But this is not the view taken by the City, and those who speak on banking. They set up a different theory, if that can be called theory which is composed of affirmation only; they hold that the amount of the reserve of the Bank of England scientifically ought to, and practically does, govern the rate of discount. Why it should, they do not explain, nor will they ever be able to explain, for there is nothing to connect these two facts together, as cause and effect, but the imagination. There is always a certain mystery as to the future of a vast commerce. When, therefore, the idea has seized upon the minds of men that an outflow from the Bank is leading to a diminution of resources, and morning after morning city articles announce that so much gold has left the Bank, a vague unreasoning alarm springs up which hastens the fulfilment of the disaster it apprehends. Hard times are fancied to be approaching, and lenders take advantage of the feeling, and make difficulties, and exact harder terms - and they obtain them, because the frightened trading public thinks it natural that it should pay more. That the Directors of the Bank of England should deliberately determine at what point the Bank begins to be in real danger of not being able to find gold demanded is conceivable, though I do not believe that for many long years they ever did anything of the kind. But that, when on every conceivable supposition, the limit of danger has long been left behind - when the proportion of reserve to liabilities has reached some preposterously high figures - that in such a case the loss of a million or two of gold, of itself alone, independently of what the cause may be which has generated it, should produce any effect on discount, and justify an increase of the interest demanded, is a hopelessly inexplicable and irrational proposition. It has not the slightest pretension to science or knowledge. It is an easy and profitable belief for bankers; traders are taught to believe that it is a natural law; they are victimised by their own fault, because they do not choose to think and reason.
Let us look at a fact which may teach us much. The tendency of imports to exceed exports in England is most marked and ever increasing. This cannot be the result of ordinary trade, for that is always an exchange of equal goods, though at a particular moment one of the parties may not have given his share, and for the time disturbs the equality by passing into debt, by taking and not giving. The excess of imports manifestly is the consequence of England occupying a permanent position of creditor towards many countries. Loans granted to foreign countries in every form and fortunes owned abroad for which the interest is regularly sent home cause England to receive more than she gives away. Now this excess of imports may assume one of two forms: it may be sent to England in gold or in goods. If it comes in goods the national wealth is increased; there is more to spend as income, or to employ as capital in industry. If it comes in gold, it travels straight to the cellar of the Bank. Is it not obvious to the most uneducated understanding that to import this excess over exports in goods is to make England richer, to import it in gold is absolutely the same thing as to give England nothing, for gold in a vault, if not serving a positively useful purpose, is no better than a heap of pebbles. But it does serve a useful purpose, it may be said, it makes the bank stronger; but what is this but to say that banking is the warehousing of gold and nothing more? The action of human life thinks differently; the imports are sent in goods. England asks for and gets wealth, not machinery for moving it, whether in coin or in banks, whatever those who preach the doctrine that to import gold would cheapen discount, may desire. And do they never perceive that the way to cheapen discount is to increase goods? for as no one borrows of a bank but to buy goods, and no one deposits at a bank but in consequence of his having more goods than he can use and having sold them, a larger stock of goods is an increased supply of the things demanded through banking, and necessarily and inevitably leads to easier terms for lending them.
The reverse happens when there is a diminution of goods, of the national stock of wealth. Thus a bad harvest in England compels heavy purchases of corn in America, and at first is invariably attended by a large export of gold from the Bank. The rate of discount rises. See the consequences of gold diminishing, cries the City, but the cry is the utterance of ignorance. The bad weather has destroyed a large quantity of English capital. The food, clothes, materials, expended on the farming of the year have not been reproduced in corn. That corn must be purchased a second time from the Americans, be paid for twice over with British wealth. The cost of producing the corn which never ripened has been a vast destruction of capital; it was not replaced at the harvest, and consequently those who borrow capital find less in the loan market, and have to pay more to procure it. The departure of the gold, instead of being the cause, is actually a very important diminution of the evil. If the gold were not sent away, the full value of the corn brought would have to be sent away in goods, in capital, and the rate of interest would be still higher. The City may mourn over the loss of the gold and ascribe the pressure to the disappearance of their beloved treasure; they little know that its retention would have added one or two per cent to the bank-rate in the very teeth of a larger reserve.
The law is universal. Gold cannot be placed in the reserve of the Bank of England or of any other bank, except at the cost of diminishing the other wealth of the country. A million of additional gold at the Bank means always, and under all circumstances, a million less of other property, of goods, in the country; and consequently an increase of the Bank's reserve is always a distinct loss of wealth and of capital, unless it can be shown that that gold serves a useful purpose which more than compensates for the diminution of wealth. The safety of the Bank is such a useful purpose, and none other can be named, but to say that the Bank is in peril because its reserve is accounted low, or a million or two has gone away, much more a few hundreds of thousands, is senseless talk, unless the probability or even possibility of the Bank coming to a stoppage be shown.