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clearings at Manchester, Liverpool, Newcastle, Leeds, Bristol, Hull, &c., is not free money, it is necessary till-money-clearing till-money. I incline to take off 10 millions from the 52 millions of available cash as being about the average amount required to meet the London clearing balances, and there is a further amount, 'X,” an unknown quantity, permanently locked up to meet the provincial clearing balances. It becomes a very interesting question in view of these figures, how much free bankers' money does the Bank of England hold ?
During the last two years, in which the clearing bankers' balances were published, viz., 1875 and 1876, the figures were for 1875 a little over 10 millions, and in 1876 close upon 12 millions. Since that day the use of cheques and telegraphic transfers has vastly increased. The cheque and the clearing system have elbowed the bank-note out of circulation, and the yearly growing volume of our trading activities has been financed, not by gold and notes, but by cheque, set-off, transfer barter, clearing; but still there always remains the bankers' liability to repay his deposits in actual cash.
I wish to make it quite clear that moneys kept by the London bankers with the Bank of England to meet the daily balances of the clearing cannot be withdrawn by them at any time, be the times quiet or be they critical. The London clearing bankers must at all times (while the Bank of England continues to be the banker for the clearing house) keep with the Bank of England balances sufficient to meet their daily engagements—what are called the clearing balances. The same thing is true of the balances of the provincial clearing bankers.
I have ventured to call the amount that must be kept by the London clearing bankers 10 millions, but I have not ventured even a guess at the figures that must in a similar way be maintained in the case of the provincial clearing bankers at the nine towns where the Bank of England has branches. Between 1847 and 1877 the cash reserve of the Bank of England no less than 61 times was less than the amount of the London bankers' balances. In times of crisis the Bank of England has made advances in gold and notes to the London bankers, and to country bankers to enable them to strengthen their tills by filling them with cash.
And is it not true that London bankers who are London agents would have to help their correspondents by assisting them with cash in much the same way that bankers in general find help from the Bank of England when the financial storm signals are up.
The Bank of England in critical times,-times of crisis or of panic-has allowed her cash reserve to be borrowed by bankers or drawn on by bankers in support of trade until it has dwindled away. That is the true use of a reserve of cash-to meet emergencies.
But if the clearing bankers' balances had been withdrawable on the 61 occasions named, and if those balances had in times of crisis and panic been available, would not the clearing bankers have taken away their own money from the Bank of England and thus in an equal degree reduced alike her deposit liabilities and her cash reserves ?
Was it not the knowledge that the bankers' balances were absolutely needed to meet the clearing that caused the London bankers to leave them with the Bank of England? And on the other hand, was it not the knowledge that the clearing balances were irremovable that gave the Bank of England confidence to go on lending all her cash in the face of the great apparent but really non-existent liability to repay the clearing bankers' balances in cash. Free money only can be withdrawn. We usually describe such a condition of affairs as complete dependence on the Bank of England.
In cases of internal panic, when bankers are individually thinking of their own security, the instinct to call in short money and so to strengthen the till is strong, because men are afraid that there is not sufficient liquid capital to go round. We continually, even in quiet times, see paragraphs such as this in the money articles of the daily papers. The brokers paid so much per cent. to avoid going to the bank—that is, it was possible to get fresh loans, at a price, from a new lender when an old one was unwilling to renew.
But what of the time when because of the thinness of their own cash reserves bankers generally are calling in money? There is only one large store of loose unemployed cash in the country, viz., the Bank of England Reserve. Disturb the short money market and pressure begins to fall on the Bank of England Reserve. If the pressure be moderate a moderate amount of cash will meet it, but in the conceivable case of panic extending over the country even for a few hours, is the statement liabilities 633 millions cash 52 millions “ money at call and short notice” 125 millions satisfactory?
What amount would be wanted to fill the tills of the 5,800 offices of the banks of the United Kingdom and to meet the withdrawals of gold by foreign houses nervous as to the safety of money employed in a market in a state of panic ? There may not be actual danger at a given moment, but if all begin to prepare for danger-preparation which would practically be proclaimed on the housetop, from the rush for loans and the rise in the value of short money, then bankers would create the danger it was hoped to avert. We have refined our methods of working until we are spinning a big top on a needle point. When people want cash
money at call and short notice” will not meet the case. Our money market is sensitive because we make it so. To force users of short money to repay in time of acute distrust would be impossible under our present arrangements. We simply could not find a great sum of cash at short notice-it is not in the country. A suspension of the Bank Act might supply legal tenders for internal purposes, but where under such conditions would gold come from to meet a foreign drain ? Have we sufficient cash to continue to call “money at call or short notice” part of our cash provisions ? Is it under any conditions wise to do so ?
If there be 125 millions of call and short-notice credits on the market, could we in time of need withdraw any considerable amount without bringing on evil? The short money market is part of our system of finance—one of its pivots. Brokers are habitual customers of the banks; the market is a permanent one, and to disorganise it is as simple a way of creating a crisis as has so far been thought of. But is the position assigned to call and short money in the balance sheets of the banks a prudent one ? It is practically called reserve money, but it is the staff of life to a great market. In case of pressure, could this great mass of market credits be translated into cash, with a Bank of England reserve of 19 millions? Credit is a lever to move the world ; but a lever must have something to rest on before it can exert its power. In finance the resting ground is cash. The second pivot of the money market is the Stock Exchange. Fortnightly loans on securities play a great part in London finance. Inability to renew means a wasting of margins, pressure to sell, a serious, even a disastrous, fall in prices-possibly panic. If the cash basis of the national finance be reasonably broad, the fear of serious crisis is minimised. It is at a time when those who should themselves give help become nervous and refuse because of their own needs, that crisis comes. Bankers com. pelled to call in money from the short-loan market and from the Stock Exchange, not because they are individually attacked, but from a nervous consciousness that their cash reserves are too small, are like a life-boat's crew hoisting a signal of distress, and asking for a rope from the vessel whose crew they should save.
Cash is not now the medium of payment in England, else it would be kept. Bankers settle, in the cammon term of money, by means of set-off, the mutual barterings of merchants. Cheques and bills come into the banks for the credit of customers, and cheques and bills are paid to their debit ; cash pays wages, and that is its only great employment. In London nearly everything is done by clearing. USE OF COIN AND CHEQUES IN LONDON BANKS.
1881. Coin ....
2.039 Cheques and bills
100 In the light of these figures, and of the preceding ones giving the cash and market credits, it is hardly safe to base the greatest money market in the world on so slender a basis of cash It appears also to be necessary to reconsider the place of “short money” in the balance sheets of the banks. Is it not fairly evident that if internal panic, or even grave distrust, were to set in, “ short money” could not be withdrawn in quantity? If that be so, then “short money” is a form of employment of the loanable resources of the bank lending the money-an employment on excellent security—but it can hardly be considered cash in hand. Bankers keep loose that which they may want in time of stress. Is it wise to make that provision in a form in which it cannot be available ?
I recognise that the contract is clear “cash at call or cash at short notice,” but in time of trouble is the contract-I am speaking of the market broadly—an enforceable one? The last time we had a crisis (1890), the then Governor of the Bank of England and the Chancellor of the Exchequer fixed on this point as the
Their anxiety appears to have been that the bankers should stand solidly together, and not attempt, by individually withdrawing money from the brokers, to protect themselves at the danger of a general discredit. There was undoubted solidarity of interest; what was needed, and was secured, was solidarity of action. If the banks were unable or unwilling to lend, it was of the highest importance that they should not destroy the equilibrium of the short-loan market, already in a condition of sensitive balance, by making demands for the repayment of “call money, No. 35.- VOL. IX.
or money at short notice.” To do that would have been to force the brokers on to the Bank of England, and thus risk a panic of incalculable calamity. If such a calamity had come upon us, where was the remedy? A Chancellor's letter? And 5,800 bank offices as points of attack. I fear that a Chancellor's letter would have availed little. It is cash you want in time of crises, and Mr. Lidderdale summed it all up when he said, “Keep more cash." We are concerned with the growth, the development, the evolution of a system. The clearing system has the exquisite nicety of a masterpiece of mechanism, but it wants driving power, and the driving power is cash.
The consolidation of our banks into a few great institutions goes on. There are ten English banks with more than 100 branches each ; they have nearly 1,100 branches among them. One small and powerful group of English banks (seven) holds over 240 millions of deposits. But in these quiet and prosperous. times we may safely ask, Do each of the banks of the United Kingdom recognise that it is part of sound banking to keep unemployed a sufficient proportion of their deposits to ensure in their own strength their individual safety in times of difficulty, and also their ability to contribute to, and not take from, the general safety? I am aware that to keep reserves costs money, and it is no use insuring the day after the fire. Look at the figures-770 to 780 millions of liabilities, 52 millions of cash. Where is the reserve? If we analysed the balance sheets of the banks individually, we should find varying conceptions of the proportion that should be kept as cash on hand. That shows the fallacy of an average, and the difficulty of bringing all the banks into line.
Some keep merely "cash on hand "-till-money; and some keep sufficient cash to enable them to bear their own burdens in times of stress. The group of London clearing bankers has a vast sum of country bankers' money at “call and short notice," and in that respect they no doubt regard their deposits as peculiarly liable to be withdrawn in any time of real stringency. But the London agency system as we knew it 20 years ago is changing. The London agent is giving place to the London office. The banker who was indirectly interested in the welfare of half a score of country correspondents and their branches, is now at the head of a huge establishment which has absorbed-amalgamated
- the country correspondent, and he is directly and vitally concerned in maintaining the credit of his bank over a spider web system of branches that may extend over 200 towns. To