Lombard Street: A Description of the Money Market

f England Has Discharged Its Duty of Retaining a Goo

appreciate the importance of the duties which the Bank of

solution of Parliament, no report of any Committee of Parliament (as far as I know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the Bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of an

id great harm; others again that it could do neither good nor harm. But for the whole period there was an incessant and fierce discussion. That discussion was terminated by the Act of 1844. By that Act the currency manages itself; the entire working is automatic. The Bank of England plainly does not manage-cannot even be said to manage-the currency any more. And naturally, but rashly, the only reason upon which a public responsibility used to be assigned to the Bank having now clearly come to an end, it was inferred by many that the Ba

LATE MEETING OF THE PROPRIE

keen sensations but short memories, and they will care no more next February for the events of last May than they now care for the events of October 1864. A pro forma inquiry, on which no real mind is spent, and which everyone knows will lead to nothing, is far worse than no inquiry at all. Under these

sits, and not the reserve held against notes. We have often insisted in these columns that the Bank of England does keep the sole real reserve-the sole considerable unoccupied mass of cash in the country; but there has been no universal agreement about it. Great authorities have been unwilling to admit it. They have not, indeed, formally and explicitly contended aga

is a complete admissio

or of the

itself most successfully-to meet the crisis. We did not flinch from our post. When the storm came upon us, on the morning on which it became known that the house of Overend and Co. had failed, we were in as sound and healthy a position as any banking establishment could hold, and on that day and throughout the succeeding week we made advances which would hardly be credited. I do not believe that anyone would have thought of predicting, even at the shortest period beforehand, the greatness of those advances. It was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the Bank should have gone to the Chancellor of the Exchequer and requested the Government to empower us to issue

cash-of real sovereigns and bank notes, as will help them through a sudden panic. It acknowledges a "duty" on the part of the B

banks and the private banks and the country banks are to keep their share, let us determine on that; Mr. Gladstone appeared not long since to say in Parliament that it ought to be so. But at any rate there should be no doubt whose duty it is. Upon grounds

ry much what the bankers were lately they were the borrowers who wanted sudden and incalculable advances. But the bill-brokers were told not to expect the like again. But Alderman Salomons, on the part of the London bankers, said, "he wished to take that opportunity of stating that he believed nothing could be more satisfactory to the managers and shareholders of joint stock banks than the testimony which the Governor of the Bank of England had that day borne to the sound and honourab

advanced in three months. And the Bank do not say to the mercantile community, or to the bankers, "Do not come to us again. We helped you once. But do not look upon it as a

this use, that it brought out the facts. All the directors would have felt a difficulty in commenting upon, or limiting, or in differing from, a speech of a Governor from the chair. But there was no difficulty or delicacy in attacking the 'Economist.' Accordingly Mr. Hankey, one of the most experienced bank directors, not long after, took occasion to observe: 'The "Economist" newspaper has put forth what in my opinion is the most mischievous doctrine ever broached in the monetary or banking world in this count

k of England ought to be prepared to do much more than this, though I confess my surprise at finding an advocate for such an opinion in the "Economist." If it were practicable for the Bank to retain money unemployed to meet such an emergency, it would be a very unwise thing to do so. But I contend that it is quite impracticable, and if it were possible, it would be most inexpedient; and I can only express m

but I do not think Mr

' very con

at is. The 'Economist' did not say that the system of a single bank reserve was a good system,

of England out of which advances in time of panic could be made. These advances are necessary, and must be made by someone. The 'r

, not to speak of the private banks, would be 30,000,000 L.; and the private deposits of the Bank of England are 18,000,000 L. According to his own statement, there is a conspicuous contrast. The joint stock banks, and the private banks, no doubt, too, keep one sort of reserve, and the Bank of Englan

lmost always advanced to the mercantile public and to bill-brokers. But the point is, that by our system all extra pressure is thrown upon the Bank of England. In the worst part of

he Governor in 1866, which at least (according to the interpretation of the 'Economist') was clear and excellent, Mr. Hankey leaves us in doubt altogether as to what will be the policy of the Bank of England in the next panic, and as to what amount of aid the public may then expect from it. His words are too vague. No one can tell what a 'fair share' means; still less can we tell what other people at some future time will say it means. Theory sug

sible merchants will always act according to what it considers 'safe' principles-that is, according to the received maxims of the mercantile world then and there-and in this manner the directors of the Bank of England have acted nearly uniformly. Their strength and their weakness were curiously exemplified at the time when they had the most power. After the suspension of cash payments in 1797, the directors of the Bank of England could issue what notes they liked. There was no check; these notes could not come back upon the Bank for payment; there was a great temptation to extravagant issue, and no present penalty upon it. But the directors of the Bank withstood the temptation; they did not issue their inconvertible notes extravagantly. And the proof is, that for more than ten years after the suspension of cash payments the Bank paper was undepreciated, and circulated at no discount in comparison with gold. Though the

he same opinion which has now bee

think it necessary to advert to the price of gold, or the st

e general amount of your advances?-I do not advert to it with a view

s: 'I must very materially alter my opinions before I can suppose that the

d have managed to commit so m

directors adopted the ordinary opinions, and pursued the usual practice of their time. It was this 'routine' that caused their moderation. They believed that so long as they issued 'notes' only at 5 per cent, and only on the discount of good bills, those notes could not be depreciated. And as the number of 'good' bills-b

rrent transactions is a most engrossing business, and those charged with them are usually but little inclined to think on points of theory, even when such thinking most nearly concerns those transactions. No doubt when men's own fortunes are at stake, the instinct of the trader does somehow anticipate the conclusions of the closet. But a board has no instincts when it is not getting an income for its member

gravest magnitude. The first time of trial came in 1825. In that year the Ban

coin and bullion in th

5, it was reduc

uced to 2,404,000 L.: a great alarm pervaded society, and generated an eager controversy, out of which ultimately emerged the Act of 1844. The next trial came in 1847, and then the Bank permitted its banking reserve (which the law had now distinctly separated) to fall to 1,176,000 L.; and so intense was the alarm, that the executive Government issued a letter of li

0 4,02

3,217

3,485

2,258

2,155

957

aid of the banking reserve, and the Bank of England did so borrow several hundred pounds till the end of the month of November. A more miserable catalogue than t

gether different from any which they kept before. At one period the Bank directors even went farther: they made a distinct step in advance of the public intelligence; they adopted a particular mode of raising the rate of interest, which is far more efficient than any other mode. Mr. Goschen observes, in his book on the Exchanges: 'Between the rates in London and Paris, the expense of sending gold to and fro having been reduced to a minimum between the two cities, the difference can never be very great; but it must not be forgotten that, the interest being taken at a percentage calculated per annum, and the probable profit having, when an operation in three-month bills is contemplated, to be divided by four, whereas the pe

d, as far as I know, on this occasion alone, the Bank of England made an excellent alteration of their policy, which was not exacted by contemporary opinion, and which was in advance of it. The beneficial results of the improved policy of the Bank were palpable and speedy. We were enabled by it to sustain the great drain of silver from Europe to India to pay for Indian cotton in the years between 18621865. In the autumn of 1864 there was especial danger; but, by a rapid and able use of their new policy, the Bank of England main

1857. The suspension of Overend and Gurney-the most trusted private firm in England caused an alarm, in suddenness and magnitude, without example. What was the effect of the Act of 1844 on the panic of 1866 is a question on which opinion will be long divided; but I think it w

reserve than was ever before required, and to be much more watchful than in former times lest that banking reserve should on a sudden be dangerously diminished. The forces are greater and quicker than they used to be, and a firmer protection and a surer solicitude are necessary. But I do not think the Bank of England is sufficiently aware of this. All the governing body of the Bank certainly are not aware of it. The same eminent director to whom I have before referred, Mr. Hankey, published in the 'Times' an elaborate letter, saying again

faults in the policy of the Bank of England, which arise, as will

raise the rate of interest sufficiently quickly. It does raise it; in the end it takes the alarm, but it does not take the alarm sufficiently soon. A cautious man, in a new office, does not like strong measures. Bank Governors are generally cautious men; they are taken from a most cautious class; in consequence they are very apt to temporise and delay. But alm

decided policy, and the indisposition to a timely action, which are excusable in one whose influence is beginning, and whose reign is

m one-fourth to one-third of its banking liabilities as a reserve. But no one now would ever be content if the banking reserve were near to one-fourth of its liabilities. Mr. Hankey, as I have shown, considers 'about a third' as the proportion of reserve to liabili

ng Department-that it is not even a proper minimum, far less a fair average; and I shall allege what seem to me good reasons for thinking that, unl

I

to use that reserve effectually when that time of panic comes. The keepers of the Banking reserve, whether one or many, are obliged then to us

one, and survive intact while all else perishes around it. On various occasions, most influential persons, both in the government of the Bank and out of it, have said that such was their opinion. And we must at

at such a time is very hard to get back; those who have taken it will not let it go-not, at least, unless they are sure of getting other money in its place. And at such instant the recovery of money is as hard for the Bank of England as for any one else, probably even harder. The difficulty is this: if the Bank decline to discount, the holders of the bills previously discounted cannot pay. As has been shown, trade in England is largely carried on with borrowed money. If you propose greatly to reduce that amount, you will cause many failures unless you can pour in from elsewhere some equivalent amount of new money. But in a panic there is no new money to be had; everybody who has it clings to it, and will not part with

he country any large sum of unused ready money ready to buy it. The only unused sum is the reserve in the Banking Department of the Bank of England: if, therefore, in a panic that Department itself attempt to sell stock, the failure would be ridiculous. It would hardly be able to sell any at all. Probab

reserve, and do not diminish it by extra loans, the Bank of England is sure to be safe. But this form of the opinion, though more reasonable and moderate, is not, therefore, more true. The panic of 1866 is the best instance to test it. As everyone knows, that panic began quite suddenly, on th

ank of England to survive, and get all their business. They would withdraw their deposits from the Bank; they would not assist it to stand erect amid their ruin. But even if this were not so, even if the banks were willing to keep their deposits at the Bank while it was

to his debtor C D, 'I cannot take your cheque, I must have bank-notes.' If it is a debt on securities, he will be very apt to say this. The usual practice-credit being good-is for the creditor to take the debtor's cheque, and to give up the securities. But if the 'securities' really secure him in a time of difficulty, he will not like to give them up, and take a bit of paper-a mere cheque, which may be paid or not paid. He will say to his debtor, 'I can only give you your securities if you will give

ecurities is settled on the Stock Exchange twice a month, and the number of securities then given up for mere cheques, and the number of cheques then passing at the C

ople; their cheques would not be taken any more than those of others; they would have to

annot pay No. 2 till he has sold or pledged those bills to some one else. But till he has the bills he cannot pledge or sell them; and if No. 2 will not give them up till he gets his money, No. 1 will be ruined, because he cannot pay it. And if No. 2 has No. 3 to pay, as is very likely, he may be ruined beca

he Banking Department would have enough money to pay the demands on it; and this is a mistake: the Banking Department would not have a hundredth part of the necessary funds. And in the second, a great panic which deranged the Clearing-house would soon be diffused all through the country. The money therefore taken from the Bank

s happened before will happen again; and when they have got money, they will not deposit it at an establishment which may not be able to repay it. This did not happen in former panics, because the case we are considering never arose. The Bank was helping the

ting them at a bank. But in the Bank of England there is a great difference: their notes are legal tender. Whoever holds them can always pay his debts, and, except for foreign payments, he could want no more. The

is simply in the position of a Bank keeping the Banking reserve of the country; that it must in time of panic do what all

ossible, stay the panic. And for this purpose there are two rules: First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applicati

fy the terror everywhere. No advances indeed need be made by which the Bank will ultimately lose. The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business. That in a panic the bank, or banks, holding the ultimate reserve should refuse bad bills or bad securities will not make the panic really worse; the 'unsound' people are a feeble minority, and they are afraid even to look frightened for fear their unsoundness may be detected. The great majority, the majority t

s money go the farthest, and of enabling it to get through the panic if anything will so enable it. Making no loans as we have seen will ruin it; making large loans and stopping, as we have also seen, will ruin it. The only saf

er different from our present ones. In the panic of 1825, the Bank of England at first acted as unwisely as it was possible to act. By every means it tried to restrict its advances. The reserve being very small, it endeavoured to protect that reserve by lending as little as possible. The result was a period of frantic and almost inconceivable violence; scarcely any one knew whom to trust; credit was almost suspended; the country was, as Mr. Huskisson expressed it, within twenty-four hours of a state of barter. Applications for assistance were made to the Government, but though it was well known that the Government refuse

d in 1793 and 1811. Our friends whispered about that we were acting quite in a differe

d in favour of the issue of Exchequer Bills, yet that the measur

the outstanding ones-say bearing an interest of five per cent-the old ones would be immediately at a great discount unless the interest were raised. If the interest were raised, the charge on the revenue would be of course proportionate to the increase of rate of interest. We found that the Bank had the power to lend money on deposit of goods. As our issue of Exchequer Bills would have been useless unless the Bank cashed

, and rescued us from a ver

fore; we took in stock on security, we purchased Exchequer Bills, we made advances on Exchequer Bills, we not only discounted outright, but we made advances on deposits of bills of Exchange to an immense amount-in short, by every possible means consistent with the safety of the Bank.' And for the complete and courageous adoption of this policy at the last moment the directors

nd 1839 were severe, but neither terminated in a panic: both were arrested before the alarm reached its

g any advances which they would otherwise have then made. Secondly, that in the last stage of panic, the Act of 1844 has been already suspended, rightly or wrongly, on these occasions; that no similar occasion has ever yet occurred in which it has not been suspended; and that, rightly or wrongly, the world confidently expects and relies that in all similar cases it will be suspended again. Whatever theory ma

e very large advances indeed. It is certain, too, that in all of them the Bank has been quicker than it was in 1825; that in all of them it has less hesitated to use its banking reserve in making the advances which it is one principal

ould be made on everything which in common times is good 'banking security.' The evil is, that owing to terror, what is commonly good security has ceased to be so; and the true policy is so to u

ing. But these are only a small part of the securities on which money in ordinary times can be readily obtained, and by which its repayment is fully secured. Railway debenture stock is as good a security as a commercial bill, and many people, of whom I own I am one, think it safer than India stock; on the

ought not to advance during a panic on any kind of security on which they do not commonly advance. But if bankers for the most part do advance on such security in common times, and if that security is indisputably good, the ordinary practice of the

e public is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made, or on what security it will be made. The best palliative to a panic is a confidence in the adequate amount of t