The important matter for a banker to study is not the movements up or down of his reserve, regarded as isolated facts, but the forces which are acting on that reserve, if he desires to learn the present state and the future prospects of the banking world. It is not the figure at which the reserve stands which will instruct him, but the causes telling on his receipts and his loans. Banking is substantially the conversion of receipts into loans: what his receipts are and are likely to be, what loans he may safely make, and what is his position as to the repayment of loans already made, -this inquiry will disclose to the banker where he stands. When banking effects the exchanges of more than one hundred millions of pounds worth of property in a single week in a single locality by means of loans on paper, it is perfectly idle to affirm that its operations, its danger or safety, its abundance or poverty, turn upon the presence or the absence of a million or two of gold in the vaults of the Bank of England. Granted, if there is a run on the bank from any cause, the presence of a spare million acquires immense importance, as lately happened to the Bank of San Francisco - and I freely admit that to the extent of the gold being actually wanted to face a run, not a word is to be said against the policy of a reserve. To that extent a reserve ought ever to be maintained: it is gold really at work, just as the coin in a shopkeeper's till to give change to his customers. And if the language of City articles, and Economical journals means strictly this - that there is a danger of a run on the bank, and that the bank may come to a stoppage for want of gold - then it is rational and logical, and open to no objection except on the score of the fact observed being otherwise. But that is notoriously what the oracles of the money market do not mean. They mean that the increase or diminution of gold in the Bank of England is and ought to be the regulator of the rate of interest, not because the safety of the Bank is imperilled, and it may have to stop payment - (that is too ridiculous to write, if the Bank's debtors are sound and its property uninjured) - but because of confidence, or the necessity of having some rule, even if it be one of thumb, or any other unscientific and arbitrary reason. The vital matters for a bank are always the state of its depositors and the state of its borrowers. Are deposits likely to increase or fall off, are profits or losses going on in the nation which will act on these deposits, are the bank's loans and advances safe, or have they been granted to persons who have injured or destroyed the property which they bought with them? If the banker's borrowers are good men, still will they repay the loans as fast as his depositors may be drawing cheques on the bank? These are the issues of life or death to a banker, and not whether his reserve is a little stronger or a little weaker. The state of the gold, of itself alone, can give no answer to these questions. The answer must come from the forces acting on the two principals of the banker.
Recently, in June 1875, the money market of London was on the very brink of a real panic. The great Joint Stock Banks of the City discovered that they had made losses that were roughly estimated at half a million, for one of them alone. Soon after the reality of the disorder was disclosed by dividends halved from their usual rates, and by enormous sums set down to the loss account. Was it deficiency of gold at the Bank of England that brought upon these banks such harm and such danger? Quite the contrary - the reserve at the bank was exceptionally high - upwards of ten millions - in a few days it grew to beyond thirteen. The real cause was a banking cause, not the dead uselessness of the idle gold. The disaster lay in bills, in the banking carried on by the bankers in the department entirely under their control - in the lending out of their deposits. They had discounted a large mass of worthless, and, it was alleged, dishonest bills. In other words, their banking had been bad. They had received from depositors a power of buying which they had transferred to unsound borrowers. These borrowers had with this power purchased property, and then wasted or lost it, and could not repay these loans to the banks, when the banks had to repay their depositors. What had gold at the Bank of England, be it much or little, to do with this disturbance, with its cause or its cure? The gold was in large supply - it went on increasing as the ruinous facts were discovered, and the money market was in great terror - interest instead of rising fell - but the banks lost huge sums. They paid away their dividends to their depositors instead of to their shareholders - and so ended the matter. The state of the reserve never came into account at all.
It is hard, no doubt, to investigate so vast a field as the commercial life of a nation whose transactions cover the whole globe, but on no other tenure is safe banking possible. If the banks of England are acted upon by receipts and withdrawals generated by trading events which may happen in "China or Peru," the bankers must study what is passing abroad in reference to their business, or they must abandon it to mere chance. The gold, by itself, will explain nothing; it will not tell whether they are safe or in danger.
One conclusion to be drawn from these considerations is that the tendency of a reserve to increase or diminish is of far greater importance to study than its actual figures. The anxious question always is how far the diminution will extend, to what lengths the demands of depositors for repayment and the failures of borrowers to meet their engagements will proceed. The object to be discovered is not how much currency is moving about - that may vary exceedingly without having any importance for banking. For instance, the circulation is always much larger in summer than in winter; more is wanted for the harvest and for travelling; but will anyone Venture to say that banks are not so safe in summer as in winter, or that this is a reason why the rate of interest should be higher at one period than at the other? Has any sane man ever put his name to such nonsense, however much the fact itself may have been put forward by City articles? The causes which act on banks relate to capital exclusively, to the influences increasing or diminishing wealth. Banking is an agency between lenders and borrowers of wealth.