It is not sufficient, however, that a banker should be in a position to meet known demands; unforeseen demands may be sprung upon him at any moment, and he must be prepared to meet them immediately they arise. Mr. Bagehot, in his Lombard Street, writes as follows of these unexpected demands:—
“Any sudden event which creates a great demand for actual cash may cause, and will tend to cause, a panic in a country where cash is much economised, and where debts payable on demand are large. In such a country an immense credit rests on a small cash reserve, and an unexpected and large diminution of that reserve may easily break up and shatter very much, if not the whole, of that credit. Such accidental events are of the most various nature: a bad harvest, an apprehension of foreign invasion, the sudden failure of a great firm which everybody trusted, and many other similar events have all caused a sudden demand for cash.”
A banker therefore fortifies himself against any sudden or unexpected call by keeping much more cash in his till than he is ever likely to require in normal times; by maintaining a large balance with the Bank of England—which to all intents and purposes is equivalent to “cash” in the till; and by lending out large amounts to bill-brokers, which advances are fully secured, and are repayable either on demand or at short notice. He is able to arrange the amount advanced in this way from day to day—by lending further sums or calling in loans—according to the circumstances of the moment, so that he can maintain that amount in “cash” or “bank balance” which he considers necessary for his safety.
So we see that “cash” and “balance” at the Bank of England together constitute a banker’s first line of defence—they are, so to speak, his “firing line”—and the money which he lends to the bill-brokers constitutes the “supports” to the “firing line.”
The next defence which a banker maintains against possible pressure is represented by the amount invested in securities. Investments yield on an average a higher return than sums lent at short notice or call; but it must be remembered that securities are not so easily realised, if the necessity should arise.
Of these investments a large portion is represented by Consols, as, in case of need, these can always be sold for cash at very short notice, or in case of great pressure doubtless the Bank of England would be willing to make advances on the security of this stock. Of securities guaranteed by the British Government, other than Consols, there will probably be a large holding, although these securities might not in time of panic be so readily realisable as Consols. Yet it is probable that the Bank of England would, in order to avert disaster, accept such stocks as security against advances. Other high-class securities which yield a somewhat higher return will also probably be held to a large amount. A banker, however, should not rely too much on these securities for purposes of realisation in time of monetary pressure, it being quite possible that at such times there would be no buyers of any class of securities with the probable exception of Consols.
After making due allowance for “cash,” “bank balances,” “call money,” and “investments,” a banker employs the balance of his funds in discounting bills, buying bills from the market, and making advances to customers.
As the dates when bills fall due for payment are fixed, if for any reason a banker deems it prudent to increase his “cash” and “bank balance,” he can readily do so by letting his bills in hand mature, and not taking up new bills in their place. It is open to the banker to sell the bills he holds, that is, to rediscount them, if he choose to do so; but this course is not practised at the present day, except by a few country banks. Moreover, in the event of a panic, probably no one can be found to buy bills, so that they are not in practice realisable before the maturity dates. As an illustration of this, it may be mentioned that on one occasion during the crisis of 1847, it was found to be impossible in the city of London to discount even an Exchequer Bill of the English Government.
Of the various investments of a banker, “advances to customers” are the most difficult to realise in time of pressure, as the wherewithal for the customers to repay their advances is then wanting, and in their efforts to obtain necessary funds the danger would only be aggravated. In such times, indeed, the commercial world requires extra assistance to avert an actual crash.
“Premises” is an item appearing among the assets in balance sheets of joint-stock banks. It is probable that in many cases the value of the premises largely exceeds the figure at which they are put in the accounts, and hence they constitute a hidden reserve; but the investment, by its nature, is one that cannot readily be made available to meet sudden demands.