thirty-three millions, of 1866 amply testify. It is remarkable too that there is always a well-defined

tendency for deposits to increase at the Bank of England in crises. They are removed from suspected banks, whilst the suspension of mercantile operations leads traders to place their funds in its keeping for a while, thus enabling it to afford invaluable help to solvent yet momentarily embarrassed borrowers.

It would seem natural to suppose that in seasons of such pressure for borrowing, the Bank would gain a resource of great power from the suspension of the Bank Charter Act of 1844, whereby it becomes enabled to issue, at its own discretion, any number of Bank of England notes that it choses. Many a trustworthy trader, it would seem, might be saved by an advance of such notes. But, as was shown in the preceding chapter, the suspensions of 1847 and 1866 gave the Bank not a single additional bank-note beyond what it would have had under the Statute, and though in 1857 it acquired the command of lending £800,000 beyond what the law allowed, nevertheless, if the line of uncovered issues had stood at fifteen millions, as it does now, the suspension of that year would have been as great a nullity as it was in the two others.

But what shall be said of gold? Is not that the resource on which a panic-struck money market must ultimately rest for salvation? The sole motive for a

reserve of gold in banking is the danger of deposits being drawn out faster than the loans granted by the bank return to its till, and thus it might come to a stoppage though perfectly sound and solvent. Under this law the Bank of England falls, like every other

bank; but does it appear that the Bank in any crisis ever ran a true and real risk of stoppage from the want of a sufficient reserve? The nearest approach to such a danger occurred in 1825. There was a run upon the Bank by depositors. For gold? In no way. The run was to procure the notes of the Bank itself. Depositors preferred to have their own funds in their own chests. in notes rather than to leave them in the Bank. They felt they were safe if only they had the notes in their own houses. That was all. Were the notes gold? Nothing of the kind. They were tickets authorising claims for gold; but there was no security beyond the Bank itself whether any gold could ever be had. They were legal titles against the Bank; but those who hoarded them cared nothing of what reserve the Bank held. The run was so sharp and sudden that the Bank was saved from being compelled to declare that all its cash was gone by the discovery of a million of unburnt one pound notes. They were short of printed paper; that was the danger, and that only. Evidently their paper -without gold-sufficed as a reserve in a very serious crises; the credit of the Bank itself was perfect, and that was enough. Never, in this century, was the Bank so near stoppage as then. Mr Bagehot, the advocate of a huge gold reserve, distinctly admits that the panic of 1825 was stopped by notes. This admission, by itself alone, disposes of the alleged necessity of a large permanent reserve in gold. The same inference results from the suspensions. Had they been realities, they would have been saviours by paper and not by metal.

That the Bank of England was not saved by a

reserve of gold in 1866, at least in the opinion of its directors, we have already seen; for they lowered away their reserve resolutely in the face of a deliberate and unexampled expansion of their lendings. The poor gold was so neglected as to sink below a million. But there is a second fact of extreme significance which weighs with crushing force on the city theory, that the rate of discount is governed by the movements of gold in the reserve. I do not say that the Directors of the Bank of England are guided—simply-by the amount of their reserve or by its arithmetical ratio to their liabilities in fixing the minimum terms on which they will make advances. On the contrary, we are assured by Mr Gibbs, that this is not their principle or their practice.* They simply announce the figure every week; they publish no explanation of their views and motives. It is the outside world which imputes to them the movements of the gold, its flow and outflow, as the basis of their action. The Bank of England is a purely private bank; it conducts its affairs as it thinks proper; it lays down such rules for their management as it thinks will best promote its interests. But its rate of discount has long been held by the whole country as the commanding authority in the banking world. Other banks have been wont to raise or lower their terms of lending in conformity with its action.

But a new fact has been increasingly revealing itself in these later days, a fact pregnant with instruction. The Bank rate is becoming less and less the supreme governor of the banking market. Other banks often discount freely and largely on lower

* See Appendix, p. 487.

terms than those demanded by the Bank of England. Hence a remarkable spectacle has come to light -two money markets, so to speak, in the great city which is held up as the financial centre of the whole world, the money market of the Bank of England, the private and personal one of that bank; the second, the market of the remainder of the banking community. The rates of interest charged on loans and discounts in these two markets are often radically different. At the latter end of 1875 the Bank rate sprang up in a week or two from two per cent. to four. Gold had left for Germany -no other movement was visible in the market. The resources of the banks were overflowing; borrowers were few, bills scarce, and the difficulty of placing out their funds very embarrassing for bankers. An excess of supply of purchasing power over demand was the unmistakeable feature of the situation. But, from whatever motives, the Bank demanded at least four per cent. interest on its loans.

But a counter force had come into play. The other banks of England found that there was great difficulty in finding customers for their supplies. They had to deal with the stern realities of fact, with the actual condition of the banking business. To tempt borrowers to come in, they acted as all dealers do in over-stocked markets, they lowered the price of their wares, they consented to lend at one per cent. or more below the Bank of England. And then what was the issue of the battle of the markets? The natural market came off victorious. The real rate of discount paid no heed to the departure of the gold, but the Bank of England was compelled soon to submit to the law of the market.

It lowered back its rate, for its discount office was probably deserted.

So it happened again in July 1877. The Bank refused long to lend at a lower charge than 2 per cent., but the greatest bankers in London discounted at one. A little later, on September 10, the Daily News—a journal accustomed to insist on the doctrine of a rate regulated by the Bank of England's reserve of gold-was forced to write : "The position in which the financial world is placed at the present time causes attention to be again drawn to the anomaly of a fixed minimum official rate of discount. There was nothing whatever in the ordinary course of trade to justify the advance to 3 per cent. a fortnight since, and so far as the present outlook is concerned a further rise to 4 per cent., which appears possible within the next few days, will also be caused by circumstances entirely apart from commercial demand." Here the existence of the two money markets is distinctly proclaimed, and the very obvious and legitimate inference is drawn, that "the total abolition of the fixed minimum —that is, a minimum determined by the amount of the gold reserve of a single bank, would be a great improvement. Why, it may be demanded by a merchant, should he pay an enhanced rate of discount on his bills solely because Germany or the United States draws on the stock of bullion in the Bank of England." A most pertinent question. Why, indeed ?

The Times repeats the same tale on October 20, a week after the Bank had raised its rate to 5 per cent. : "Borrowers are now as disinclined to take money as they were a week ago eager to supply themselves in anticipation of their wants."

Here