The Reserve

The term Reserve1 is not mentioned in the return, nor is its amount separately expressed, but the elements of which it is constituted are individually furnished, so that an exact calculation is practicable. This provision is the predominant question of scrutiny by ,the financial world when each week's return is studied - the extent of this reserve or the amount of cash which the bank possesses - for on its sufficiency do-pends the solvency of the nation, as will hereafter be perceived. Let us ascertain its amount at the date of the return we are considering.

1 Reserve: derived from the Latin re, back, and servare, to keep, to save. The old French word reserve meant a store; and we have a similarly formed term in reservoir, or a place where water is kept back or stored.

Its Vital Significance

It is perhaps needless to impress again upon the reader's mind the vital significance of this Reserve. It has been pointed out that the circulation and acceptance of representative money - notes, cheques and bills of exchange - employed in the satisfaction of mutual indebtedness in commercial and financial transactions depends entirely upon the conviction that it is really representative; that gold certainly exists for which the paper currency can be exchanged; that, in short, gold forms, in reality, the medium of exchange for commodities, though, for reasons of convenience and rapidity of transfer, documents are utilised; and the sole depository of this national fund of gold, as the foundation of commerce, is the Bank of England. The notes in the banking department (referring to the return now scrutinised) amounted to £26,564,120, and as they are protected by the gold coin and bullion (and other assets) in the issue department they can properly be regarded as cash: the banking department contained, in addition, £1,654,035 of gold and silver coin. Summing these two amounts we find that the banking cash reserve then existing was £28,218,155. Now a reserve is not an absolute but a relative figure; it tells nothing definitely and conclusively in itself. A bank may hold £10,000,000 of coin in reserve and yet be less solvent than one which possessed only £1,000,000. The adequacy of the reserve (or the cash to satisfy obligations) can only be measured by comparing its amount with the liabilities for which it is intended to provide. What, then, was the extent of the liabilities the bank was required to meet at this date? These consisted of the "public deposits" of £7,639,534; the "other deposits" of £44,292,844; certain bills representing £53,309, or an aggregate of £51,985,687. A sum in proportion accordingly shows that the cash reserve of £28,218,155 amounted to 54.28 (or about 54¼) per cent of the liabilities.

Joint Stock Banks Do Not Maintain Specific Reserves

The joint stock banks do not maintain specific reserves in cash of their own as a provision for extensive and exceptional contingencies; such as a commercial crisis or general failure of credit when, in consequence of a widely spread distrust among the mercantile community in each other's solvency, the exchange of goods becomes practically reduced to an actual cash basis, which entails an abnormal demand for gold from the banks. They simply retain sufficient cash in their tills for the payment of cheques in notes or coin in the ordinary course of business - the amount of which they are able, from the experience of the past, to predict from day to day. But any cash reserve adequate for the excited and concurrent claims which have been mentioned they do not maintain. They possess sound assets, it is true, in the form of investments in Government and other approved securities, but these would not be available to discharge the clamorous calls of their customers for the cash which alone is acceptable in periods of alarm. An attempt to realise these securities in the market at such a time would be inevitably futile; none would possess the cash with which to buy; and even if a store of cash were available, none would invest in securities which, in the common apprehension and disturbance, were apparently destined to sustain a continuous fall. The banks, then, cast upon the Bank of England alone the duty of providing the total reserve for preservation of national solvency, by keeping large accounts with that bank.

The Reserve: How Affected, How Preserved

Consider now the modes in which this Reserve can bo affected, and the nature of the protective measures for ensuring its integrity, with the manner of their operation. The bank can directly increase its store of gold by purchasing the metal imported into the country in the form of bullion (or bars of uncoined substance) or of foreign gold coins which, if necessary, can be melted into pure gold free from its alloy. For these purchases the bank, of course, pays the equivalent value; as the exchanged value assumes the form of notes, the stock of gold can thus be augmented; and with any addition of gold to the account of the issue department, the banking department can hold an increased fund of notes which, as has been observed, may be treated as cash, and thus improve the cash reserve. But let it be remembered that the notes thus granted in the purchase of bullion can be presented at any moment for instant conversion into gold. Now this accumulation of gold - by reason of its constituting the sole reserve which merchants and their banks possess - is subject to every influence which governs the transference of bullion from one country to another, and equally subject to demands for gold occasioned by the varying condition of our internal trade. Any important depletion of this stock is termed a "drain."1

1 Drain: originally to draw off or away a liquid gradually, or in small quantities, by means of a conduit: hence the word drain-pipe; then the word was used to describe the act of drawing off; and is now employed figuratively for a constant or gradual withdrawal.