The Store in the Issue Department.

We next have to consider the amount of gold coin and bullion in the Issue Department—to wit, £33,617,330, and we must remember that this accumulation is the national store, that the cash reserves of all the banks in England, Scotland, and Ireland are dependent thereupon, and that, consequently, the solvency of the nation is decided thereby.

The indebtedness of the English, Scotch, and Irish Banks to the public at December, 1901, as shown by their balance sheets, upon current accounts, deposit receipts, and notes in circulation, amounted to nearly £910,000,000. The liabilities of the Bank of England and of those private bankers who publish balance sheets are included in this huge total.

This £910,000,000 may be called the "floating capital" of the country. It is deposited or left with the banks, who invest a certain proportion of it in securities, in short loans to the bill brokers and stockbrokers, in making advances and loans to their customers, and in discounting bills for them; and, as the said millions are left at either call or short notice, the banks also have to maintain a sufficient supply of legal tender to meet all probable demands upon this immense debt. It is with this "floating capital" that the present chapter is principally concerned.

Stored in their strong rooms the banks keep sufficient legal tender (Bank of England notes and specie) with which to conduct their business. The sum thus held may be called their "till money"; and it probably would not exceed five per cent. of the £910,000,000 in question—viz.: £45,500,000. A large part of this till money is, however, held in Bank of England notes, which are warrants for gold upon the store in the Issue Department, but as creditors cannot refuse the notes they are quite as valuable to a banker as gold. All a banker has to consider is whether he has a sufficient supply of legal tender to discharge his public indebtedness; and if he have, he need take no thought for the morrow.

Deducting £45,500,000 from £910,000,000, we get £864,500,000. Though this is an accumulation of credit in the books of the banks rather than of cash, their customers can demand the equivalent from them in legal tender; yet we see that, were the banks drained of £45,500,000, they would then be entirely dependent upon their reserves at the Bank of England.

The reserves are included in Other Deposits, £42,695,526; and seeing the magnitude of the amount it seems a pity that the Bank of England does not tell us each week what portion of this total belongs to the other banks. Further, the Bank of England employs these balances in its own business; and, though it generally maintains a very large ratio per cent. of reserve to liabilities, the fact remains that a certain proportion of the cash reserves of our banks is lent out to the public—a somewhat startling position at first sight. The banks accumulate a reserve against those dangers from which their business is never free, and the Bank of England advances some of it to its own customers! Apparently, what could be more absurd? But in finance things are so often not what they seem.

We now come to the store of gold coin and bullion in the Issue Department—£33,617,330. A certain proportion of this must be retained in order to secure the convertibility of the notes of the Bank, and the remainder may perhaps be called the national store or accumulation. The banks of the United Kingdom are indebted, roughly speaking, to the public to the extent of £910,000,000. But we have seen that, say, £45,500,000 of this sum is secured by legal tender in hand, so the unsecured portion amounts to £864,500,000. Our position, then, stands as under:—

As a matter of fact, we are looking on the bright side of the picture, for seeing that a large amount in Bank notes would be held among the £45,500,000 deducted, it follows that the store in the Issue Department might be appreciably reduced were a considerable number of these notes presented for payment; and then again, the indebtedness of those private bankers who do not publish balance sheets has been omitted. Suppose we say that the banks hold £35,500,000 in specie. This, added to the store at the Bank, gives us £71,300,000. Then our banks owe £910,000,000; but there is only £71,000,000 of specie in their possession with which to pay their huge debt. On the other hand, many of the banks do not hold nearly five per cent. of their liabilities to the public in legal tender on their premises; and, were the truth known, it is more than probable that in some instances three-and-a-half to four-and-a-half per cent. would be nearer the mark.

England, after all, is only a gigantic workshop, and so long as her shops are busy there is no danger. But have those people who live on incomes invested solely in British securities ever reflected that, were there no work for her shops, this system of credit would collapse like a castle of cards, when their incomes would be gone? Our solvency as a nation depends absolutely upon the skill and ability displayed by British manufacturers, and upon the muscles and intelligence of their workmen. Given a high standard of efficiency and adaptability on the part of our producers, then trade flows to this country, and by trade alone can we support our credit and pay our debts. Small wonder, then, that thoughtful people are becoming alarmed at the apotheosis of Games in this country, and at the large number of idlers who do not take a part in production, but are dependent upon the interest received from investments, which can only be productive so long as our commerce is flourishing.

The capital of this country has been computed by a competent authority at about £10,500,000,000, but doubtless these figures are very wide of the mark. Still, the amount of fixed capital invested in the country must be immense. By "fixed" capital, as distinguished from the floating or loanable capital deposited with the banks and kindred institutions, those investments of a more permanent character are implied. A depositor can demand his money back from his banker, but bank shares he would have to sell on the Stock Exchange—therefore the one is "floating" and the other "fixed" capital. It is the same with Consols, railway shares, and with the shares of all companies in which there is a market. When there is not a market, then the capital is fixed indeed; and there would not even be a market for Consols were the Bank of England drained of its gold. Moreover, during normal times the demand for loanable capital at the banks will help to determine the price an investor will receive should he desire to sell any of his fixed investments.

It consequently amounts to this: The fixed capital of the country cannot be converted or sold unless the banks maintain large cash reserves; so we may truthfully assert that about £10,000,000,000 of capital is erected on a basis of about £71,000,000 of cash. This cash, in its turn, can only be kept in the country while our workshops are busy; therefore it at once becomes apparent that the national aim should be to increase our trade, for the yield, and consequently the value, of British securities is bound to either increase or diminish in proportion as the trade of the country is either flourishing or the reverse. Even the Government can only meet the interest on Consols while the people are in a position to pay their taxes.

Such a statement may come as a shock to those persons who are accustomed to draw their dividends each half-year or year, and to imagine that unless the world came to an end these dividends could not cease; but they would cease were this country to fall hopelessly behind in the race for trade. This is not the old Socialist maxim that "Labour supports the world" put into a new print dress. It is evident that the fixed capital of this country, as represented by stocks and shares, would be mere waste paper unless the banks held sufficient gold to ensure a market for them: and as this gold cannot be kept in the country unless our workshops are able to compete successfully with those of other nations, it follows that the position of those persons who draw incomes from British securities is entirely dependent upon the brains and abilities of the men who direct our industries. How important, then, that the very best talent the nation possesses should be used in trade; and what folly it is on the part of those so-called "superior" persons to sneer at the trader—at him who, without doubt, enables them to draw their incomes regularly!

There was a time when capital, broadly speaking, could only be obtained in London; but since then population has increased all the world over, and as capital is only the savings of labour, it naturally follows that it can now be obtained abroad, and that London is less necessary to the foreign borrower; and, as the world fills up, it must surely become less and less necessary. Yet our gilded youth affects to despise trade. This is somewhat absurd, when it is trade that enables him to live in idleness; and British pride, unless it recognises this fact, may have a bad fall.

The banks of the United Kingdom, roughly speaking, are indebted to the public to the extent of £910,000,000. They only keep till-money in their safes, and are dependent upon the store in the Issue Department of the Bank of England for their reserves of cash. In other words, this £33,000,000 of specie is the foundation stone upon which £910,000,000 of credit rests. It has already been shown in what relation the fixed capital of the country stands to this fund.

The smaller of the provincial banking companies keep their cash reserves with their London agents, who also place their reserves with the Bank of England. Consequently, as the agents include the reserves of these banks with their own deposits, they, like the Bank of England in relation to the bankers' balances, lend out a percentage of the reserves of the smaller banks. It follows, therefore, that the bankers' balances in the hands of the Bank are smaller than would be the case if each bank kept its reserve with it. The London agents are dependent upon the Bank, and the smaller banks upon the agents.

As the store in the Issue Department is the only large collection of specie and bullion in the three kingdoms, and as the amount therein is always extremely small when compared with the huge liabilities which, under certain conditions, it might be asked to liquidate, any considerable depletion of this store makes the owners of large bank balances nervous; for if the Bank of England cannot pay the bankers, then their bankers will not be able to pay them.

Again, the liabilities of the banks are so immense in comparison with their reserves that a very small diminution of the fund in the Issue Department makes owners of capital anxious, whilst a serious drain would probably create a panic; and unless means were devised to allay the panic, it might develop into a revolution; for we are very commercial in these days, and are beginning to realise that mere glory may be bought too dearly. Commercialism, however, is not exactly a fascinating virtue.

We are constantly being told that the money market is an extremely sensitive organisation. And no wonder! The banks owe hundreds of millions on demand and short notice. Considerably over eighty per cent. of these millions is invested and lent, and as the banks' reserves of gold are small, every sudden demand for large supplies of the precious metals is liable to disorganise the market; and the Bank, which holds the final reserve, is therefore compelled to raise its rate of discount in order to protect the bullion in its Issue Department.

But for this very reason capital may generally be borrowed more cheaply in London than elsewhere; and though cash is perhaps dangerously economised, credit is proportionately the more easily obtainable, and the price of a loan is cheaper than would be the case were the banks to maintain a higher ratio of cash to liabilities. They would then have less to lend, and in times when trade was brisk demand would drive up the rate of interest to higher figures than those which prevail under our present system, and reduce the profits of borrowers. The average rate, too, would be greater.

The dangers of our system are very apparent, but so are its advantages; and though we consider it pays us to take the risks, it is evident that we cannot afford to neglect the necessary precautions.