The banking department of the Bank of England is substantially the equivalent of an extensive banking house, with all banking functions except that of issue. It receives deposits, discounts commercial paper, loans on collateral and buys and sells exchange precisely the same as any other bank. In addition to this it acts as the banker of the government, in the management and payment of interest on the public debt, the issue and withdrawal of Exchequer bills and bonds, the issue of government loans, and all other financial operations affecting the government. Like other banks it must as a matter of ordinary prudence keep on hand a cash reserve against its liabilities. It is bound to meet all its demand liabilities in cash, consisting of notes or coin, like other banks, and if it has need for a greater quantity of notes than that on hand, it may procure them from the issue department in exchange for gold the same as any other bank.

Every deposit bank must retain constantly on hand, or within easy reach, a sum of legal tender money, equal to a safe and proper proportion of its liabilities, in order to meet unexpected demands of depositors. This is a universal rule the world over, and is based upon the supposition, which experience has shown to be generally true, that all depositors will not call for their deposits at the same time, but under disturbed conditions, an unusual number may make such demands, and the bank must at all times be in readiness to meet such calls. This reserve is the safety fund over and above the daily requirements of cash to transact the ordinary volume of business, held by the bank to meet extraordinary and infrequent demands. The banks all over England keep their reserves in London. The same reasons which induce a merchant to keep a bank account, viz., convenience, safety, etc., act as incentives to a bank to deposit its reserve in whole or in part with another bank or banker. In order to conduct exchange transactions and have facilities for rediscounting time bills, every bank and banker in the United Kingdom, not located in the metropolis, find it necessary to carry an account with some London bank or banker, and as the latter, as well as the bill brokers of Lombard Street, who are really bankers under another name, allow interest on such deposit accounts, the result is that practically all of the reserve of the country is carried in these accounts. "Owing to the fierce competition for practical profits/,"* nowhere more severe than in the field of banking, the London joint-stock and private banks maintain no coin reserve of their own, but deposit with the Bank of England all cash not needed for ordinary transactions from day to day. The Bank of England does not pay interest upon these deposit accounts but the willingness of smaller banks to place their reserves in the Bank of England is due to the fact that they are relieved of the care and risk of such large sums, and by showing their funds in their balance sheets thus deposited they command public confidence. Another reason is that the London clearing house settlements are made through the Bank of England, which practically compels the members of the clearing house to keep their reserve cash with that institution. The Scotch and Irish banks keep their surplus money in London. A portion of it is loaned out or invested in securities and the remainder deposited in the Bank of England. It will thus be seen at once that the Bank of England holds not only its own reserve, but the reserve of all London, and not only of all London but of all England, Ireland and Scotland.

♦Conant, Modern Banks of Issue, p. 130,

This great responsibility of the Bank of England makes it the basis of the credit system of the kingdom. Upon the management of the Bank of England depends the solvency or insolvency of England, for all business is dependent upon the banks, and all banks are dependent upon the one great bank, "The Old Lady of Threadneedle Street." While the Bank of England is a private corporation carried on for the benefit of its stockholders, who alone share the profits and direct its management, it is in a sense a public institution, for to it is confided the safety of the commercial public and credit of the kingdom, and it is morally bound in time of stress to sustain the entire financial fabric.

There is no law requiring the bank to maintain a stated reserve in proportion to its liabilities, and since the management is expected to earn as large dividends as possible for the stockholders, the tendency would naturally be to reduce the volume of idle cash to the lowest point consistent with safety. Like other banks, the Bank of England loans out a portion of its deposits, consisting largely of reserves of other banks, and the effect of this is to cause the reserve to be much smaller in proportion to the liabilities of all the banks than it would be were each bank to hold its own reserve. But the fact that under the English system the bank reserve is reduced to a comparatively small proportion of the liabilities is not the only objection which can be, and often is, urged against it. This reserve, all important as it is, is given over to one board of directors, and upon their wisdom its control depends. If they commit indiscretions the entire financial and commercial system may be seriously injured. Having a smaller balance to meet liabilities, any error in the management of that balance becomes proportionately serious.

The natural method would appear to be that each bank should keep its own reserve. Each would then be most anxious to keep a sufficient reserve, because its own life and existence would depend upon it. The reserve of the entire country would then be guarded and controlled by the total banking wisdom of many boards of directors, and the loss of interest occasioned by the amount of dead capital locked up in the banks as reserves, would be more than offset by the added security. In no other country than England could the one reserve system exist as it does there. The system was not, deliberately founded there, but grew up as a consequence of many events. As the system grew, confidence in the bank also grew, until the stability of the bank is beyond question and supports the system of one reserve. It is the absolute faith of the people in the stability of the Bank of England that takes the place of a large reserve.