Lombard Street: A Description of the Money Market Part 6

Under these circ.u.mstances the official statements of the Governor of the Bank are the only authentic expositions we shall have of the policy of the Bank Directors, whether as respects the past or the future. And when we examine the proceedings with care, we shall find that they contain matter of the gravest import.

'This meeting may be considered to admit and recognise the fact that the Bank of England keeps the sole banking reserve of the country.

We do not now mix up this matter with the country circulation, or the question whether there should be many issuers of notes or only one. We speak not of the currency reserve, but of the banking reserve--the reserve held against deposits, and not the reserve held against notes. We have often insisted in these columns that the Bank of England does keep the sole real reserve--the sole considerable unoccupied ma.s.s 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 against it. If they had, they must have pointed out some other great store of unused cash besides that at the Bank, and they could not find such store. But they have attempted distinctions; have said that the doctrine that the Bank of England keeps the sole banking reserve of the country was "not a good way of putting it,"

was exaggerated, and was calculated to mislead.

'But the late meeting is a complete admission that such is the fact.

The Governor of the Bank said:

"'A great strain has within the last few months been put upon the resources of this house, and of the whole banking community of London; and I think I am ent.i.tled to say that not only this house, but the entire banking body, acquitted themselves most honourably and creditably throughout that very trying period. Banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year. But the manner in which the banking establishments generally in London met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. This house exerted itself to the utmost--and exerted itself most successfully--to meet the crisis. We did not flinch from our post. When the storm came upon us, on the morning on which it became known that the house of Overend and Co. had failed, we were in as sound and healthy a position as any banking establishment could hold, and on that day and throughout the succeeding week we made advances which would hardly be credited. I do not believe that anyone would have thought of predicting, even at the shortest period beforehand, the greatness of those advances. It was not 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 notes beyond the statutory amount, if we should think that such a measure was desirable. But we had to act before we could receive any such power, and before the Chancellor of the Exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret. But we would not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and I am not aware that any legitimate application made for a.s.sistance to this house was refused. Every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house."

'Now this is distinctly saying that the other banks of the country need not keep any such banking reserve--any such sum of actual cash--of real sovereigns and bank notes, as will help them through a sudden panic. It acknowledges a "duty" on the part of the Bank of England to "support the banking community," to make the reserve of the Bank of England do for them as well as for itself.

'In our judgment this language is most just, and the Governor of the Bank could scarcely have done a greater public service than by using language so business-like and so distinct. Let us know precisely who is to keep the banking reserve. If the joint stock banks and the private banks and the country banks are to keep their share, let us determine on that; Mr. Gladstone appeared not long since to say in Parliament that it ought to be so. But at any rate there should be no doubt whose duty it is. Upon grounds which we have often stated, we believe that the anomaly of one bank keeping the sole banking reserve is so fixed in our system that we cannot change it if we would. The great evil to be feared was an indistinct conception of the fact, and that is now avoided.

'The importance of these declarations by the Bank is greater, because after the panic of 1857 the bank did not hold exactly the same language. A person who loves concise expressions said lately "that Overends broke the Bank in 1866 because it went, and in 1857 because it was not let go." We need not too precisely examine such language; the element of truth in it is very plain--the great advances made to Overends were a princ.i.p.al event in the panic of 1857; the bill-brokers were then very much what the bankers were lately they were the borrowers who wanted sudden and incalculable 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 honourable manner in which their business was conducted. It was manifestly desirable that the joint stock banks and the banking interest generally should work in harmony with the Bank of England; and he sincerely thanked the Governor of the Bank for the kindly manner in which he had alluded to the mode in which the joint stock banks had met the late monetary crisis." The Bank of England agrees to give other banks the requisite a.s.sistance in case of need, and the other banks agree to ask for it.

'Secondly. The Bank agrees, in fact, if not in name, to make limited advances on proper security to anyone who applies for it. On the present occasion 45,000,000 L. was so advanced in three months. And the Bank do not say to the mercantile community, or to the bankers, "Do not come to us again. We helped you once. But do not look upon it as a precedent. We will not help you again." On the contrary, the evident and intended implication is that under like circ.u.mstances the Bank would act again as it has now acted.'

This article was much disliked by many of the Bank directors, and especially by some whose opinion is of great authority. They thought that the 'Economist' drew 'rash deductions' from a speech which was in itself 'open to some objection--'which was, like all such speeches, defective in theoretical precision, and which was at best only the expression of an opinion by the Governor of that day, which had not been authorised by the Court of Directors, which could not bind the Bank. However the article had at least this use, that it brought out the facts. All the directors would have felt a difficulty in 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 country; viz, that it is the proper function of the Bank of England to keep money available at all times to supply the demands of bankers who have rendered their own a.s.sets unavailable. Until such a doctrine is repudiated by the banking interest, the difficulty of pursuing any sound principle of banking in London will be always very great. But I do not believe that such a doctrine as that bankers are justified in relying on the Bank of England to a.s.sist them in time of need is generally held by the bankers in London.

'I consider it to be the undoubted duty of the Bank of England to hold its banking deposits (reserving generally about one-third in cash) in the most available securities; and in the event of a sudden pressure in the money market, by whatever circ.u.mstance it may be caused, to bear its full share of a drain on its resources. I am ready to admit, however, that a general opinion has long prevailed that the Bank of England ought to be prepared to do much more than this, though I confess my surprise at finding an advocate for such an opinion in the "Economist." If it were practicable for the Bank to retain money unemployed to meet such an emergency, it would be a very unwise thing to do so. But I contend that it is quite impracticable, and if it were possible, it would be most inexpedient; and I can only express my regret that the Bank, from a desire to do everything in its power to afford general a.s.sistance in times of banking or commercial distress, should ever have acted in a way to encourage such an opinion. The more the conduct of the affairs of the Bank is made to a.s.similate to the conduct of every other well-managed bank in the United Kingdom, the better for the Bank, and the better for the community at large.'

I am scarcely a judge, but I do not think Mr. Hankey replies to the 'Economist' very conclusively.

First. He should have observed that the question is not as to what 'ought to be,' but as to what is. The 'Economist' did not say that the system of a single bank reserve was a good system, but that it was the system which existed, and which must be worked, as you could not change it.

Secondly. Mr. Hankey should have shown 'some other store of unused cash' except the reserve in the Banking Department of the Bank of England out of which advances in time of panic could be made. These advances are necessary, and must be made by someone. The 'reserves'

of London bankers are not such store; they are used cash, not unused; they are part of the Bank deposits, and lent as such.

Thirdly. Mr. Hankey should have observed that we know by the published figures that the joint stock banks of London do not keep one-third, or anything like one-third, of their liabilities in 'cash' even meaning by 'cash' a deposit at the Bank of England.

One-third of the deposits in joint stock banks, not to speak of the private banks, would be 30,000,000 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 England a different kind of reserve altogether. Mr.

Hankey says that the two ought to be managed on the same principle; but if so, he should have said whether he would a.s.similate the practice of the Bank of England to that of the other banks, or that of the other banks to the practice of the Bank of England.

Fourthly. Mr. Hankey should have observed that, as has been explained, in most panics, the princ.i.p.al use of a 'banking reserve'

is not to advance to bankers; the largest amount is almost always advanced to the mercantile public and to bill-brokers. But the point is, that by our system all extra pressure is thrown upon the Bank of England. In the worst part of the crisis of 1866, 50,000 L. 'fresh money' could not be borrowed, even on the best security--even on Consols except at the Bank of England. There was no other lender to new borrowers.

But my object now is not to revive a past controversy, but to show in what an unsatisfactory and uncertain condition that controversy has left a most important subject. Mr. Hankey's is the last explanation we have had of the policy of the Bank. He is a very experienced and attentive director, and I think expresses, more or less, the opinions of other directors. And what do we find? Setting aside and saying nothing about the remarkable speech of the Governor in 1866, which at least (according to the interpretation of the '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 suggests, and experience proves, that in a panic the holders of the ultimate Bank reserve (whether one bank or many) should lend to all that bring good securities quickly, freely, and readily. By that policy they allay a panic; by every other policy they intensify it. The public have a right to know whether the Bank of England--the holders of our ultimate bank reserve--acknowledge this duty, and are ready to perform it. But this is now very uncertain.

If we refer to history, and examine what in fact has been the conduct of the Bank directors, we find that they have acted exactly as persons of their type, character, and position might have been expected to act. They are a board of plain, sensible, prosperous English merchants; and they have both done and left undone what such a board might have been expected to do and not to do. n.o.body could expect great attainments in economical science from such a board; laborious study is for the most part foreign to the habits of English merchants. Nor could we expect original views on banking, for banking is a special trade, and English merchants, as a body, have had no experience in it. A 'board' can scarcely ever make improvements, for the policy of a board is determined by the opinions of the most numerous cla.s.s of its members--its average members--and these are never prepared for sudden improvements. A board of upright and sensible merchants will always act according to what it considers 'safe' principles--that is, according to the received maxims of the mercantile world then and there--and in this manner the 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 Bank directors of that day at last fell into errors, yet on the whole they acted with singular judgment and moderation. But when, in 1810, they came to be examined as to their reasons, they gave answers that have become almost cla.s.sical by their nonsense. Mr. Pea.r.s.e, the Governor of the Bank, said: 'In considering this subject, with reference to the manner in which bank-notes are issued, resulting from the applications made for discounts to supply the necessary want of bank-notes, by which their issue in amount is so controlled that it can never amount to an excess, I cannot see how the amount of bank-notes issued can operate upon the price of bullion, or the state of the exchanges; and therefore I am individually of opinion that the price of bullion, or the state of the exchanges, can never be a reason for lessening the amount of bank-notes to be issued, always understanding the control which I have already described.

'Is the Governor of the Bank of the same opinion which has now been expressed by the Deputy-Governor?

'Mr. Whitmore, I am so much of the same opinion, that I never think it necessary to advert to the price of gold, or the state of the exchange, on the days on which we make our advances.

'Do you advert to these two circ.u.mstances with a view to regulate the general amount of your advances?--I do not advert to it with a view to our general advances, conceiving it not to bear upon the question.

And Mr. Harman, another Bank director, expressed his opinion in these terms: 'I must very materially alter my opinions before I can suppose that the exchanges will be influenced by any modifications of our paper currency.'

Very few persons perhaps could have managed to commit so many blunders in so few words.

But it is no disgrace at all to the Bank directors of that day to have committed these blunders. They spoke according to the best mercantile opinion of England. The City of London and the House of Commons both approved of what they said; those who dissented were said to be abstract thinkers and unpractical men. The Bank directors adopted the ordinary opinions, and pursued the usual practice of their time. It was this 'routine' that caused their moderation. They 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--bills which sound merchants know to be good--does not rapidly increase, and as the market rate of interest was often less than 5 per cent, these checks on over-issue were very effective. They failed in time, and the theory upon which they were defended was nonsense; but for a time their operation was powerful and excellent.

Unluckily, in the management of the matter before us--the management of the Bank reserve--the directors of the Bank of England were neither acquainted with right principles, nor were they protected by a judicious routine. They could not be expected themselves to discover such principles. The abstract thinking of the world is never to be expected from persons in high places; the administration of first-rate current transactions is a most engrossing business, and those charged with them are usually but little inclined to think on points of theory, even when such thinking most nearly concerns those transactions. No doubt when men's own fortunes are at stake, the instinct of the trader does somehow antic.i.p.ate the conclusions of the closet. But a board has no instincts when it is not getting an income for its members, and when it is only discharging a duty of office. During the suspension of cash payments--a suspension which lasted twenty-two years--all traditions as to a cash reserve had died away. After 1819 the Bank directors had to discharge the duty of keeping a banking reserve, and (as the law then stood) a currency reserve also, without the guidance either of keen interests, or good principles, or wise traditions.

Under such circ.u.mstances, the Bank directors inevitably made mistakes of the gravest magnitude. The first time of trial came in 1825. In that year the Bank directors allowed their stock of bullion to fall in the most alarming manner:

On Dec. 24, 1824, the coin and bullion in the Bank was L 10,721,000 On Dec. 25, 1825, it was reduced to L 1,260,000

and the consequence was a panic so tremendous that its results are well remembered after nearly fifty years. In the next period of extreme trial--in 1837-9--the Bank was compelled to draw for 2,000,000 L.

on the Bank of France; and even after that aid the directors permitted their bullion, which was still the currency reserve as well as the banking reserve, to be reduced to 2,404,000 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 licence, permitting the Bank, if necessary, to break the new law, and, if necessary, to borrow from the currency reserve, which was full, in aid of the banking reserve, which was empty. Till 1857 there was an unusual calm in the money market, but in the autumn of that year the Bank directors let the banking reserve, which even in October was far too small, fall thus:

Oct. 10 4,024,000 L " 17 3,217,000 L " 24 3,485,000 L " 31 2,258,000 L Nov. 6 2,155,000 L " 13 957,000 L

And then a letter of licence like that of 1847 was not only issued, but used. The Ministry of the day authorised the Bank to borrow from the currency reserve in aid of the banking reserve, and the Bank of England did so borrow several hundred pounds till the end of the month of November. A more miserable catalogue than that of the failures of the Bank of England to keep a good banking reserve in all the seasons of trouble between 1825 and 1857 is scarcely to be found in history.

But since 1857 there has been a great improvement. By painful events and incessant discussions, men of business have now been trained to see that a large banking reserve is necessary, and to understand that, in the curious const.i.tution of the English banking world, the Bank of England is the only body which could effectually keep it.

They have never acknowledged the duty; some of them, as we have seen, deny the duty; still they have to a considerable extent begun to perform the duty. The Bank directors, being experienced and able men of business, comprehended this like other men of business. Since 1857 they have always kept, I do not say a sufficient banking reserve, but a fair and creditable banking reserve, and one altogether different from any which they kept before. At one period the Bank directors even went farther: they made a distinct step in advance of the public intelligence; they adopted a particular mode of raising the rate of interest, which is far more efficient than any other mode. Mr. Goschen observes, in his book on the Exchanges: 'Between the rates in London and Paris, the expense of sending gold to and fro having been reduced to a minimum between the two cities, the difference can never be very great; but it must not be 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 percentage of expense has to be wholly borne by the one transaction, a very slight expense becomes a great impediment. If the cost is only 1/2 per cent, there must be a profit of 2 per cent in the rate of interest, or 1/2 per cent on three months, before any advantage commences; and thus, supposing that Paris capitalists calculate that they may send their gold over to England for 1/2 per cent expense, and chance their being so favoured by the Exchanges as to be able to draw it back without any cost at all, there must nevertheless be an excess of more than 2 per cent in the London rate of interest over that in Paris, before the operation of sending gold over from France, merely for the sake of the higher interest, will pay.'

Accordingly, Mr. Goschen recommended that the Bank of England should, as a rule, raise their rate by steps of 1 per cent at a time when the object of the rise was to affect the 'foreign Exchanges.'

And the Bank of England, from 1860 onward, have acted upon that principle. Before that time they used to raise their rate almost always by steps of 1/2 per cent, and there was nothing in the general state of mercantile opinion to compel them to change their policy.

The change was, on the contrary, most unpopular. On this occasion, and, as far as I know, on this occasion alone, the Bank of England made an excellent alteration of their policy, which was not exacted by contemporary opinion, and which was in advance of it. The beneficial results of the improved policy of the Bank were palpable and speedy. We were enabled by it to sustain the great drain of silver from Europe to India to pay for Indian cotton in the years between 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 maintained an adequate reserve, and preserved the country from calamities which, if we had looked only to precedent, would have seemed inevitable. All the causes which produced the panic of 1857 were in action in 1864--the drain of silver in 1864 and the preceding year was beyond comparison greater than in 1857 and the years before it--and yet in 1864 there was no panic. The Bank of England was almost immediately rewarded for its adoption of right principles by finding that those principles, at a severe crisis, preserved public credit.

In 1866 undoubtedly a panic occurred, but I do not think that the Bank of England can be blamed for it. They had in their till an exceedingly good reserve according to the estimate of that time--a sufficient reserve, in all probability, to have coped with the crises of 1847 and 1857. The suspension of Overend and Gurney--the most trusted private firm in England caused an alarm, in suddenness and magnitude, without example. What was the effect of the Act of 1844 on the panic of 1866 is a question on which opinion will be long divided; but I think it will be generally agreed that, acting under the provisions of that law, the directors of the Bank of England had in their banking department in that year a fairly large reserve quite as large a reserve as anyone expected them to keep--to meet unexpected and painful contingencies.

From 1866 to 1870 there was almost an unbroken calm on the money market. The Bank of England had no difficulties to cope with; there was no opportunity for much discretion. The money market took care of itself. But in 1870 the Bank of France suspended specie payments, and from that time a new era begins. The demands on this market for bullion have been greater, and have been more incessant, than they ever were before, for this is now the only bullion market. This has made it necessary for the Bank of England to hold a much larger banking reserve than was ever before required, and to be much more watchful than in former times lest that banking reserve should on a sudden be dangerously diminished. The forces are greater and quicker than they used to be, and a firmer protection and a surer solicitude are necessary. But I do not think the Bank of England is sufficiently aware of this. All the governing body of the Bank certainly are not aware of it. The same eminent director to whom I have before referred, Mr. Hankey, published in the 'Times' an elaborate letter, saying again that one-third of the liabilities were, even in these altered times, a sufficient reserve for the Banking Department of the Bank of England, and that it was no part of the business of the Bank to keep a supply of 'bullion for exportation,' which was exactly the most mischievous doctrine that could be maintained when the Banking Department of the Bank of England had become the only great repository in Europe where gold could at once be obtained, and when, therefore, a far greater store of bullion ought to be kept than at any former period.

And besides this defect of the present time, there are some chronic faults in the policy of the Bank of England, which arise, as will be presently explained, from grave defects in its form of government.

There is almost always some hesitation when a Governor begins to reign. He is the Prime Minister of the Bank Cabinet; and when so important a functionary changes, naturally much else changes too. If the Governor be weak, this kind of vacillation and hesitation continues throughout his term of office. The usual defect then is, that the Bank of England does not raise the rate of interest sufficiently quickly. It does raise it; in the end it takes the alarm, but it does not take the alarm sufficiently soon. A cautious man, in a new office, does not like strong measures. Bank Governors are generally cautious men; they are taken from a most cautious cla.s.s; in consequence they are very apt to temporise and delay. But almost always the delay in creating a stringency only makes a greater stringency inevitable. The effect of a timid policy has been to let the gold out of the Bank, and that gold must be recovered. It would really have been far easier to have maintained the reserve by timely measures than to have replenished it by delayed measures; but new Governors rarely see this.

Secondly. Those defects are apt, in part, or as a whole, to be continued throughout the reign of a weak Governor. The objection to a decided policy, and the indisposition to a timely action, which are excusable in one whose influence is beginning, and whose reign is new, is continued through the whole reign of one to whom those defects are natural, and who exhibits those defects in all his affairs.

Thirdly. This defect is enhanced, because, as has so often been said, there is now no adequate rule recognised in the management of the banking reserve. Mr. Weguelin, the last Bank Governor who has been examined, said that it was sufficient for the Bank to keep from one-fourth to one-third of its banking liabilities as a reserve. But no one now would ever be content if the banking reserve were near to one-fourth of its liabilities. Mr. Hankey, as I have shown, considers 'about a third' as the proportion of reserve to liability at which the Bank should aim; but he does not say whether he regards a third as the minimum below which the reserve in the Banking Department should never be, or as a fair average, about which the reserve may fluctuate, sometimes being greater, or at others less.

In a future chapter I shall endeavour to show that one-third of its banking liabilities is at present by no means an adequate reserve for the Banking Department--that it is not even a proper minimum, far less a fair average; and I shall allege what seem to me good reasons for thinking that, unless the Bank aim by a different method at a higher standard, its own position may hereafter be perilous, and the public may be exposed to disaster.

II.

But, as has been explained, the Bank of England is bound, according to our system, not only to keep a good reserve against a time of panic, but to use that reserve effectually when that time of panic comes. The keepers of the Banking reserve, whether one or many, are obliged then to use that reserve for their own safety. If they permit all other forms of credit to perish, their own will perish immediately, and in consequence.

As to the Bank of England, however, this is denied. It is alleged that the Bank of England can keep aloof in a panic; that it can, if it will, let other banks and trades fail; that if it chooses, it can stand alone, and survive intact while all else perishes around it.

On various occasions, most influential persons, both in the government of the Bank and out of it, have said that such was their opinion. And we must at once see whether this opinion is true or false, for it is absurd to attempt to estimate the conduct of the Bank of England during panics before we know what the precise position of the Bank in a panic really is.

The holders of this opinion in its most extreme form say, that in a panic the Bank of England can stay its hand at any time; that, though it has advanced much, it may refuse to advance more; that though the reserve may have been reduced by such advances, it may refuse to lessen it still further; that it can refuse to make any further dis counts; that the bills which it has discounted will become due; that it can refill its reserve by the payment of those bills; that it can sell stock or other securities, and so replenish its reserve still further. But in this form the notion scarcely merits serious refutation. If the Bank reserve has once become low, there are, in a panic, no means of raising it again. Money parted with at such a time is very hard to get back; those who have taken it will not let it go--not, at least, unless they are sure of getting other money in its place. And at such instant the recovery of money is as hard for the Bank of England as for any one else, probably even harder. The difficulty is this: if the Bank decline to discount, the holders of the bills previously 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 it. Especially what has been advanced to merchants cannot easily be recovered; they are under immense liabilities, and they will not give back a penny which they imagine that even possibly they may need to discharge those liabilities. And bankers are in even greater terror. In a panic they will not discount a host of new bills; they are engrossed with their own liabilities and those of their own customers, and do not care for those of others. The notion that the Bank of England can stop discounting in a panic, and so obtain fresh money, is a delusion. It can stop discounting, of course, at pleasure. But if it does, it will get in no new money; its bill case will daily be more and more packed with bills 'returned unpaid.'

The sale of stock, too, by the Bank of England in the middle of a panic is impossible. The bank at such a time is the only lender on stock, and it is only by loans from a bank that large purchases, at such a moment, can be made. Unless the Bank of England lend, no stock will be bought. There is not in the country any large sum of unused ready money ready to buy it. The only unused sum is the reserve in the Banking Department of the Bank of England: if, therefore, in a panic that Department itself attempt to sell stock, the failure would be ridiculous. It would hardly be able to sell any at all. Probably it would not sell fifty pounds' worth. The idea that the Bank can, during a panic, replenish its reserve in this or in any other manner when that reserve has once been allowed to become empty, or nearly empty, is too absurd to be steadily maintained, though I fear that it is not yet wholly abandoned.

The second and more reasonable conception of the independence of the Bank of England is, however, this: It may be said, and it is said, that if the Bank of England stop at the beginning of a panic, if it refuse to advance a shilling more than usual, if it begin the battle with a good banking reserve, and do not diminish it by extra loans, the Bank of England is sure to be safe. But this form of the opinion, though more reasonable and moderate, is not, therefore, more true. The panic of 1866 is the best instance to test it. As everyone knows, that panic began quite suddenly, on the fall of 'Overends.' Just before, the Bank had 5,812,000 L. in its reserve; in fact, it advanced 13,000,000 L. of new money in the next few days, and its reserve went down to nothing, and the Government had to help. But if the Bank had not made these advances, could it have kept its reserve?