due; that it can refill its reserve by the payment of those bills; that it can sell stock or other securities,
and so replenish its reserve still further. But in this form the notion scarcely merits serious refutation.
If the Bank reserve has once become low, there are, in a panic, no means of raising it again. Money
parted with at such a time is very hard to get back; those who have taken it will not let it gonot, at
least, unless they are sure of getting other money in its place. And at such instant the recovery of
money is as hard for the Bank of England as for any one else, probably even harder. The difficulty is
this: if the Bank decline to discount, the holders of the bills previously discounted cannot pay. As
has been shown, trade in England is largely carried on with borrowed money. If you propose greatly
to reduce that amount, you will cause many failures unless you can pour in from elsewhere some
equivalent amount of new money. But in a panic there is no new money to be had; everybody who
has it clings to it, and will not part with it. Especially what has been advanced to merchants cannot
easily be recovered; they are under immense liabilities, and they will not give back a penny which
they imagine that even possibly they may need to discharge those liabilities. And bankers are in
even greater terror. In a panic they will not discount a host of new bills; they are engrossed with their
own liabilities and those of their own customers, and do not care for those of others. The notion that
the Bank of England can stop discounting in a panic, and so obtain fresh money, is a delusion. It
can stop discounting, of course, at pleasure. But if it does, it will get in no new money; its bill case
will daily be more and more packed with bills `returned unpaid.'
The sale of stock, too, by the Bank of England in the middle of a panic is impossible. The bank at
such a time is the only lender on stock, and it is only by loans from a bank that large purchases, at
such a moment, can be made. Unless the Bank of England lend, no stock will be bought. There is
not in the country any large sum of unused ready money ready to buy it. The only unused sum is the
reserve in the Banking Department of the Bank of England: if, therefore, in a panic that Department
itself attempt to sell stock, the failure would be ridiculous. It would hardly be able to sell any at all.
Probably it would not sell fifty pounds' worth. The idea that the Bank can, during a panic, replenish
its reserve in this or in any other manner when that reserve has once been allowed to become
empty, or nearly empty, is too absurd to be steadily maintained, though I fear that it is not yet wholly
abandoned.
The second and more reasonable conception of the independence of the Bank of England is,
however, this:It may be said, and it is said, that if the Bank of England stop at the beginning of a
panic, if it refuse to advance a shilling more than usual, if it begin the battle with a good banking
reserve, and do not diminish it by extra loans, the Bank of England is sure to be safe. But this form
of the opinion, though more reasonable and moderate, is not, therefore, more true. The panic of
1866 is the best instance to test it. As everyone knows, that panic began quite suddenly, on the fall
of `Overends.' Just before, the Bank had 5,812,000 l. in its reserve; in fact, it advanced 13,000,000 l.
of new money in the next few days, and its reserve went down to nothing, and the Government had
to help. But if the Bank had not made these advances, could it have kept its reserve?
Certainly it could not. It could not have retained its own deposits. A large part of these are the
deposits of bankers, and they would not consent to help the Bank of England in a policy of isolation.
They would not agree to suspend payments themselves, and permit the Bank of England to survive,
and get all their business. They would withdraw their deposits from the Bank; they would not assist it
to stand erect amid their ruin. But even if this were not so, even if the banks were willing to keep
their deposits at the Bank while it was not lending, they would soon find that they could not do it.
They are only able to keep those deposits at the Bank by the aid of the Clearing-house system, and
if a panic were to pass a certain height, that system, which rests on confidence, would be destroyed
by terror.
The common course of business is this. A B having to receive 50,000 l. from C D takes C D's
cheque on a banker crossed, as it is called, and, therefore, only payable to another banker. He pays
that cheque to his own credit with his own banker, who presents itto the banker on whom it is drawn,
and if good it is an item between them in the general clearing or settlement of the afternoon. But this
is evidently a very refined machinery, which a panic will be apt to destroy. At the first stage A B may
say to his debtor C D, `I cannot take your cheque, I must have bank-notes.' If it is a debt on
securities, he will be very apt to say this. The usual practicecredit being goodis for the creditor to
take the debtor's cheque, and to give up the securities. But if the `securities' really secure him in a
time of difficulty, he will not like to give them up, and take a bit of paper a mere cheque, which may
be paid or not paid. He will say to his debtor, `I can only give you your securities if you will give me
banknotes.' And if he does say so, the debtor must go to his bank, and draw out the 50,000 l. if he
has it. But if this were done on a large scale, the bank's `cash in house' would soon be gone; as the
Clearing-house was gradually superseded it would have to trench on its deposit at the Bank of