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an imperial scale should be to accept imperial responsibilities.
It may be appropriate at this point to mention another factor of considerable gravity in discussing the question of bankers'
And that is the no reserve policy of the savings banks. The Government take in from individuals deposits up to £50 a year, and allow 2} per cent. They invest the money at 24 per cent. nominal, in securities that are now at a premium, and consequently yield a return varying with the amount of the premium. On such a basis the system does not pay. If the system is intended for the benefit of the working classes, successive Chancellors have a singularly limited experience of life if they have brought themselves to believe that individually working people save £50 a year. Why do we need old age pensions if there is this general opulence ? Consols will not always be at a premium. They fall in times of public distress—when there is war-scarcity of employment, such as has been, and unhappily will be again, and at such a time it is reasonable to suppose that a people pinched by the evils of the day will take out more money in a twelvemonth than they can put in.
The savings banks fund under such conditions would not be solvent—although the depositors would be safe, and the loss on securities sold below par would fall on the general taxpayers. But where would the post-office authorities find cash if they wanted a few millions ? They don't keep cash, that is admitted ; therefore, any pressure on the savings banks would fall on the Bank of England (the centre of the nervous system of commerce) —and for this reason the Bank of England is the Government banker. The cash reserve of the Bank of England—the mainstay of credit-would then, and perhaps under deplorable circumstances, be subjected to a new and serious call. The facts should only need to be stated for their seriousness to be admitted. But what has been done so far? In this matter we do not want a politician but a statesman.
The foregoing considerations lead to the questions: (1), Do we need a larger central stock of gold ? (2), Where should the central stock of gold be kept ? (3), Do bankers generally keep a sufficient percentage of loose cash ?
In the first place—the English market is the free market for gold. All foreign liabilities—including the deposits of foreign Governments, and the obligations to foreign bankers—are payable in gold. In a sense London is the financial Rome of the civilised world. It is believed that here gold can be obtained; hence it is . the practice of foreign bankers. to hold in their portfolios great amounts of bills on London which give them the power to withdraw gold. The free market is the market from which it is natural to take gold when it is needed for shipment to meet a foreign loan-even if that loan be arranged in Paris or Berlin. But what happens if a few millions are wanted for export ? The bank begins to take precautions-raises its rate. We get uneasy. In time of international disagreement it is quite possible, with our attenuated gold reserve, that a foreign Government might strike its most effective blow by aiming at our financial supremacy. The power to act on our few millions of gold might be acquired by an enemy able to deplete the bank and bring on a crisis. We are absolutely alone in the magnitude of our responsibilities, in the perfection of our credit system, in the success with which we have excluded coin, and notes based on coin, from our ordinary modes of payment, and also in our unpreparedness to meet in gold a reasonable proportion of the obligations we have undertaken.
Russia is a poor country relatively to England, but the Russian Government has collected an enormous mass of gold to ensure the convertibility of her notes, and to give her a war chest. The Austrian Government has got together many millions—Germany has the military chest of Spandau. The following figures illustrate my meaning :
GOLD AND SILVER IN STATE BANKS.
Poorer countries than England have collected gold, we can do so also, if we believe that we need it and are prepared to pay for it. The free market with the biggest liabilities-contracts actually made-has the smallest provision.
In 1890 the Bank of England borrowed from the Bank of France and thus calmed the crisis. Should we as a matter of settled practice allow our financial solvency to depend on the chance of being able to borrow a few millions? A continental combination to squeeze England, which included France, Germany and Russia would effectually veto a timely loan to prevent our crisis becoming panic. War is not merely the movement of armies or fleets, it may strike at credit. Should it not be a cardinal principle of our national finance that we keep a sufficient amount of gold-a central stock-bankers' reserves—to protect our international solvency, to ensure our financial supremacy, and the safe working of our banking system ?
We have no great State bank, such as the Bank of France, with branches all over the country. We have evolved a system of our own-an insular system, and we must accept the system we have and perfect it. As there is no one State bank, the responsibility becomes an individual and a collective one for all the banks. Should it not, therefore, be an axiom of English banking -possibly enforceable by legislation—that a given percentage of the deposit liabilities of each bank should be habitually kept unemployed and in actual cash, that is, in gold or Bank of England notes? This would apply not only to the great London and Provincial banks, but to all the banks. The great banks at the centre of finance might consider that it was desirable that they should individually keep a larger proportion of loose cash, because of the exceptional nature of some of their deposits, than would be needful in the case of purely country banks. Indeed a study of the balance sheets of some of the banks suggests that this view is taken. But this desi
But this desirable state of affairs can only be brought about by common voluntary action of the banks, or by legislation.
Let me distinctly say that I am not advocating the holding of a fixed minimum proportion of deposit untouchable under any circumstances. If that plan had been followed, the Bank of England during some past crises in our financial history would bave had to retain its cash reserve when it reached the legal minimum and thus have invited panic. I ask for the habitual retention of a given percentage of deposits in cash, that is, gold and bank-notes. On a former page we called the deposits of the English, Scottish, and Irish banks-exclusive of the Bank of England-780 millions. If I am approximately right in the estimate of 52 millions, then the banks on an average hold 7 per cent. of their liabilities in the form of Bank of England notes, coin and cash at the Bank of England. That is practical
dependence on the Bank of England. 1 per cent. makes a difference of 8 millions. I have previously suggested 15 per cent. as the percentage of cash to deposit liabilities to be habitually kept unemployed—this would include till money, and that, beyond the till money, the cash kept on hand should be held in Bank of England notes. That course would give us a total of 117 millions.
Some banks already keep about 15 per cent. of cash unemployed, but that brings into clearer relief the deficiencies of some others. Is it not desirable that all bank statements shall specify separately (i) cash on hand and at Bank of England, (ii) money at call and short notice? The periodical issue of returns in this form would bring some pressure to bear. I hope that it is probable that the Committee of London Bankers now sitting or about to sit will do something towards strengthening bankers' reserves. I am, indeed, not aware of the constitution of that Committee or of the proposals likely to be made by it, but it will, I presume, at all events for some purposes, include a representative of the Bank of England, and in that case the unrivalled tradition and experience of the Bank of England in dealing with crises and panics will be at the disposal of the members. The Bank of England always has been the agent of the Government, and an interchange of experiences and a harmonising of views would help to bring about practical results. Until bankers and the Bank of England get absolutely in touch and exchange confidences, it is hardly possible to settle to their mutual satisfaction whether or no the Bank of England gets too great an advantage from the possession of the clearing account, and the consequent holding of the clearing bankers' balances. I don't suggest that such a question will be raised—I don't know—but if it were raised and the clearing bankers withdrew their balances, they would have to set up a costly machinery of their own for the safe keeping of their ten or eleven millions which is now safeguarded by the Capital of the Bank of England, and they would, one would suppose, mutually insure the store of gold-if it were gold -or keep Bank of England notes to a given proportionate amount in common, and take care of them. The clearing balances must in any case be met. There is a certain amount of competition by the Bank of England now, tempered by the mutual relation that exists between her and the banking community, but that change, which has been suggested, would bring the Bank of England, perhaps, all over the country, as a competitor, on modern lines, with an enormous capital, whose notes
money at call
are legal tender, and who is also the agent of the Government in time of panic. In fact we might get a State Bank. If the clearing banks agree upon some course, which leads them to keep a greater percentage of cash unemployed there still remains the difficulty of bringing responsibility home to all the Banks.
Probably some of the weaker might, in case of pressure to alter their methods, solve the question by seeking amalgamation with a larger institution. The point is to get bankers to keep a larger proportion of cash somewhere, and granting the need for this larger provision, means should if possible be devised to ensure an acceptance of an individual and a collective obligation. In business the line of least resistance is often best. We should aim at avoiding elaborate schemes difficult to understand and difficult to carry out, which may also in working develop difficulties unsuspected by their authors. It is probable that legislation to compel the accepting of responsibility may follow our next crisis if we have not beforehand set about the business. A compulsory publication of balance sheets showing separately “cash on hand and at the Bank of England, and short notice," would do something, but I fear that in all cases such publication would not be sufficient. But compulsory returns every three months to an authority to be set up, showing the daily percentage to deposit liabilities of cash on hand and at Bank of England might do more, especially if accompanied by penalties.
That is to say—if the proportion of cash in hand and money at the Bank of England had fallen for a month below a fixed percentage, interest at 5 per cent. on the average deficiency should be paid over to the Inland Revenue department. By fixing the maximum percentage, say at 15 per cent. and insisting that it should once in three months be reached, and by allowing a variation down to 10 per cent. free of penalty, there would be preserved the element of elasticity, and a substantial inducement to keep loose cash. To let reserves fall too low is reprehensible, and the offence should be penalised. But should we not find in practice that, once the habit of keeping reserves was formed, helped by publicity and the inducement of self-interest, the system would work automatically ?
Habit is strong-we need to break present habits and bring up the coming generation of bankers to new ones. Again the point is, keep cash somewhere. Personally, I prefer that cash reserves should be kept in Bank of England notes. We use them habitually, they are legal tender, the public understand them ; in