'Secondly. The Bank agrees, in fact, if not in name, to make limited advances on proper security to anyone who applies for it. On the present occasion 45,000,000 L. was so advanced in three months. And the Bank do not say to the mercantile community, or to the bankers, "Do not come to us again. We helped you once. But do not look upon it as a precedent. We will not help you again." On the contrary, the evident and intended implication is that under like circumstances the Bank would act again as it has now acted.'
This article was much disliked by many of the Bank directors, and especially by some whose opinion is of great authority. They thought that the 'Economist' drew 'rash deductions' from a speech which was in itself 'open to some objection—'which was, like all such speeches, defective in theoretical precision, and which was at best only the expression of an opinion by the Governor of that day, which had not been authorised by the Court of Directors, which could not bind the Bank. However the article had at least this use, that it brought out the facts. All the directors would have felt a difficulty in commenting upon, or limiting, or in differing from, a speech of a Governor from the chair. But there was no difficulty or delicacy in attacking the 'Economist.' Accordingly Mr. Hankey, one of the most experienced bank directors, not long after, took occasion to observe: 'The "Economist" newspaper has put forth what in my opinion is the most mischievous doctrine ever broached in the monetary or banking world in this country; viz, that it is the proper function of the Bank of England to keep money available at all times to supply the demands of bankers who have rendered their own assets unavailable. Until such a doctrine is repudiated by the banking interest, the difficulty of pursuing any sound principle of banking in London will be always very great. But I do not believe that such a doctrine as that bankers are justified in relying on the Bank of England to assist them in time of need is generally held by the bankers in London.
'I consider it to be the undoubted duty of the Bank of England to hold its banking deposits (reserving generally about one-third in cash) in the most available securities; and in the event of a sudden pressure in the money market, by whatever circumstance it may be caused, to bear its full share of a drain on its resources. I am ready to admit, however, that a general opinion has long prevailed that the Bank of England ought to be prepared to do much more than this, though I confess my surprise at finding an advocate for such an opinion in the "Economist." If it were practicable for the Bank to retain money unemployed to meet such an emergency, it would be a very unwise thing to do so. But I contend that it is quite impracticable, and if it were possible, it would be most inexpedient; and I can only express my regret that the Bank, from a desire to do everything in its power to afford general assistance in times of banking or commercial distress, should ever have acted in a way to encourage such an opinion. The more the conduct of the affairs of the Bank is made to assimilate to the conduct of every other well-managed bank in the United Kingdom, the better for the Bank, and the better for the community at large.'
I am scarcely a judge, but I do not think Mr. Hankey replies to the
'Economist' very conclusively.
First. He should have observed that the question is not as to what 'ought to be,' but as to what is. The 'Economist' did not say that the system of a single bank reserve was a good system, but that it was the system which existed, and which must be worked, as you could not change it.
Secondly. Mr. Hankey should have shown 'some other store of unused cash' except the reserve in the Banking Department of the Bank of England out of which advances in time of panic could be made. These advances are necessary, and must be made by someone. The 'reserves' of London bankers are not such store; they are used cash, not unused; they are part of the Bank deposits, and lent as such.
Thirdly. Mr. Hankey should have observed that we know by the published figures that the joint stock banks of London do not keep one-third, or anything like one-third, of their liabilities in 'cash' even meaning by 'cash' a deposit at the Bank of England. One-third of the deposits in joint stock banks, not to speak of the private banks, would be 30,000,000 L.; and the private deposits of the Bank of England are 18,000,000 L. According to his own statement, there is a conspicuous contrast. The joint stock banks, and the private banks, no doubt, too, keep one sort of reserve, and the Bank of England a different kind of reserve altogether. Mr. Hankey says that the two ought to be managed on the same principle; but if so, he should have said whether he would assimilate the practice of the Bank of England to that of the other banks, or that of the other banks to the practice of the Bank of England.
Fourthly. Mr. Hankey should have observed that, as has been explained, in most panics, the principal use of a 'banking reserve' is not to advance to bankers; the largest amount is almost always advanced to the mercantile public and to bill-brokers. But the point is, that by our system all extra pressure is thrown upon the Bank of England. In the worst part of the crisis of 1866, 50,000 L. 'fresh money' could not be borrowed, even on the best security—even on Consols except at the Bank of England. There was no other lender to new borrowers.
But my object now is not to revive a past controversy, but to show in what an unsatisfactory and uncertain condition that controversy has left a most important subject. Mr. Hankey's is the last explanation we have had of the policy of the Bank. He is a very experienced and attentive director, and I think expresses, more or less, the opinions of other directors. And what do we find? Setting aside and saying nothing about the remarkable speech of the Governor in 1866, which at least (according to the interpretation of the 'Economist') was clear and excellent, Mr. Hankey leaves us in doubt altogether as to what will be the policy of the Bank of England in the next panic, and as to what amount of aid the public may then expect from it. His words are too vague. No one can tell what a 'fair share' means; still less can we tell what other people at some future time will say it means. Theory suggests, and experience proves, that in a panic the holders of the ultimate Bank reserve (whether one bank or many) should lend to all that bring good securities quickly, freely, and readily. By that policy they allay a panic; by every other policy they intensify it. The public have a right to know whether the Bank of England—the holders of our ultimate bank reserve—acknowledge this duty, and are ready to perform it. But this is now very uncertain.
If we refer to history, and examine what in fact has been the conduct of the Bank directors, we find that they have acted exactly as persons of their type, character, and position might have been expected to act. They are a board of plain, sensible, prosperous English merchants; and they have both done and left undone what such a board might have been expected to do and not to do. Nobody could expect great attainments in economical science from such a board; laborious study is for the most part foreign to the habits of English merchants. Nor could we expect original views on banking, for banking is a special trade, and English merchants, as a body, have had no experience in it. A 'board' can scarcely ever make improvements, for the policy of a board is determined by the opinions of the most numerous class of its members—its average members—and these are never prepared for sudden improvements. A board of upright and sensible merchants will always act according to what it considers 'safe' principles—that is, according to the received maxims of the mercantile world then and there—and in this manner the directors of the Bank of England have acted nearly uniformly. Their strength and their weakness were curiously exemplified at the time when they had the most power. After the suspension of cash payments in 1797, the directors of the Bank of England could issue what notes they liked. There was no check; these notes could not come back upon the Bank for payment; there was a great temptation to extravagant issue, and no present penalty upon it. But the directors of the Bank withstood the temptation; they did not issue their inconvertible notes extravagantly. And the proof is, that for more than ten years after the suspension of cash payments the Bank paper was undepreciated, and circulated at no discount in comparison with gold. Though the Bank directors of that day at last fell into errors, yet on the whole they acted with singular judgment and moderation. But when, in 1810, they came to be examined as to their reasons, they gave answers that have become almost classical by their nonsense. Mr. Pearse, the Governor of the Bank, said: 'In considering this subject, with reference to the manner in which bank-notes are issued, resulting from the applications made for discounts to supply the necessary want of bank-notes, by which their issue in amount is so controlled that it can never amount to an excess, I cannot see how the amount of bank-notes issued can operate upon the price of bullion, or the state of the exchanges; and therefore I am individually of opinion that the price of bullion, or the state of the exchanges, can never be a reason for lessening the amount of bank-notes to be issued, always understanding the control which I have already described.