Lombard Street : a description of the money market eBook

This eBook from the Gutenberg Project consists of approximately 277 pages of information about Lombard Street .

Lombard Street : a description of the money market eBook

This eBook from the Gutenberg Project consists of approximately 277 pages of information about Lombard Street .
lose them if the bank fail.  As all other bankers keep their banking reserve at the Bank of England, they are liable to fail if it fails.  They are dependent on the management of the Bank of England in a day of difficulty and at a crisis for the spare money they keep to meet that difficulty and crisis.  And in this there is certainly considerable risk.  Three times ‘Peel’s Act’ has been suspended because the Banking Department was empty.  Before the Act was broken—­

In 1847, the Banking Department was reduced to L 1,994,000 1857 " " L 1,462,000 1866 " " L 3,000,000

In fact, in none of those years could the Banking Department of the Bank of England have survived if the law had not been broken.  Nor must it be fancied that this danger is unreal, artificial, and created by law.  There is a risk of our thinking so, because we hear that the danger can be cured by breaking an Act; but substantially the same danger existed before the Act.  In 1825, when only coin was a legal tender, and when there was only one department in the Bank, the Bank had reduced its reserve to 1,027,000 L., and was within an ace of stopping payment.

But the danger to the depositing banks is not the sole or the principal consequence of this mode of keeping the London reserve.  The main effect is to cause the reserve to be much smaller in proportion to the liabilities than it would otherwise be.  The reserve of the London bankers being on deposit in the Bank of England, the Bank always lends a principal part of it.  Suppose, a favourable supposition, that the Banking Department holds more than two-fifths of its liabilities in cashthat it lends three-fifths of its deposits and retains in reserve only two-fifths.  If then the aggregate of the bankers’ deposited reserve be 5,000,000 L., 3,000,000 L. of it will be lent by the Banking Department, and 2,000,000 L. will be kept in the till.  In consequence, that 2,000,000 L. is all which is really held in actual cash as against the liabilities of the depositing banks.  If Lombard Street were on a sudden thrown into liquidation, and made to pay as much as it could on the spot, that 2,000,000 L. would be all which the Bank of England could pay to the depositing banks, and consequently all, besides the small cash in the till, which those banks could on a sudden pay to the persons who have deposited with them.

We see then that the banking reserve of the Bank of England—­some 10,000,000 L. on an average of years now, and formerly much less—­is all which is held against the liabilities of Lombard Street; and if that were all, we might well be amazed at the immense development of our credit systemin plain English. at the immense amount of our debts payable on demand, and the smallness of the sum of actual money which we keep to pay them if demanded.  But there is more to come.  Lombard Street is not only a place requiring to keep a reserve, it is itself a place where reserves are kept.  All country

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Lombard Street : a description of the money market from Project Gutenberg. Public domain.