New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1873-10-10

holds vast amount OF money, belonging 10 otnor
people, on running account and deposit. The safety
of the bank consists its ability to meet its prom
Uses. The condition of this ability Is a sufficient
supply of the legal tender Of the country. whatever
that legal tender may be- But the amount of legal
tender held by the banks, as Mr. Bagehot shows'H
remarkably small. No bank in Lombard Street
holds any considerable sum in cash, legal tender,
but the Bank of England. In $780, with deposits OF
f27OOOOO0 that bank had cash reserve Of Slloco,-
coo n little more than one-thrd Of the amount Bat
this ia great deal if compared with the position of
other banks No other bank holds any considerable
amount of cash beyond what is wanted for daily
purposes All London banks keep their principal
reserve on deposit with tho Bank OF England But
those who keep immense sums with banker gam
convenience at the risk of danger. They lose
them if the bank fails AS all other bankers Keep
their reserve at the Bank of England, if that fails
they fail. They are dependent on tho Bank OF
England at a crisis for the spare money they keep
to meet that crisis. The of the Bank OF IN
gland, accordingly,-some f1O,OOo,OCo on an aver
age-is all that is held against the Liabilities Of Lom
bard Street. If this were the whole, one might well
be amazed at the immense amount Of debts payable
on demand and the smaluess Of the sum that ID
kept TO pay them if demanded. Bat there Is more 10
come. Lombard Street is not only place required
to keep reserve, but a place where reserves are
kept All country bankers keep their reserve IN
London. The habit of Scotch and ltlsh bankers ~
much the same With the exception OF the cash
minimum necessary to transact the home business
they send the money to London, invest part OF IL
in securities and keep the rest with the London
bopkers Hence the reserve Of the Bank Of England
is the reserve of all London, ana not only OF all
London. hut Of oil England, Ireland, and Scotland
too.
The liability of the Bank Of England is stil further
increased by large amount of foreign deposits
But this foreign deposit is of peculiar and delicate
nature 1t depends on the good opinion Of foreign
ers and that may suddenly change. After the panic
Of 1866, large amount of foreign money was with
| drawn from London. In proportion as the cash
deposits of foreigners increased the chances Of
| a run upon England are multiplied. III that
should take place, the bullion to meet 1t
must be taken from the bank. In consequence,
the whole credit system depends on the Bank OF
England for its security Whether England shall DO
solvent OF insolyent depends on the wisdom Of the
| directors of that one joint stock company. Every
/ merchant depends on some bank, a1d every bank
! depends on the Bank of England. II merchant
have 10000 at his bankers, and wants to pay 1t I'D
| Germany he cannot do so unless his banker can pay
! him, and the banker will not be able to pay II the
! Bank of England should be in difficulty and cannot
| produce his reserve.
! If the evil day should suddenly come, and hnan-
cial circles are struck with panic Mr. Bagohot IN
derakes to show that free disbursement is the best
| policy A panic, he aflrns, is species OF nenra-
ea and according To the rules Of science, must not
! he starved The holders of the cash reserve must
be ready not only keep it for their own Liabilities,
bnt TO advance it freely for the liabilities Of others
They must lend to this man and that man, whenever
the security is good In wild periods of alarm, one
! failure makes many. The best way to prevent tho
deryative failures is to arrest the primary failure
! which causes them. panic at first is only kind
! of vague conversation. A hundred people ara
| talked about Is Smith good as he used 10 be
Has not Brown lost money! Is Jones ~ hrm on MS
feet as fornerlyi Every day, the panic grows
this floating suspicion becomes more intense, and
! snreads more wildly. 1t attacks more persons, ana
| is more yirulent than at first. All men of expert
cnce therefore try 10 strengthen themselves IN tho
F, early stage of a panic. They borrow money while
! they can. They offer notes for discount which IN
common circumstances they would not have offered
for weeks 10 come If the merchant is regular
customer the bank does not like to refuse because
il NAV be said to be III want of money, and 50 may
attract the panic to itself The panic of 1926 was
stopped by the liberal course of the Bank of En-
gland. I'VE lent money" says one of its officers,
"by every possible means, and in modes never
adopted before we took in stock on security; we
| purchased Exchequer bills; we made advances on
| Excheouer bills; we not only discounted outright,
but we made advances on the deposit of bills Of ex-
change to an immense amount; in short, by every
possible means consistent with the safety of the
Bank. and we were not on some occasions over nice
Seeing the dreadful state in which the public were
we rendered every assistance in our power" THIS
| treatment produced the desired effect After day
or two the entire panic subsidized, and the City
| quite calm.
The problem of managing panic, Mr.. Bagchot
| suggests must not be thought of as mainly bank
ing problem. 1t is primarily mercantile one. Al
merchants are under liabilities; they have notes
which will soon fall due; and they can only pay
them by dlscountiug tho paper of other merchants.
In other words, all merchants are dependent on Dor
rowing money, and largo merchants dependent
! on borrowing much money. At the slightest symp
| tom of panic many merchants want TO borrow more
than usual if the bankers crafty them. they must
largely lend when they least like it, if they do not
| crafty them, there is panic.
| At first sight there seems here TO be great in
consistency. First, You establish reserve in some
! bank. You make of it kind Of ultimate treasury
IN which the last shilling Of the country il kept.
You then go say that this final treasury IL also
the last lendinghou by which immense advances
are to be made when no one else lends. This seems
like saying first. that the reserve should be kept,
and then that it should not be kept. But there II
no puzzle in the matter. The ultimate banking re-
serve Of country is not kept for show, but for
tain essential purposes. One of those purposes ~
the meeting a demand for cash caused by alarm.
Hence il is not unreasonable that ultimate treas
are in certain cases should be lent. 1t lie kept for
that very purpose.
The fact Of the matter is plainly this An alarm
is an opinion that the money of certain persons Will
not pay their creditors when they want to be paid