ular customer, a banker does not like to refuse, because if he does he will be said, or may be said, to be in want of money, and so may attract the panic to himself. Not only merchants but all persons under pecuniary liabilities present or imminent feel this wish to ' strengthen 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 them- 8 5O * GENERAL VILIV OF LOMBARD STREET. selves 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 livelihood. As business grows, the number of such subsidiary persons augments. The various modes in which money may be lent have each their peculiarities, and persons who devote themselves to one only lend in that way more safely, and therefore more cheaply. In time of panic, these subordinate dealers in money will always come to the principal dealers. In ordinary times, the intercourse between the two is probably close enough. The little dealer is prob- ably in the habit of pledging his ' securities ' to the larger dealer at a rate less than he has him- self charged, and of running into the market to lend again. His time and brains are his principal capital, and he wants to be always using them. But in times of incipient panic, the minor money dealer always becomes alarmed. His credit is never very established or very wide ; he always lears that he may be the person on whom current suspicion will fasten, and often he is so. Accord- ingly he asks the larger dealer for advances. A number of such persons ask all the large dealers --those who have the. money the holders of the A GENERAL VIEW OF LOMBARD STREET. 51 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 refusal of it even be dangerous ? A panic grows by what it feeds on ; if it devours these second-class men, shall we, the first-class, be safe ? ' A panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ' this man and that man/ whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. ' We lent it,' said Mr. Harman, on behalf of the Bank of England, ' by every possible means arid in modes we had never adopted before ; we took iu stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only 52 A GENERAL VIEW OF LOMBARD STREET. 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 assist- ance 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 mer- chants 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 A GENERAL VIEW OF LOMBARD STREET. ?$ kind of ultimate treasury, where the last shilling of the country is deposited and kept. And then you go on to say that this final treasury is also to be the last lending-house ; that out of it unbounded, or at any rate immense, advances are to be made when no on&e else lends. This seems like saying first, that the reserve should be kept, and then that it should not be kept. But there is no puzzle in the matter. The ultimate banking reserve of a country (by whomsoever kept) is not kept out of show, but for certain essential purposes, and one of those purposes is the meeting a demand for cash caused by an alarm within the country. It is not unreasonable that our ultimate treasure in particu- lar cases should be lent ; on the contrary, we keep that treasure for the very reason that in particular cases it should be lent. v 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. I f 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 aggra- vates into a panic, which is an opinion that most people, or very many people, will not pay their 54 A GENERAL VIEW OF LOMBARD STREET. creditors ; and this too can only be met by ena bling all those persons to pay what they owe, which takes a great deal of money, No one has enough money, or anything like enough, but the holders of the bank reserve. Not that the help so given by the banks holding that reserve necessarily diminishes it, Very com- monly 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 1 844, 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 nc more ; they never presented them for payment ; A GENERAL VIEW OF LOMBARD STREET. 55 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 us 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 conveni- ent 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 3 6 A GENERAL VIE IV OF LOMBARD STREET. , * ready motfey always available, and advance out oi it very freely in periods of panic, and in times oi incipient alarm. The management of the Money Market is the more difficult, because, as has been said, periods of internal panic and external demand for bullion commonly occur together. The foreign drain empties the Bank till, and that emptiness, and the resulting rise in the rate of discount, tend to frighten the market. The holders of the reserve have, therefore, to treat two opposite maladies at once one requiring stringent remedies, and especially a rapid rise in the rate of interest ; and the other, an alleviative treatment with large and ready loans. Before we had much specific experience, it was not easy to prescribe for this compound disease ; but now we know how to deal with it. We must look first to the foreign drain, and raise the rate of interest as high as may be necessary, Unless you can stop the foreign export, you cannot allay the domestic alarm. The Bank will get poorer and poorer, and its poverty will protract or renew t he 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 A GENERAL VIEW OF LOMBARD STREET. 57 worst malady of the money market when a foreign drain is added to a domestic drain. Any notion that money is not to be had, or that it may not be had at any price, only raises alarm to panic and enhances panic to madness. But though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal at once with such great and contrary evils. And great as is the delicacy of such a problem in all countries, it is far greater in England now than it was or is elsewhere. The strain thrown by a panic on the final bank reserve is proportional to the magnitude of a country's commerce, and to the number and size of the dependent banks banks, that is, holding no cash reserve that are grouped around the central bank or banks. And in both respects our system causes a stupendous strain. The magnitude of our commerce, and the number and magnitude of the banks which depend on the Bank of England, are undeniable. There are very many more persons under great liabilities than there are, or ever were, anywhere else. At the commencement of every panic, all persons under such liabilities try to supply themselves with the means of meeting those liabilities while they can. This causes a great demand for new loans And so far from being able to meet it, the 3* ^8 A GENERAL VIEW OF LOMBARD STREET. bankers who do not keep an extra reserve at that time borrow largely, or do not renew large loans very likely do both. London bankers, other than the Bank of England, effect this in several ways. First, they have probably discounted bills to a large amount for the bill brokers, and if these bills are paid, they decline discounting any others to replace them. The directors of the London and Westminster Bank had, in the panic of 1857, discounted millions of such bills, and they justly said that if those bills were paid they would have an amount of cash far more than sufficient for any demand.* But how were those bills to be paid ? Some one else must lend the money to pay them. The mer- cantile 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. Speak- ing broadly, those bills can only be paid by the dis- count 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, * See Note B. at the end of the volume. A GENERAL VIEW OF LOMBARD STREET. 59 and he has sold on credit. He is but a middle- man. 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 w r hich 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 approaching the interest they can charge ; as they can only keep a small reserve a panic tells on them more quickly than on anyone else. The) stop their discounts, or much diminish their dis- counts, immediately. There is no new money to (5o A GENERAL VIEW OF LOMBARD STREET. 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 excel- lent bills in their case, but these will not be due for some days ; and the demand from the more or less alarmed bankers is for payment at once and to-day. Accordingly the bill broker takes refuge at the Bank of England the only place where at such a moment new money is to be had. The case is just the same if the banker wants to sell Consols, or to call in money lent on Consols. These he reckons as part of his reserve. And in ordinary times nothing can be better. According to the saying, you ' can sell Consols on a Sunday.' In a time of no alarm, or in any alarm affecting truJ: particular banker only, he can rely on such reserve without misgiving. But not so in a general panic. Then, if he wants to sell 5oo,ooo/. worth of Consols, he will not find 5OO,ooo/. of fresh money ready to ^ome into the market. All A GENERAL VIEW OF LOMBARD STREET. l irdinary bankers are wanting to sell, or thinking they may have to sell. The only resource is the | Bank of England. In a great panic, Consoler cannot be sold unless the Bank of England will advance to the buyer, and no buyer can obtain advances on Consols at such a time unless the Bank of England will lend to him. The case is worse if the alarm is not confined to the great towns, but is diffused through the country. As a rule, country bankers only keep / so much barren cash as is necessary for their common business. All the rest they leave at the bill brokers, or at the interest-giving banks, or invest in Consols and such securities. But in a panic they come to London and want this money. And it is only from the Bank of England that they \ can get it, for all the rest of London want their \ money for themselves. If we remember that the liabilities of Lombard Street payable on demand are far larger than those of any like market, and that the liabilities of the country are greater still, we can conceive the magnitude of the pressure on the Bank of Eng- land 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 62 A GENERAL VIEW OF LOMBARD STREET. formidable, for none ever before kept the banking reserve for such a nation as the English. The mode in which the Bank of England meets this great responsibility is very curious. It un- questionably does make enormous advances in every panic- In 1847 the loans on ' private se- curities ' increased from 18,963,000 to 20,409,000 1857 ditto ditto 20,404,000 to 31,350,000 1866 ditto ditto 18,507,000 to 33,447,000 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 Depart- ment of the Bank of England is only a bank like /other banks that it has no peculiar duty in times of panic that it then is to look to itself alone, as other banks look. And there is this excuse for the Bank. Hitherto questions of banking have been so little discussed in comparison with ques- tions 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 A GENERAL VIEW OF LOMBARD STREET. 3 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 Govern- ment 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 r.aid 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 connec- tion between the two. And the State, in getting ihe 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 64 A GENERAL VIEW OF LOMBARD STREET. importance and perhaps its novelty it is worth saying again whatever bank or banks keep the ultimate banking reserve of the country must lend that reserve most freely in time of apprehension, for that is one of the characteristic uses of the bank reserve, and the mode in which it attains one of the main ends for which it is kept. Whether rightly or wrongly, at present and in fact the Bank of England keeps our ultimate bank reserve, and therefore it must use it in this manner. And though the Bank of England certainly do make great advances in time of panic, yet as they \ do not do so on any distinct principle, they natu- / rally do it hesitatingly, reluctantly, and with mis- ' giving. In 1847, even in 1866 the latest panic, and the one in which on the whole the Bank- acted the best there was nevertheless an instant when it was believed the Bank would not advance on Consols, or at least hesitated to advance on them. The moment this was reported in the City and telegraphed to the country, it made the panic indefinitely worse. In fact, to make large advances in this faltering way is to incur the evil of making them without obtaining the advantage. What is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. A GENERAL VIEW OF LOMBARD STREET. 65 If people could be really convinced that they eould have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. Either shut the Bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the w r orst of all pol- icies ; but it is the policy now pursued. In truth, the Bank dotjnot lend from the motives which should make a bank lend. The holders of the Bank reserve ought to lend at once and most freely in an incipient panic, because they fear destruction in the panic. They ought not to do it to serve others ; they ought to do it to serve themselves. They ought to know that this bold policy is the only safe one, and for that reason they ought to choose it. But the Bank directors are not afraid. Even at the last moment they say that ' whatever happens to the commu- nity, they can preserve themselves.' Both in 1847 and 1857 (I believe also in 1866, though there is no printed evidence of it) the Bank directors con- tended that the Banking Department was quite safe though its reserve was nearly all gone, and 66 A GENERAL VIE IV OF LOMBARD STREET. that it could strengthen itself by selling securi- ties 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 can- not stay still and wait till its bills are paid, and so fill its coffers, for unless it discounts equiva- lent bills, the bills which it has already discounted will not be paid. When the reserve in the ulti- mate 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 system of entrusting all our reserve to a single board, like that of the Bank directors, is very anomalous; that it is very dan- gerous ; 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 A GENERAL VIEW OF LOMBAkD STREET. fy accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. But the' natural system that which would have sprung up if Government had let banking alone is that of many banks of equal or not altogether unequal size. In all other trades competition brings the traders to a rough approximate equality. In cotton spinning, no single firm far and perma- nently outstrips the others. There is no tendency to a monarchy in the cotton world ; nor, where banking has been left free, is there any tendency to a monarchy in banking either. In Manchester, in Liverpool, and all through England, we have a great number of banks, each with a business more or less good, but we have no single bank with any sort of predominance ; nor is there any such bank in Scotland. In the new world of Joint Stock Banks outside the Bank of England, we see much the same phenomenon. One or more get for a time a better business than the others, but no single bank permanently obtains an unques- tioned predominance. None of them gets so much before the others that the others voluntarily place their reserves in its keeping. A republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade 38 -1 GENERAL VIEW OF LOMBARD STREET. if left to itself, and of banking as much as any other. A monarchy in any trade is a sign oi some anomalous advantage, and of some inter- vention from without. I shall be at once asked Do you propose a revolution ? Do you propose to abandon the one- reserve system, and create anew a many-reserve system? My plain answer is that I do not propose it. I know it would be childish. Credit in business is like loyalty in Government. You must take what you can find of it, and work with it if possible. A theorist may easily map out a scheme of Government in which Queen Victoria could be dispensed with. He may make a theory that, since we admit and we know that the House of Commons is the real sovereign, any other sover- eign is superfluous ; but for practical purposes, it is not even worth while to examine these argu- ments. Queen Victoria is loyally obeyed without doubt, and without reasoning by millions of human beings. If those millions began to argue, it would not be easy to persuade them to obey Queen Victoria, or anything else. Effectual arguments tc 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 A GENERAL VIEW JF LOMBARD STREET. 69 foreigners too, trust it implicitly. Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone : but what we have requires no proof. The whole rests on an instinctive confidence generated by use and years. Nothing would persuade the English people to abolish the Bank of England ; and if some calamity swept it away, generations must elapse before at all the same trust would be placed in any other equivalent. , A many-reserve system, if some miracle should put it down in Lombard Street, would seem mon- strous 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 k should return to a natural or many-reserve system of banking. I should only incur useless ridicule if I did suggest it. Nor can I propose that we should adopt the simple and straightforward expedient by which the French have extricated themselves from the same difficulty. In France i all banking rests on the Bank of France, even 7Q A. GENERAL VIEW OF LOMBARD STREET. more than in England all rests on the Bank oi I England. The Bank of France keeps the final banking reserve, and it keeps the currency reserve too. But the State does not trust such a function to a board of merchants, named by shareholders The nation itself the Executive Government names the governor and deputy-governor of the (Bank of France. These officers have, indeed, beside them a council of ' regents,' or directors, named by the shareholders. But they need not attend to that council unless they think fit ; they are appointed to watch over the national interest, and, in so doing, they may disregard the murmurs of the ' regents ' if they like. And in theory, there is much to be said for this plan. The keeping the single banking reserve being a national function, it is at least plausible to argue that Government should choose the functionaries:. No doubt such a political intervention is contrary to the sound economical doctrine that ' banking is a trade, and only a trade/ But Government forgot that doctrine when, by privileges and monopolies, it made a single bank predominant over all others, and established the one-reserve system. As that system exists, a logical Frenchman consistently enough argues that the State should watch and manage it. But no such plan would answer in A GENERAL VIEW OF LOMBARD STREET. j\ 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 thi? case be bad. The governor of the Bank woulc 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 attain- ment would be managed by a shifting and un- trained ruler. In fact, the whole plan would seem to an Englishman of business palpably absurd ; he would not consider it, he would not think it worth considering. That it works fairly well in France, and that there are specious arguments of theory for it, would not be sufficient to his mind. All such changes being out of the question, I can propose only three remedies. First. There should be a clear understanding between the Bank and the public that, since the )3ank hold our 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 o( internal panic as freely and readily, as plain prin- ciples of banking require. This looks very different from the French plan, 7 2 A GENERAL VIEW OF LOMBARD STREET. but it is not so different in reality. In England we can often effect, by the indirect compulsion ol 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 harden- ing. His functions at the Bank fill a very small part of his time ; all the rest of his life (unless he be in Parliament) is spent in retired and mercantile industry. He is not subjected to keen and public criticism, and is not taught to bear it. Especially when once in his life he becomes, by rotation, governor, he is most anxious that the two years of office shall ' go off well.' He is apt to be irritated even by objections to the prin- ciples on which he acts ; and cannot bear with equanimity censure which is pointed and personal A GENERAL VIEW OF LOMBARD STREET. 73 At present I am not sure if this sensitive- ness is beneficial. \As the exact position of the Bank of England in the Money Market is indistinctly seen, there is no standard to which a Bank governor can appeal. He is always in feai that * something may be said ; ' but not quit* knowing on what side that 'something' may be, his fear is but an indifferent guide to him. But II the cardinal doctrine were accepted, if it were acknowledged that the Bank is charged with the custody of our sole banking reserve, and is bound to deal with it according to admitted principles, then a governor of the Bank could look to those principles. He would know which way criticism was coming. If he was guided by the code, he would have a plain defence. And then we may be sure that old men of business would not deviate from the code. At present the Board of Directors are a sort of semi-trustees for the nation. I would have them rea) trustees, and with a good trust deed. Secondly. The government of the Bank should be improved in a manner to be explained. We should diminish the ' amateur ' element ; we should augment the trained banking element ; and we should ensure more constancy in the adminis- tration. 4 74 A GENERAL VIEW OF LOMBARD STREET. Thirdly. As these two suggestions are designed to make the Bank as strong as possible, we should look at the rest of our banking system, and try to reduce the demands on the Bank as much as we can. The central machinery being inevitably frail, we should carefully and as much as possible diminish the strain upon it. But to explain these proposals, and to gain a full understanding of many arguments that have been used, we must look more in detail at the component parts of Lombard street, and at the curious set of causes which have made it assume its present singular structure. CHAPTER III. HOW LOMBARD STREET CAME TO EXIST, AND WHY IT ASSUMED ITS PRESENT FORM. IN the last century, a favourite subject of literary ingenuity was ' conjectural history/ as it was then called. Upon grounds of probability 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 banking 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 76 HOW LOMBARD STREET CAME TO EXIST, AND 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 unfa- miliar. 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 deposi- tors 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 *heir money in a caisse at their houses. Steady WHY IT ASSUMED ITS PRESENT FORM. 77 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 commu- nity 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 corresponding 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 ver) 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 content 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 73 HOW LOMBARD STREET CAME TO EXIST, AND to satisfy an extreme want, it is used to satisfy less pressing wants, or to supply additional con* veniences. On this account, political Government the oldest institution in the world has been the hardest worked. At the beginning of history, we find it doing everything which society wants done, and forbidding everything which society does not wish done. In trade, at present, the first com- merce 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, were 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 ol the cities in which they were formed. The want oi money is an urgent want of Governments 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, WHY IT ASSUMED ITS PRESENT FORM. 79 they began to do what we call banking ousiness ; but at first they never thought of it. The great banks of the North of Europe had their origin ip 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 consists 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 cur- gO HOW LOMBARD STREET CAME TO EXIST, AND rency being", in all foreign states, necessarily val* ued even below what it is worth. ' In order to remedy the inconvenience to which this disadvantageous exchange must have sub- jected 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 transfer 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 th 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 subservient to other purposes. The money of such banks, being better than the common cur- rency of the country, necessarily bore an agio, which was greater or smaller, according as the currency was supposed to be more or less degraded below the standard of the state. The agio of the bank of Hamburgh, for exa'mple, which is said to be commonly about fourteen per cent., is the sup- posed difference between the good standard money of the state, and the dipt, worn, and diminished WHY IT ASSUMED ITS PRESENT FORM. gj currency poured into it from all the neighbouring states. 'Before 1609 the great quantity of dipt and worn foreign coin, which the extensive trade of Am- sterdam 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 regulations which were made to prevent it, became in a great measure uncertain. ' 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 deduc- tion was made, it gave a credit in its books. This credit was called bank money, which, as it represented money exactly according to the $2 HOW LOMBARD STREET CAME TO EXIST, AND standard of the mint, was always of the same real value, and intrinsically worth more than current 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 pay- ment which he desires to make at a great dis- tance, 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 require- ment. Such bills must be made payable at a place convenient to the seller of the goods in payment * Smith's ' Wealth of Nations,' Book IV. chap. iii. ' Digres.*iofl concerning lanks of Deposit,' c. WHY IT ASSUMED ITS PRESENT FORM. g^ 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 remittance of money is an early neces- sity of growing trade ; and that remittance it war a first object of early banks to accomplish. These are all uses other than those of deposit banking which banks supplied that afterwards became in our English sense deposit banks. By supplying these uses, they gained the credit that afterwards enabled 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 func-. tion which deposit banks at first perform is much more popular, and it is only when they can per- form this more popular kind of business that de- posit banking ever spreads quickly and extensively. This function is the supply of the paper circula- tion to the country, and it will be observed that I am not about to overstep my limits and discuss 84 ffOW LOMBARD STREET CAME TO EXIST, AND 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 1 do not meddle here. I am only narrating- un- questionable history, not dealing with an argu- ment where every step is disputed. And part oi 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 super- sede 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 dif- fused is Scotland, and there the original profits were entirely derived from the circulation. The note issue is now a most trifling part of the liabili- ties 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 Scot- land, was founded in 1763, and had become before its amalgamation, eight or nine years since, a bank of considerable deposits. But for twenty-five years from its foundation it had no deposits at all. it subsisted mostly on its note issue, and a littlt on its remittance business. Only in 1792, after WHY IT ASSUMED ITS PRESENT FORM. 85 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 accounts in de- tail which go back so far. But probably up to 1830 in England, or thereabouts, the main profit ol 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 circula- tion. We are still living in the debris of that con- troversy, for, as I have so often said, people can hardly think 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. Their 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 state- ment before the German war showed that the cir- culation of the Bank of France was as much as 59,2}4,ooo/., and that the private deposits were only I7,i27,ooo/. Now the private deposits are about the same, and the circulation is 1 1 2,ooo,ooo/. So difficult is it in even a great country like France * See Note C in Appendix. S6 HOW LOMBARD STREET CAME TO EXIST, AND 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 39,875,0007., and the deposits to be 6,472,ooo/. while the corresponding figures at the present moment are circulation, 6o,ooo,ooo/. and deposits 8,ooo,ooo/. It would be idle to multiply instances. The reason why the use of bank paper com- monly 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 get- ting 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 business, and they have only not to take those notes to the banker for payment WHY IT ASSUMED ITS PRESENT FORM. 87 < If the public refrain from taking trouble, a paper circulation is immediately in existence. A paper circulation is begun by the banker, and requires no effort on the part of the public ; on the con- trary, it needs an effort of the public to be rid of notes once issued ; but deposit banking cannot be begun by the banker, and requires a spontaneous and consistent effort in the community. And therefore 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 return 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 before even this simple reasoning is understood by un- educated 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 con- quers, The circulation of bank-notes decreases, 88 HOW LLMBARD STREET CAME TO EXIST, AND and the deposit of money with the banker in creases. 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 : Notes 112,000,000 Deposits 15,000,000 But the aggregate Swiss banks, on the contrary, st.md : Notes 761,000 Deposits 4,709,000* The reason is that a central bank, which is * These are the amounts at December 31, 1865. Sec ' Grundziige derNational-Oekonomie. Von Max Wirth.' Dritter Band, p. 491. WHY IT ASSUMED ITS PRESENT FORM. 89 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 district, and know the men and things in it. A note issue is mainly begun 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 discounted are trifling ; the persons bor- rowing are of small means and only local repute ; the value of any property they wish to pledge de-. pends on local changes and local circumstances. A banker who 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 knowledge which alone can teach him how to issue that circulation with safety. A system of note issues is therefore the best introduction to a large system of deposit banking. As yet, historically, it is the only introduction : no nation as yet has arrived at a great system of 90 HOW LOMBARD STREET CAME TO EXIST, AND 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 revolu- tion too. In such great and close civil dangers a nation is always demoralised ; everyone looks to himself, and everyone likes to possess him- self of the precious metals. These are sure to be valuable, 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 land revolution. In Holland and Germany two countries where note issue and deposit banking would seem as natural as in England and Scot- land there was never any security from foreign war. A profound apprehension of external in- WHY IT ASSUMED ITS PRESENT FORM. g\ vasion penetrated their whole habits, and men of business would have thought it insane not to con- template 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 attempted revo- lution. 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 Government had created a machinery of ruin, and had thriven on it. Among so appre- hensive a race as the French the result was fatal. For many years no attempt at note issue 01 deposit banking was possible in France. So late as the foundation of the Caisse (T Escompte, in Turgot's time, the remembrance of Law's failure was distinctly felt, and impeded the commence- ment of better attempts. This therefore is the reason why Lombard Street exists ; that is, why England is a very 92 HOW LOMBARD STREET CAME TO EXIST, AND great Money Market, and other European coun- tries 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 elsewhere, and in conse- quence London is full of money, and all conti- nental cities are empty as compared with it. ii. 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 everyone's hands. Still I must remind my readers of the curious story. Of all institutions in the world the Bank of England is now probably 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 WHY IT ASSUMED ITS PRESENT FORM. 93 story was this. The Government of Charles II. (under the Cabal Ministry) had brought the credit of the English State to the lowest possible point. It had perpetrated one of those monstrous frauds, which are likewise gross blunders. The gold- smiths, 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 Govern- ment. 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 Government was trusted implicitly. But Charles II. showed that it was trusted unde- servedly. 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 instinc- tively, and there is always a rational apprehension 94 HOW LOMBARD STREET CAME TO EXIST, AND that the Government which one revolution thought fie to set up another revolution may think lit 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 conse- quence 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 un- favourable to the public, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. They were so incorporated, and the i,2OO,ooo/. 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 ol that debt was a main reason why the industrial classes never would think of recalling the WHY IT ASSUMED ITS PRESENT FORM. 95 Pretender, or of upsetting the revolution settle- y ment. 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 inestimable ser- vices. In return for these substantial benefits the Bank of England received from the Govern ment, either at first or afterwards, 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 con- spicuous entity with which the mass of any people are acquainted ; its range of knowledge must always be infinitely greater than the average of tacir knowledge, and therefore, unless there is a conspicuous warning to the contrary, most men are 96 HOW LOMBARD STREET CAME TO EXIST, AKD 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 conversation 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 1 Why, what do you say, then, to the Bank of England, where you keep your own account ? ' ' Oh ! ' he replied, ' that is an exceptional case.' And no doubt it was an exception of the greatest value to the Bank of England, because it induced WHY IT ASSUMED ITS PRESENT FORM. 97 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 privi- lege of being the sole joint slock company per- mitted to issiie 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 ' of EXCLUSIVE BANKING ; and also in regard to creating any other bank or banks by Parliament, or restraining other persons from banking during the continuance of the said privi- lege granted to the governor and company of the Bank of England, 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 persons whatsoever united or to be united in 08 HOW LOMBARD STREET CAME TO EXIST, AND covenants or partnership exceeding the number ol 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 com- pany, who are hereby declared to be and remain a corporation with the privilege of exclusive bank- ing, as before recited.' To our modern 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 hundred years ago they WHY IT ASSUMED ITS PRESENT FORM. 99 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 bank- ing ' to the Bank of England was read in its most natural modern 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 Eng- land 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 com- pany in London. With so many advantages over all competitors, r HOW LOMBARD STREET CAME TO EXIST, ETC. it is quite natural that the Bank of England should have far outstripped them all. Inevitably it became the bank in London ; all the other bankers grouped themselves round it, and lodged their reserve with it. Thus our W-reserve 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. CHAPTER IV. THE POSITION OF THE CHANCELLOR CF THE EXCHEQUER IN THE MONEY MARKET. NOTHING can be truer in theory than the economi cal 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 injures that trade. The best thing undeniably 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 Government is necessarily at times possessed of large sums in cash. It is by far the richest corporation in the country ; its annual revenue payable 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 IO 2 ' *'HE' POSITION OF THE CHANCELLOR OF 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 modern 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 exist- ence, 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 account. He may advance, as is so often done in other bank failures, what the Govern- ment needs for the moment in order to secure the Government account in future. But the imperfec- tion 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,ooo,ooo/. or 6,ooo,ooo/. which the quarter day of a Government 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 THE EXCHEQUER IN THE MONEY MARKET. 103 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 Government 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 expen- diture ; it should be a principal care with him to make sure that more should not be locked up at a particular moment in the Government coffers than is usually locked up there. If 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 -^vil is nothing in comparison with that of losing the money necessary for inevitable expence by entrust- ing it to a bad Bank, or that of recovering this money by identifying the national credit with the THE POSITION OF THE CHANCELLOR OF 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 Government 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 prevent ing the establishment of a future good Bank. When the trade of Banking began to be bettei understood, when the Banking system was thoroughly secure, the Government might begin to lend gradually ; especially to lend the unusual- ly 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 Govern- ment in keeping a banker would be reduced to a minimum. It would have the choice of many bankers, and w 3uld not be restricted to any one. Its course would be very simple, and be analogous to that of other public bodies in the THE EXCHEQUER IN THE MONE} MARKET. 105 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 any- one else in the world. He would have greater facility, indeed, than now, for, except with the leave of Parliament, the Chancellor of the Ex- chequer cannot borrow by our present laws in the I0 6 1HE> POSITION OF THE CHANCELLOR OF open market. He can only borrow from the Bank of England on what are called ' deficiency bills.' In a natural system, he would borrow ol 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 withdrawn, 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 g\\ e it. The Government could use its favour as a bounty on prudence, and the withdrawal of that favour as a punishment for culpable folly. Under a good system of banking, a great collapse, except from rebellion or invasioh, would probably not happen. A large number of banks, IffE EXCHEQUER IN THE MONEY MARKET. 107 each feeling that their credit was at stake in keep- ing a good reserve, probably would keep one ; \( any one did not, it would be criticised constantly, and would soon lose its standing, and in the end disappear. And such banks would meet an in- cipient 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 Government, 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 to this hour. It can- not let the money market take care of itself because 108 THE POSITION OF THE CHANCELLOR OP 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 oi 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 tradition 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. ist. Because being created by state aid, it is more likely than a natural system to require state help. 2ndly. Because, being a 6W-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 (ess 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 ne- cessity of its nature, given over to one board ol THE EXCHEQUER 7A r THE MO KEY MARKET. [09 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 indiscretion, 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 imper- atively requires 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 pro- ceeded to impair it, and demoralise all the public opinion respecting it. For more than a century after its creation (notwithstanding occa- sional errors) the Bank of England, in the main, acted with judgment and with caution. Its busi- ness 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 retaining pub- lic confidence made it cautious. But the English HO THE POSITION OF THE CHANCELLOR OF Government removed that necessity. In 1797, Mr. Pitt feared that he might not be able to obtain sufficient specie for foreign payments, in consequence of the low state of the Bank re- nerve, and he therefore required the Bank not to pay in cash. He removed the preservative apprehension 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 1/97. Mr. Pitt did not say that the Bank of England need not pay its notes in specie ; he 'restricted' them from doing so; 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 THE EXCHEQUER IN THE MONEY MARKET. \\\ 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 expected 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 Govern- ment 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 Exchequer 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 U2 THE CHANCELLOR IN THE MONEY MARKET. 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 exponent 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 system 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 CHAPTER V. THE MODE IN vVHICH THE VALUE OF MONEY IS SETTLED IN LOMBARD STREET. MANY persons 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 de- mand, 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 TI4 THE MODE TN WHICH THE VALUK Of 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 circum- stances make it convenient 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 mo- ments there is not money enough in Lombard Street to discount all the bills in Lombard Street without taking some money from the Bank ol England. As soon as the Bank rate is fixed, a ! , MONEY IS SETTLED IN LOMBARD STREET. n$ great many persons who have bills to discount 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 maximum 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 mo- Il6 THE MODE IN WHICH THE VALUE OF rnent, 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 mo- nopoly of note issue suddenly lends (suppose) 2,ooo,ooo/. more than usual, it causes a propor- tionate increase of trade and increase of prices. The persons to whom that 2,ooo,ooo/. 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 demand 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 derpand, 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 MONEY IS SETTLED IN LOMBARD STREET, nj portion of the market value of such securities, 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 enter- prising 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 permanently, 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 Il8 THE MODE IN WHICH THE VALUE OF 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 diminu- tion 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 laxity. 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 oi 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 cor- porate dealer, making bids and much influencing MONEY IS SETTLED IN LOMBARD STREET, ng 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 fluct- uations 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. If a merchant has acceptances to meet to-morrow, money he must and will find to- day 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 seek- ing 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 oi 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, of 120 THE MODE IN WHICH THE VALUE OF 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 point 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 i-.^h. ' The fluctuations in the value of money are therefore greater than those on the value of most other commodities. At times there is an exces- sive pressure to borrow it, and at times an exces- sive pressure to lend it, and so the price is forced up and down. MONEY IS SETTLED IN LOMBARD STREET. i 2 \ 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 I egal tender exchangeable for bul- lion. These banks can in no degree control the permanent value of money, but they can com- pletely control its momentary value. They can- not change the average value, but they can deter- mine the deviations from the average. If the dom- inant 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 th?. average rate ; it will neither ascend so high nor descend so low. As far as anything can be steady ihe 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 b^eft wi from it. 6 CHAPTER VI. WHY LOMBARD STREET IS OFTEN VERY DULL AND SOMETIMES EXTREMELY EXCITED. ANY sudden 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 econ- omised, 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 apprehen- sion 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 AND SOMETIMES EXCITED. !2J 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 organisation is liable not only to irregular external accidents, but likewise 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 accord- ing 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,' meaning by 1 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 every- body, 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 124 WHY LOMBARD STREET IS OFTEN DULL* 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 explain why that fund is not available for the same purpose in bad times. Our current political economy does not suffi- ciently 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 are First. That as goods are produced to be ex- changed, 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 w r ho 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 AND SOMETIMES EXCITED. 125 a difficulty 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 effectiveness 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 126 WHY LOMBARD STREET IS OFTEN DULL, group of industries. Each industry when pros- perous buys and consumes the produce probably of most (certainly 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 com- modities 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 SOMETIMES EXCITED. t2 f and multiplies the faster the higher the previous perfection of the system of divided labour, and the more nice and effectual the mode of inter- change. 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, inconsequence, 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 impor- tant, 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 sub- tracted 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 corn, and the most affected are the large ones, which produce the objects in ordinary times most consumed by the working classes. The f28 WHY LOMBARL STREET IS OFTEN DULL, clothing trades feel the difference at once, and in this country the liquor trade (a great source oi English revenue) feels it almost equally soon, Especially when for two or three years harvests have been bad and corn has long been dear, every industry is : i.ipoverished, 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 pur- chasing 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 minimum. 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 AND SOMETIMES EXCITED. 1 29 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, there- fore, 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 inevitably peri- ods of rapid dilatation, and as inevitably periods of contraction and of stagnation. Nor is this the only changeable element in modern industrial societies. Credit the disposi- tion 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, everybody again con- fides 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 refine! 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 130 WHY LOMBARD STREET IS OFTEN DULL, 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 ex plained. 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 producer 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 anything 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 others. 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 AND SOMETIMES EXCITED. 13, 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 keep- ing. An Englishman a modern 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 ; indeed, in most countries, owing to a bad Govern- ment and a backward industry, no investment, or hardly any, really is safe. In most countries 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 superabundance. Lord Ma- caulay has graphically described one of the periods of excess. He says ' During the interval between the Restoration and the Revolu- tion the riches of the nation had been rapidly increasing. 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 1:o be employed was a question of some 132 WHY. LOMBARD STREET IS OFTEN DULL, 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 place them safely and profit- ably, 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 seek- ing" 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 com- panies, 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 AND SOMETIMES EXCITED 133 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 business 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 expenses ; 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 drawers and behind wainscots. ' The natural effect of this state of things was that a crowd of projectors, ingenious and absurd, honest and knavish, employed themselves in de- vising 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 companies, every one of which confi- LOMBARD STREET IS IF TEN DULL, dently held out to subscribers the hope of immense gains, sprang into existence the Insurance Com- pany, the Paper Company, the Lutestring Com- pany, the Pearl Fishery Company, 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 valuable 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 ad- mitted. The whole process was exhibited on the Thames. Fine gentlemen and fine ladies were invited 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 AND SOMETIMES EXCITED. 135 to drive the Dutch whalers and herring busses out of the Northern Ocean. There was a Tan- ning Company, which promised to furnish leather superior to the best that was brought from Turkey or Russia. There was a society which undertook the office of giving gentlemen a liberal education on low terms, and which assumed the sounding name of the Royal Academies Company. In a pompous advertisement it was announced that the directors of the Royal Academies Com- pany 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 thousand prizes were to be drawn ; and the fortunate holders of the prizes were to be taught, at the charge of the Company, Latin, Greek, Hebrew, 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 remembered, the form was the same, only a little more extrava- gant ; the companies in that mania were for objects snch as these : ' " Wrecks to be fished for on the Irish Coast Insurance of Horses and other Cattle 136 WHY LOMBARD STREET IS OFTEN PULL, (two millions) Insurance of Losses by Servants To make 'Salt Water Fresh For building oi 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 extract- ing 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 Under- taking 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 pro- jector 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 quantities, their usual kind of in- vestments, rush into anything that promises spe- ciously, and when they find that these specious AND SOMETIMES EXCITED. 137 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 be- comes secondary. There is a second appetite for targe 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 possible to effect them, ruin begins. So long as the saving^, remain in possession of their owners, these hazardous gamblings in speculative undertakings are aim x -st the whole effect of an excess of accumulation over tested investment. Little effect is produced T the general trade of the country. The owners oi 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 securi- ties ; 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 !38 WHY LOMBARD STREET IS OFTEN DULL, lent to such men ; more bargains are made in consequence ; commodities are more sought after ; **nd, in consequence, prices rise more and more. The rise of prices is quickest in an improving state of credit. Prices in general are mostl) determined by wholesale transactions. The retail 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, vju can commonly tell their retail price. Now wholesale transactions are commonly not cash transactions, but bill transactions. The dura*"'" -ti of the bill varies with the custom of the trc.de ; 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 credit, years of failing price. This is the meaning of the saying ' John Bull can stand many things, but he cannot stand two A WD SOMFTTMF.S EXLCJTRD. 13* per cent. : ' it means that the greatest effect of the three great causes is nearly peculiar to England ; here, and here almost 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 depreciation 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 pre- ceding both 1847 and 1857 there was a gen- eral rise of prices ; and in the years succeeding these years, a great fall. The same might be shown of the years before and after 1866, mutatis mutandis. And at the present moment we have a still more remarkable example, which was thus analysed in the Economist of the 3Oth December, 1871, in an article which I venture to quote as a whole : I4O WHY LOMBARD STREET JS OFTEN DULL t ' THE GREAT RISE IN THE PRICE OF COMMODITIES, ' 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 January December *. d. s. d. Wool South Down hogs per pack 13 o o 21 15 o Cotton Upland ordinary per Ib. ooyi- o o 8| No. 40 mule yarn, &c. ,, o I i| 012^ Iron Bars, British . . . per ton 726 8 17 6 Pig, No. i Clyde ... 2 13 3 3 16 o Lead 18 7 6 19 2 6 Tin 137 o o 157 o o Copper Sheeting ... 75 10 o 95 o o Wheat (GAZETTE average) per qr. 2 12 o 2 15 8 AND SOMETIMES EXCITED. I4 1 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 price- in 1869 the home stock of sheep was . . . 29,538,000 In 1871 ... 27,133,000 Diminution 2,405,000 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 corn, and improved credit. As to the first indeed, 142 WHY LOMBARD STREET IS OFTEN DULL, 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 dimi- nution 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 ol England, which was I3,i56,ooo/. in May 1866, rose to I9,4i3,ooo/. in January 1867, being an increase of over 6,ooo,ooo/. And then there comes also a second cause, tending in the same direction. During a depressed period the savings AND SOMETIMES EXCITED. 143 of the 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 addi- tional 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 ioo/. 'to the good/ holds that ioo/. in money, or some equivalent for money, till he sees some advan- tageous use to be made of it. Probably he places it in a bank, and this enables it to do more work. If 3,ooo,ooo/. of coin be deposited in a bank, and it need only keep i,ooo,ooo/. as a reserve, that sets 2,ooo,ooo/. 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 efficie/vcy 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. 144 WHY LOMBARD STREET IS OFTEN DULL, 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 purchas- ing 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, an d 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 Government probably ever had nearly as much at its command as the German Government now has. Speaking broadly, two things happened : during the war England was the best place of shelter for foreign money, and this made money more cheap here than it would otherwise have been ; after the war England be- came the most convenient 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 <\i which there is no precedent. AND SOMETIMES EXCITED. 145 '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 suffi- cient 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 aug- mented money is derived. It is derived from the savings of the people, and will only be invested in the 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 demand 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 exist- ing 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 show : 7 December, 1866 . j. . . 60 a. 3 October, 1867 January, 1867 . . . 61 4 November ,, February ,, . . 60 10 December ,, March ,, . . 59 9 January, 1868 April ,, . . 61 6 February ,, May . . . 64 8 March ,, June . .65 4 April July . . . 65 May August ,, . . 67 8 June September ,, . . 62 8 j y 146 WHY LOMBARD STREET IS OFTEN DULL, GAZETTE AVERAGE PRICE OF WHEAT. s.