In no sense can this asset in the balance sheets of the banks be looked upon as a reserve. It is money invested in the London short loan market—money lent to the bill brokers, who, in times of bad credit, might not be able to repay it on demand. Just at the very moment when bankers are most in need, this asset is the least available; therefore, it is about the worst possible form in which the reserve of a credit institution, owing large sums at call, can be invested.
As a credit bank's debts are due at call and short notice, a true reserve can only consist of legal tender, and the till money, which is required in the ordinary course of business during normal times, certainly cannot be classed with that reserve. When considering what is a bank's real cash reserve, we ought to deduct from four to five per cent. from the ratio of cash in hand and with the Bank of England to liabilities, for a trader would not include the cash required from day to day in his business with any reserve he might accumulate against accidents.
Reverting to investments, we might take Consols as an illustration of their liquidity. During normal times Consols can be sold for cash at any moment, but it is otherwise in a time of panic, when practically everybody wants either to sell them or to borrow upon them. The market is then disorganised, and people require either gold or large credits at their bankers—not securities. Hence, even Consols are unsaleable when a panic develops into a crisis.
As the Bank of England holds the cash reserve of the nation, it alone can advance against securities in the midst of a crisis, and those banks which were caught short would then have to apply to the Bank for help. The Bank certainly would not lend upon any but gilt-edged securities during a time of stress, and if their customers then made a call upon them those companies which held second-rate investments would have to close their doors, as they could not obtain assistance from any other source. A strong list of securities is, therefore, essential to every bank that is anxious to protect its customers against disaster.
These three assets (cash in hand and at the Bank of England, money at call and notice, and investments) constitute a bank's so-called liquid assets. The ratio of total liquid assets to liabilities maintained by the best English banks ranges from 43 to 78 per cent. The last-named figures, which are quite exceptional in their strength, were published by Stuckey's Banking Company. The remainder of a bank's resources is employed in making advances and loans, and in discounting bills for its clients, whilst a small proportion is locked up in premises.
We can now form some idea as to what the short loan fund of the London money market really is. Immense sums are collected at the head offices of the banks in London through their metropolitan and provincial branches; and, as the demands of trade are always uncertain—now brisk, then slack—it is impossible for them to invest all their surplus capital in securities; consequently, a certain portion of it finds remunerative employment in this channel.
A huge stream of credit is constantly circulating through the three kingdoms, and London, so to speak, is the heart of the system. In years of active or good trade this stream increases in volume, and during years of depression it contracts; yet it is difficult to say whether or not the resources of the banks (the floating capital of the country) are appreciably lessened during a period of temporary depression, although the national turnover unquestionably is, as may be seen by the Clearing House returns. During years of rising prices and increasing trade activity profits are augmented, and, consequently, the resources of the banks are swollen; but when the profits are invested within the country, a similar amount of credit is returned to the banks by those who have sold their securities, and though less capital is created when trade is dull, it is questionable whether the resources of the banks then shrink very greatly, unless foreign securities are largely purchased.
We have seen that this stream of credit flows to London, and as demand throughout the country is not sufficiently strong to attract it all back again, a large fund of loanable capital accumulates in the hands of the London banks, and flows from them to the bill brokers, who employ it in discounting bills of exchange. But though by far the greater part of the London short loan fund is accumulated in this manner by the banks, other firms and companies also discharge their surplus capital into it. The pool, of course, is not a stagnant one, for capital is constantly flowing in and out.