CHAPTER IV.

CASH RESERVES.

THE first time the reserves of the banks were brought under the public notice appears to have been in 1856, in a letter by Mr. Weguelin, the Governor of the Bank of England, to Sir George Cornewall Lewis, the Chancellor of the Exchequer. Mr. Weguelin wrote:

“If the amount of the reserve kept by the Bank of England be contrasted with the reserve kept by the joint-stock banks, a new and hitherto little considered source of danger to the credit of the country will present itself. The joint-stock banks of London, judging by their published accounts, have deposits to the amount of £30,000,000. Their capital is not more than £3,000,000, and they have on an average £31,000,000 invested in one way or another, leaving only £2,000,000 as reserve against all this mass of liabilities. It is impossible to foresee the consequences of the failure of one of these large establishments, and it is a branch of the subject which, in my opinion,

more pressingly requires the attention of Parliament than any alteration in the Banking Acts of 1844 and 1845."

This portion of Mr. Weguelin's letter does not appear to have attracted the attention it deserved, for as Mr. Bagehot observes, "the air was obscured by other matters," the discussion at that period being confined to the operation of the Bank Charter Act, 1844. Since then the importance of the matter has considerably increased, and Mr. Goschen referred to it at Leeds on the 28th Jan. last as follows:

"I come now to a point of scarcely less interest (than the suggested issue of £1 notes), and that is the reserves of the country, apart from the question of gold, and there I must give utterance to a strong conviction which I hold, that the banking reserves of the country are inadequate to the necessities of the country and are too small as compared with the gigantic liabilities which our large institutions have incurred. On that point I should wish to put a figure or two before you. They are stupendous figures. Ordinary mortals are unable to understand astronomers when they tell us the distance in miles which we are from the sun, and ordinary mortals can scarcely grasp the

hundreds of millions which enter into the transactions of our great joint-stock banks. I wish to put this argument before you that in times of crises reserves are essential, and that it is of supreme importance that all the great banks of the country, at the moment a crisis comes, should be able to afford relief to their customers rather than feel at that moment bound to curtail the facilities which they are giving. It is all very well for banks to give facilities to their customers in good times, but a customer looks to the bank for facilities when the pinch comes, and if, when the pinch comes, the bank itself is obliged to draw in its resources, to call in money, it disturbs the whole of the mercantile arrangements, and the bank is not really assisting the country, but is thwarting the best interests of the banking and trading communities. Listen to the figures. The Economist estimates the total deposits on current account held by all the banks in the United Kingdom, excluding the Bank of England, in July 1880, at from £470,000,000 to £480,000,000; and in July, 1890, at from £600,000,000 to £620,000,000, an increase in those ten years of £130,000,000. I cannot tell you, because I have not got the materials at my command, to what

extent they increased their reserve in cash in proportion to the enormous increase in their liabilities; but I can give you some indication by the published accounts of some of the largest banks. According to the Economist, again, the liabilities of eleven large banks were, in 1879, £126,000,000, while their cash in hand, or at the Bank of England, amounted to £16,200,000; in 1889 the liabilities had risen to nearly £170,000,000, during those 11 years an increase of £44,000,000, but the cash balances had risen in the same time only to £17,500,000, an increase of £1,300,000. Observe the operation-£45,000,000 increase in liabilities to depositors; increase in cash reserve to meet them £1,300,000. I hope I shall not give offence, but I say I do not consider that a perfectly satisfactory position. On further examination I find the proportion of cash to liabilities had fallen during the 10 years from 12.9 to 103, a decrease of 2.6 on 12.9, which is about one-fifth of the whole reserve. During these ten years the change is that you have only four-fifths of the reserve, instead of five-fifths you had before; and in the case of one bank the percentage of cash to liabilities had sunk from nearly 22 per cent. to 12 per cent.; and in another case, where the

percentages had fallen from 10 per cent. to a little over 6 per cent., the cash balance against the total liabilities of £9,000,000 was less than £600,000. A good deal of public attention has been called to these facts. It has been shown that while the liabilities to the public have enormously increased, the reserve has actually fallen. The reserve, let me make you clearly understand, is cash in the till or cash at the Bank of England. Some banks include cash on call, but cash on call is no reserve in the general sense so far as the community is concerned, because it means when you call in your money on call that you are embarrassing another person, while you may be relieving yourself. Let the public understand this-there is only a limited amount of money so unemployed. If everybody employs money up to the hilt there will be no unemployed money to come to the rescue in times of crisis. If you employ the money by lending it to another person you lend it to a broker. That broker cannot find the money except by going somewhere else. He goes somewhere else, and the whole in the end concentrates itself upon the Bank of England, and there is no reserve to a bank in having money on call in the sense in which I am now discussing re