So far, as we have said, an analysis of the return of the Bank of England is very favourable to the Bank.  So great a reserve need not usually be kept against the Government account as if it were a common account.  We know the laws of its changes peculiarly well:  we can tell when its principal changes will happen with great accuracy; and we know that at such changes most of what is paid away by the Government is only paid to other depositors at the Bank, and that it win really stay at the Bank, though under another name.  If we look to the private deposits of the Bank of England, at first sight we may think that the result is the same.  By far the most important of these are the ‘Bankers’ deposits’; and, for the most part, these deposits as a whole are likely to vary very little.  Each banker, we will suppose, keeps as little as he can, but in all domestic transactions payment from one is really payment to the other.  All the most important transactions in the country are settled by cheques; these cheques are paid in to the ‘clearing-house,’ and the balances resulting from them are settled by transfers from the account of one banker to another at the Bank of England.  Payments out of the bankers’ balances, therefore, correspond with payments in.  As a whole, the deposit of the bankers’ balances at the Bank of England would at first sight seem to be a deposit singularly stable.

Indeed, they would seem, so to say, to be better than stable.  They augment when everything else tends to diminish.  At a panic, when all other deposits are likely to be taken away, the bankers’ deposits, augment; in fact they did so in 1866, though we do not know the particulars; and it is natural that they should so increase.  At such moments all bankers are extremely anxious, and they try to strengthen themselves by every means in their power; they try to have as much money as it is possible at command; they augment their reserve as much as they can, and they place that reserve at the Bank of England.  A deposit which is not likely to vary in ordinary times, and which is likely to augment in times of danger, seems, in some sort, the model of a deposit.  It might seem not only that a large proportion of it might be lent, but that the whole of it might be so.  But a further analysis will, as I believe, show that this conclusion is entirely false; that the bankers’ deposits are a singularly treacherous form of liability; that the utmost caution ought to be used in dealing with them; that, as a rule, a less proportion of them ought to be lent than of ordinary deposits.

The easiest mode of explaining anything is, usually, to exemplify it by a single actual case.  And in this subject, fortunately, there is a most conspicuous case near at hand.  The German Government has lately taken large sums in bullion from this country, in part from the Bank of England, and in part not, according as it chose.  It was in the main well advised, and considerate in its action; and did not take nearly as much from the Bank as it might, or as would have been dangerous.  Still it took large sums from the Bank; and it might easily have taken more.  How then did the German Government obtain this vast power over the Bank?  The answer is, that it obtained it by means of the bankers’ balances, and that it did so in two ways.