CHAPTER VII.

A BANKING RESERVE.

MR. GOSCHEN referred to the question of compelling the banks to reserve a certain proportion of their deposits as follows:-"Now in America there is a limitation imposed upon private bankers which is of a very remarkable character. The national banks are obliged to hold 25 per cent. in reserve against their deposits. Those are the issuing banks, it is true, but the State has considered that it is so important that those banks shall meet all their liabilities that it has imposed an iron limit of 25 per cent., and the banks are compelled to hold 25 per cent. in reserve against their deposits. I am bound to say that I should never propose such an iron system upon the great banking institutions of this country; but I mention it to show what in a free country such as America they do. The question of the proportion of deposits to liabilities was so serious that they introduced a cast-iron system. Then there were other suggestions, that if there was an excess of deposits

and liabilities, up beyond a certain line, then that should be done which is done in some foreign lands, they should have to pay a certain tax upon the excess of their deposits. I will not say what view I hold upon such a suggestion, but in the most friendly spirit I would indicate to the banks of this country that the public have an enormous interest in the proportion of the reserve which they hold to deposits."

The iron system of America is certainly not worthy of imitation. The essential idea of a

reserve is that it can be utilised when required, and to say that a bank shall not touch a certain portion of its funds under any circumstances, is a most unreasonable lock up of its resources. Mr. Goschen will not do that. And with regard to the other suggestion it would be of little benefit to the public if banks were taxed if they did not keep a certain proportion of reserve to liabilities, unless it was made a condition that their reserves were not to become deposits in another bank. The filtering process, explained in a previous chapter, would destroy the effect of such a tax, as only a residuum of the amount received by that means would find its way to the ultimate reserve of unemployed cash.

But these two methods of securing a certain proportion of cash reserve to liabilities do not exhaust all the means of obtaining the end in view. That end, I take it, so far as the Government is chiefly concerned, is to see that such an amount of cash is kept in reserve as shall not render it again necessary for the Government to interfere with the ordinary law of the country in order to find ready money for banks who have undertaken liabilities which they are unable to discharge without such extraneous assistance: to protect itself from again being placed in the position of having to authorise a violation of the law under the threat of physical force (see Mr. Glyn's speech, p. 33).

To attain this end it would not be necessary to enquire into the nature of the respective liabilities of the banks, or to attempt to lay down a hard and fast line as to what would be a proper proportion of cash reserve to liabilities in every case. All that it would be necessary to enforce would be the setting aside of a minimum proportion of cash reserve to liabilities towards an insurance fund against the evils of excessive competition.

Taking the deposits of the banks, exclusive of those of the Bank of England, at the

amount quoted in Mr. Goschen's speech, viz., £600,000,000 to £620,000,000, and adding thereto the amount of the Bank of England's liabilities, say £40,000,000, there is a total of £650,000,000. To this Sir John Lubbock would add the amount of the Savings Banks deposits. Speaking at the annual general meeting of the London Chamber of Commerce on the 23rd March he said: "The Chancellor of the Exchequer had expressed an earnest wish that banks kept a larger reserve of gold. This was a point on which he would like to apply to Mr. Goschen the same arguments which the right hon. gentleman had applied to joint-stock banks. Mr. Goschen, as Chancellor of the Exchequer, was the greatest banker in the country. The Government held on behalf of the Savings Banks deposits amounting to £107,000,000, and he was glad to see that they were continually tending to increase. How much cash, however, had the Government in hand against this enormous liability? About £500,000, or less than per cent. Let the Government themselves act on their own advice, and the thing was done. Example, they all knew, was better than precept, and he had more than once pointed out that in the absence of any

reserve in the case of the Savings Banks the Government set a bad example. He knew that there were circumstances in which deposits in Savings Banks differed from deposits in other banks, but they must remember that deposits were left with the Post Office by the less wellinformed class, and it was quite possible to argue, from another point of view, that the Government, in connection with the Savings Banks deposits, ought to hold larger reserves. No doubt it might be said that, though the Government had little cash against the Savings Banks' deposits, they held an immense sum in Government securities. But so did other banks. They also had large investments in Government securities which, in all ordinary circumstances, were at once practically reserve. They were, however, dealing with what might happen in extraordinary circumstances." Mr. Bagehot in "Lombard Street," raised the same question (p. 330):-"I suppose almost everyone thinks that our system of Savings Banks is sound and good. Almost everyone will be surprised to hear that there is any possible objection to it. Yet see what it amounts to. By the last return the Savings Banks-the old and the Post Office together-contain about £60,000,000