ness stirring-that production is diminished, and that purchasers eager to borrow materials or wages to give to workmen fail to come forward. Or again, "Bankers' balances are small, and loanable money is scarce proclaims that the farmers have had a bad harvest, and have little corn to sell, and so have no surplus above their expenses to deposit, or profits are low, and merchants have little to place at banks. Or else it may be that profits are very high and speculation very brisk, and promoters of new and costly enterprises, openers of new mines, builders of fresh factories, greedily take up every pound that the banks can spare for lending. These are not facts created by banks, but they are the essence of the banking business. In one respect, however, the banker is distinguished from the ordinary broker. The latter usually confines himself to finding a buyer or seller for his principal. He seldom undertakes any responsibility for the man he introduces, and he is rewarded by a simple commission on the transaction. The banker, on the contrary, guarantees the solvency of his borrower, for he is answerable to his depositor for the repayment of the deposit. He selects a borrower at his own discretion and risk; the depositor trusts him, and him alone. The depositor knows perfectly that the banker must and will lend his deposit, that to be lent was the sole purpose for which the deposit was accepted; but the only part that he takes in the matter is to trust his banker, and to rely on his liability to repay the deposit when demanded. The banker's reward is derived from the terms on which he grants loans to borrowers. It is obvious, moreover, that banking necessarily implies an understanding that the depositors shall, as a rule, leave a balance in the banker's hands. If the deposits were withdrawn as fast as they were lodged, the banker would have nothing to lend. His only way, then, of earning a profit would be either to turn common broker and to charge a commission on every transaction, without making himself responsible for the solvency of the borrower; or else to invest the purchasing power he receives in buying Government bonds or other securities capable of being realised at any time without any probable loss. But experience teaches him that he lies under no such necessity. He discovers that in ordinary times, with a large number of depositors, demands for immediate repayment of deposits are subject to a general law of average, on which he may as safely rely as life assurance companies rely on a similar average in the death-rate. A banker obviously cannot lend the whole of his deposits. He does not know when his customers will draw cheques against their accounts. On any day he may be called upon to pay more than he receives, and he must have a stock of cash in hand to face such contingencies. That stock in hand is called a reserve. It is procured by the banker granting smaller loans than the sums which he obtains on the collection of the debts in which his purchasing power reaches him. This reserve protects him against sudden and unforeseen demands; it rescues him from the danger of having no money when he is called upon to pay. From the nature of banking which discounts the bills of manufacturers and merchants, the banker is obliged to lend for periods more or less long. The bills he has discounted may be perfectly sound, but they are not yet due. He may possess much wealth, but it cannot be reached at the moment. Security against this danger is a necessity inherent in modern banking. It is the one specific object of a reserve. How large ought this reserve to be? No more critical question can be raised in the practice of banking, and there is none which is the subject of more incessant discussion. One principle, and one principle only, governs the decision on the fitting magnitude of a reserve-safety. A reserve has no other reason for existence than safety. A flood of excited and never settled discussion is at once swept away by the recognition of this determining principle. Be it Bank of England, or the smallest bank in the country, the rule is always one and the same-what reserve ought it to keep in order to be safe, safe against having no money when asked to pay its liabilities. Every other consideration is irrelevant-ought not to be listened to in this matter. Each bank has its own particular position. The measure of safety varies with the circumstances of each. A country bank fed by rich depositors, of steady habits, and carrying on a business of pure routine, can find an exceedingly small reserve sufficient. A bank dealing with a highly speculative community, exposed to great fluctuations of fortune, is summoned to keep a much larger margin of reserve. But in every case the possible demands of depositors is the one thing to be thought of. In a nation trading with all the world, and subject to the changing fortunes of each country with which it has commercial dealings, great fluctuations in the reserve of its banks will necessarily occur. But the important matter for a banker to study is not the movements up and down of his reserve regarded as isolated facts, but the forces which are acting upon it. If he desires to learn the present state and the future prospects of the banking community, it is not the actual figure at which the reserve stands which will instruct him. The real things to learn are the state of his depositors and the state of his borrowers. What is happening to them? are they going on as usual, or are they under exceptional circumstances? and if so, what are those circumstances? Are they likely to increase deposits, or to incur losses which render it difficult, if not impossible, for borrowers, on bills or other securities, to meet their engagements to the bank? These are the vital things to study, and these are the considerations which ought to determine the course which the banker ought to pursue. To the full extent of providing against a run on the bank, the policy of a reserve, however great, is perfectly right and justifiable. But an accumulation of reserve upon a general idea that it is well to have a good stock of gold is a policy destitute of reason.* A very small stock of gold has been found perfectly compatible with safety, as in 1866; at other times, a large reserve has not prevented convulsions in the money market, and even much danger to banks. The gold by itself alone tells little to a banker. In what state is the banking-the deposits and the loans made by the banker-is the master question of the situation. Nor does the amount of the circulation of gold and notes moving about the country deserve any notice from the banker in determining the magnitude of his reserve. * See Appendix, p. 551. A strange delusion set in with the Act of 1844-though not countenanced by a single word in the Act itself— that the circulation possessed a power of controlling the movements of banking, and that, if properly handled, it could steady the vicissitudes of the banking market and regulate its rate of discount. There is reason to believe, as has been already remarked, that this idea gave birth to the enactment of that statute. But this idea was a dream of the imagination-a principle built on the sand. The variations in the circulation are a petty trifle by the side of the gigantic operations of banking. A greater or less quantity of small change— of the instrument required for petty transactions of ready money payment-what influence could it have on the events happening daily at the Clearing House? What banker required a stronger reserve to be locked up in his chest, because farmers needed more sovereigns in summer, or travellers were roaming over the land with a supply of notes in their pockets? Or did the Bank of England, or any other bank, ever lower, as a rule, its rate of discount in winter, because a reduced circulation brought cash back to their reserve? The notion is too absurd to need discussion, yet there are thousands who look at the weekly reports of the notes issued in order to learn what events are about to happen. in the banking market. The City world, and those who write on banking, set up the theory-if that can be called theory which is composed of affirmations only-that the amount of the reserve of the Bank of England, taken in the ratio it bears to the Bank's liabilities, scientifically ought, and practically does, govern the rate of its own discount, and indi |