But what is to be done when a crisis is on? How is it to be alleviated? The settlement of losses cannot be avoided; they have been incurred, and they must be endured by those upon whom they necessarily fall. But that which is the specific calamity of a crisis, the panic, the suspicion, the alarm and its wild consequences, may undoubtedly be lessened. The great object is to prevent frightened people from rushing to demand payment of their debts from banks and commercial houses, to build up rational confidence when no specific cause for distrust can be shown, to leave banks in possession of resources of supreme value at such an hour for the maintenance of discount to commerce. It must be said, however, that Mr Hubbard declared in the House of Commons, that no firm, capable of giving security, ever failed to get accommodation in a crisis; and let those who are ever talking of the state of the gold think much about this declaration. The greatest force that can be brought to bear at such a moment is an institution like the Bank of England, whose excellent banking bestows on it unassailable credit. Men of banking experience urge the Bank in crises to lend freely; that it does lend thus freely, the enormous loans in 1866, amounting to thirty-three millions, amply testify. But still more is demanded in this direction, and there is some reason for thinking that the requirement is well founded. It is remarkable that in the teeth of a heavy increase of its liabilities there is always a well-defined tendency in crises for deposits to augment at the Bank of England. They are removed from suspected banks, and the suspension of mercantile operations leads traders to place their funds in its keeping for a while. The limit of the Bank's lendings, of course, must ultimately be left to the judgment of its managers; it is for them to estimate the extent to which their depositors may draw upon them. A saviour for them and the money market is always supposed to be in reserve in the suspension of the Bank Charter act; but that has been shown above to be a fallacy.
A practice adopted in the crisis of 1873 in the money market of New York suggests a resource which might be available in England, if necessity should call for something exceptional. The banks associated themselves together, and the association certified cheques- that is, they gave a collective guarantee for the ultimate payment for cheques which they refused in the crisis to pay when presented. Creditors thus obtained complete security against ultimate loss, and an immense amount of vague alarm was calmed down. These certified cheques passed extensively as money - no one doubted their solvency; the holders could use them in effecting payments and purchases. Such a practice could not be directly imitated in London, as the law declares the refusal to pay a cheque to be an act of insolvency, but a variation of form might secure the substance of the relief for the money market of London. The Bank of England might issue certificates, either bearing interest or not, payable at a deferred period more or less long. These certificates would differ from bank-notes in this important peculiarity, that, unlike bank-notes, they could not be returned to the Bank at once and drawn against; they would remain out necessarily in circulation, which bank-notes, as the history of suspensions shows, refuse to do. They would not circulate amongst the general public, but be purely commercial paper. Multitudes of creditors, especially those whose sole motive for claiming payment was suspicion and alarm, would be satisfied with the assurance furnished by these certificates that their claims were safe; they would retire from the frightened crowd that was keeping up the crisis. On the other hand, the Bank would not issue such documents unless perfectly assured of its own safety by the protection of thoroughly sound security. Property is often unsaleable in the day of crisis which a fortnight later recovers all its value. The Bank would escape the danger of sudden demands of its liabilities- for these would have a deferred date of payment stipulated. It would bestow help by means of pledges, which in reality would seldom or never be exacted. It is reasonable to believe that effectual aid against pure alarm and suspicion might be derived from such a proceeding.
But what shall be said of gold? Is not that the resource on which a panic-struck market must ultimately rely for salvation? In the first place, the sole motive for a reserve of gold in banking is the danger of deposits being drawn out faster than the loans granted by the bank return back to its till; and thus it might come to a stoppage, though perfectly sound and solvent. Under this general law the Bank of England falls like every other bank; but does it appear that the Bank in any crisis ever ran a true and real risk of stoppage from the absence of an insufficient reserve of gold? The nearest approach to such a danger occurred in 1825. There was a run on the Bank by depositors. For gold? In no way. The run was to procure the notes of the Bank itself by men who trusted the Bank perfectly, but, in the then knowledge of banking, feared that the Bank would lend those bank-notes to other people, and would not have them ready when these notes were wanted to face the engagements of themselves, the depositors. The Bank was saved from declaring that it had no ready-money by the discovery of a million of unburnt one-pound notes. Evidently then paper sufficed as a reserve - the credit of the Bank was perfect, and that was enough. Mr Bagehot, the advocate of a large reserve, distinctly admits in" Lombard Street" that the panic of 1825 was stopped with notes. This admission, by itself alone - for it was made of the greatest run on the Bank - overthrows his doctrine of the necessity of a large reserve of gold. The same lesson is taught by the oft-repeated reference to the suspensions of the Bank Act. Mr Bagehot incessantly dwells on the assistance received by the Bank from these suspensions. He contends that the Bank would have failed without them. He forgets that the immediate effect of these suspensions, as I have shown, was absolutely nil. He forgets too, that in 1825, as he confesses, the Bank did not fail, and there was no gold to help it. But even supposing that these suspensions had saved the Bank, would it have been by pouring into it streams of gold? Just the very contrary. The suspension gave leave to the Bank to issue more paper without gold, and the salvation would have come from the Bank's own notes, its own credit, the willingness of the public to trust it, but not from an additional ounce of gold. Yet the saving power of these suspensions is appealed to by a writer whose one cry is that the Bank ought to pile up a huge reserve of gold. These are crushing proofs that much gold is not needed for the Bank's safety. Nay, when there is gold in the Bank, the crisis cannot draw it out - the gold remains, in the worst of the agony, a reserve, an unused reserve still. It is not lent - plainly because the public does not want it. Borrowers of tens of thousands do not take them out in gold, even in a panic. The Bank's own paper suffices. In 1866, as we have seen, the Bank's loans rose in a fortnight from eighteen to thirty-three millions, yet the gold sank only two millions. But these facts, in the present state of the City's knowledge, do not attract a moment's notice.