"Drains" And Their Causes

Some of the causes which extract the Bank's gold are periodic in their nature, and occur and recur with approximate regularity of incidence and amount; prediction in these cases is obviously possible, and adequate measures are thus competent of adoption in proper time. Other causes are uncertain, and of an exceptional character where, frequently, accurate foresight is impracticable; every grave malady, however, is heralded by premonitory signs or symptoms by which its full advent can, to an extent, be foretold, and preparations for its abatement arranged.

In the autumn of each year, about the beginning of October - as an example of a periodic drain - a reduction of the Reserve is caused by the requirements of the season for capital to be employed in purchasing the products of the harvest, the payment of agricultural wages during the summer, and the money already expended in holidays and travels which has diminished the store of ready cash. [It will be borne in mind that cheques and notes paid, for example, for Continental trips during the summer may pass through many banks and persons before they are finally presented for discharge in cash.] These recurrent drains, though they may produce inconvenience for the time, through temporary reduction of the extent of loanable capital and a consequent rise in the rate of discount, do not possess a permanent effect upon the amount of money available for advances. The wages paid in cash to the labourers, for example, pass to the small shopkeepers for goods; they are then transferred into the keeping of the local bankers; thence are remitted to their banking agents in London; and, finally, after the retention of a proportion for the daily cashing of cheques, find their way into the Bank of England Reserve as part of the balances which the joint stock banks deposit with that central body. The drained-off water, so to speak, reflows to its spring.

The general quarterly payment of salaries, rents, bills and the dividends upon Government Securities at the beginning of October concur with the preceding demand upon the bank's metallic resources, and it is evident that if these claims were coincident with any considerable requirements for gold abroad, the dimensions of the combined efflux of gold may sometimes amount to the extent of a panic.

In the demand for agricultural wages and other disbursements in the autumn it is the country banks of the different districts which first feel the strain: the replenishment of their resources is obtained from their banking agents in London, and these in turn restore their diminished stock by drafts on the Bank of England. Thus in every financial derangement and difficulty the citadel of the nation's solvency sustains the shock.

"Drains" From Domestic Causes

We may roughly discriminate the domestic causes which effect a reduction in the Reserve, from those which are of a foreign origin. The former comprise such events as extensive speculation in trade, commercial distress, banking panics, and deficient harvests. The inferiority of harvests necessarily means a loss of wealth which might have been employed in the purchase of goods of every description, and the consequent increase of trade: the money sunk in the buying of seed and manures, the wages spent in the labour of agriculture, and the anticipated profits have thus been largely wasted. Hence money has become less plentiful, and money, instead of being accumulated, must be expended in importing a larger supply of wheat from abroad for the consuming needs of the entire country. And the bank's Reserve must suffer. A brief history of the recurrent course of trade from a sound beginning to a calamitous close, with the involved effect upon the prices of securities, will be furnished on a later page.

"Drains" Of Foreign Origin

A reference cannot be omitted to the more significant and less predictable outflows of gold which are associated with the foreign exchanges. Reverting first, however, to the distinction between domestic and foreign causes of an abstraction of gold, it may be mentioned that money may be required abroad for the probable prosecution of war, and the necessary preparation and equipment; for the purpose of restoring commercial confidence and the relief of distress in foreign countries produced by excessive local speculation and over-trading: or a drain may assume the form of floating foreign speculative undertakings or legitimate loans in the English market, in which British capitalists may invest. For human nature, whatever be the race or clime, is fundamentally one, subject to the excited vicissitudes of feeling and recurrent hallucinations which find expression in actions fraught with disaster and misery to every section of the community. Withdrawals of gold obviously cannot be effected without a concurrent equivalent exchange; and one process of abstraction is that of employing Bills of Exchange possessed by foreign banks and merchants and drawn upon English firms (being documents expressive of indebtedness for the purchase of foreign merchandise); discounting them here, and turning the proceeds into gold.