The foreign trade and financial operations of the leading European countries are of enormous magnitude, both absolutely and relative to the total business of those countries. Many of the great crises during the nineteenth century were precipitated, and at least in part caused, by events occurring in other parts of the world with which Europe has close financial relations. The purely domestic economic activities of old countries are comparatively stable, and seldom give occasion to inordinate speculation. Any arrangement, therefore, which succeeds both in strengthening the central bank and also in placing a restraining influence upon foreign speculative operations, is one which affords protection against the most serious weaknessthreatening the European financial world.

In times of severe financial strain the central bank plays an active dominating role. Upon it rests the responsibility for maintaining specie payments, and also in large measure for the continuance of lending facilities to the business community. This responsibility was not clearly recognized, and the policy which should be followed in such situations was not clearly understood in the latter part of the eighteenth century and the early years of the nineteenth century. In some instances, loans were restricted, with disastrous consequences not only to business but to the central banks as well. In other instances, loans were granted freely, but without that concomitant advance in the rate of discount required to influence foreign exchange rates and to drive away borrowers whose needs were not urgent.1 For the last forty years at least the policy which should be followed has been clearly understood, largely owing to Bagehot's reiterated expositions in the Economist, finally embodied in more permanent form in his Lombard Street. The policy of liberal loans though at high rates and the payment of money or notes to all who for any reason whatever may demand cash are now everywhere recognized as the guiding principles of action in emergencies. Experience in many crises show that alarm can be allayed and that the actual withdrawals of cash and also the demand for loans will not be very considerable if a central bank possesses ample means to supply cash and to grant additional credit, and manifests no hesitation in making use of its resources. In carrying out its crisis policy as to loans and cash a central bank does not require any previous agreement with other banks, but in recent years still another method of relief which does require their cooperation has been adopted in practice if not in theory. Central banks have taken the lead, as in the Baring instance in 1890, in arrangements for the conservation of the assets of large banks which are not hopelessly insolvent and by preventing sudden liquidation have confined the disturbance within narrow limits. The machinery for such united action will hardly be set in motion in the absence of some person or institution of commanding influence in whom the business community has confidence.

1 Macleod's Theory and Practice of Banking contains the best account of English banking experience during crises before 1860. See Chapters IX., XL, and XII.

The practice of making settlements between banks on the books of a central bank greatly reduces the withdrawals of cash during a crisis. Banks borrowing from the central bank take the proceeds of their loans mainly in the form of deposits since, aside from the case of a run by depositors, their requirements are chiefly for the purpose of making payments to other bariks. The mere presence of a central bank removes the danger that other banks will adopt the shortsighted policy of hoarding their reserves, since the central bank is in position to insist that each bank shall use them if it is to secure such accommodation as it may require.

From the preceding pages the reasons will be evident for the general widespread adoption of a central bank as an essential part of a well-ordered banking system. Through such institutions there is gained a high degree of certainty that a reserve of cash and lending power available for emergencies will be maintained. The use of these resources in an effective manner and without hesitation when occasion requires is also assured. The community at large is relieved from the danger of attempts at wholesale loan contraction and confidence in the ability of the banks to maintain payments at all times is established.