The most striking fact in the situation of the Bank of England is that the Bank is the center of a great system of joint-stock and private banks, whose aggregate business and liabilities are many times greater than its own, and that to this system of banks are confided the financial affairs of the city which may almost be said to be the Clearing House of the world. It is at all events true that many of the largest trades in the world make their settlement in London, and that especially the world's supply of gold there finds its natural point of distribution. From this it would follow, even if England were not herself a great lender of capital, that many of the operations of lending and paying undertaken in other countries must be

1 The limiting clause of the act of 1844 was disregarded, or, as is commonly said, "suspended," October 25, 1847, November 12, 1857, May 12, 1866, and July 31, 1914. In February, 1861, and in May and September, 1864, the condition of things was critical; and in November, 1873, the suspension of the act appeared for some days not improbable.

1 In 1877, when the bankers' deposits in the Bank of England were reported on, their maximum and minimum points were in January and May respectively, the deposit accounts standing as follows:

For this report see Parliamentary Documents, 1878, xlvi.

The position of the Bank of England, then, is not simply that of a bank whose deposits are liable to sudden fluctuations of a peculiar nature; it is also a position of great responsibility. The Bank holds in its charge that on which the solvency of the banks in general, the safety of the commercial public, and the credit of England alike depend. Its managers have sometimes professed to regard it as simply a bank carried on for the profit of its own stockholders; but so long as it holds the banking deposits it has in its hands the financial safety of the whole community and the real leadership of the money-market, and cannot escape its accountability for the manner in which it performs the duties of its position. As regards the issue of notes its duties are too plain and even mechanical to throw upon it any serious burden of this kind, but as the depository of the other banks it is in effect charged with the duty of providing in large measure for the safety of all.

Its sources of profit being the same, however, as those of other banks, the Bank of England finds its interest, as they do, in the conversion of idle cash into loans and interest-bearing securities, and in holding, therefore, no larger cash reserve than is required for safety. Acting on this reserve by raising or lowering its rate of discount, it may defer too long the diminution of its business by the raising of its rate, and may thus keep itself weak, down to the moment when it needs to be strong. And it may happen, moreover, that the reserve, being suddenly reduced by causes not to be foreseen, cannot be raised by the slow action of the rate of discount, in time to escape all the consequences of such misfortune.1 In every case of remarkable pressure which has occurred since the separation of the two departments, and in most of those which happened before the real difficulty presented will be found to have been that of meeting liabilities for deposits with a reserve which had become insufficient either from continued negligence in the past, or from the sudden possibility of demands on a great scale. Of these cases we will take as an illustration of the present topic, the critical situation of the Bank in the great commercial panic of November, 1857, a case which may fairly be regarded as typical.

There is no doubt that in England the materials for a crisis had been long in preparation. Rapid commercial expansion and a great extension of credit had brought the usual results in the form of unsound business, of speculative prices, and of extreme sensitiveness to any threatening influence. If no unusual pressure had occurred all might have passed off in a mere subsidence of activity and in general depression; but the sudden occurrence of a disastrous revulsion in the United States, bringing ruin to some and carrying apprehension to all, developed a crisis which took the whole community of Great Britain by surprise. In August the state of things was reported to be "not unsatisfactory," and no fear seems to have been felt until the middle of September, when heavy failures in New York, beginning with that of the Ohio Life Insurance and Trust Company on the 24th of August, became known in London. Still, although gold began to leave England for the continent, and the pressure in New York had caused the cessation of specie exports to England, the directors of the Bank of England seem not to have thought the difficulty serious. It was not until October 8th, when the news of the general suspension of payments in Philadelphia and Baltimore proved that something more than an ordinary embarrassment, existed, that they determined to raise their rate of discount, from the point at which it had stood since July 16th, to six per cent. At this point the condition of the Bank was disquieting. In the course of three weeks it had materially increased its loans, but was losing seriously from its reserve, so that the proportion of reserve to liabilities had changed much for the worse, at a time when general uneasiness was beginning to make the commercial public more than ever anxious to borrow, as a prudent provision for the uncertainties of the immediate future. It may fairly be said then, we believe, that a singular tardiness of action on the part of the Bank was the immediate cause of much that ensued .

1 That the Bank may lead, but cannot control the market, by changes of rate, see Bagehot's Lombard Street, p. 114.

Without following the steps by which the crisis from this point was converted into panic, we will take the state of things existing in the early days of November, when the Bank rate stood at eight per cent. At this juncture, the alarm caused by the failure of several large firms and of one or two provincial banks of some importance had intensified the demand for loans, both upon the Bank of England and the other banks in the city. The increasing disposition of the latter to strengthen their own position, in view of the possible heavy demands to which their great liabilities exposed them, not only threw much of the increased pressure for loans upon the Bank of England, but also led to a marked increase in the bankers' balances - that is, in the deposits of reserve by other banks. At the same time with this serious change in the amount and character of the liabilities, the cash resources of the Bank were falling. An active export .of specie to the United States had taken a considerable amount from the reserve, the rise of rates on the continent of Europe had made it impossible to draw specie from that quarter, and the apprehension of banks in the interior led to a serious absorption of cash by them. In short, at a time when it was called upon to extend its use of its own credit, the Bank found itself acted upon by what has been called an internal drain as well as an external one.