The same result may be arrived at more easily.  Supposing any foreign Government or person to have any sort of securities which he can pledge in the market, that operation gives it, or him, a credit on some banker, and enables it, or him, to take money from the banking reserve at the Bank of England, and from the bankers’ balances; and to replace the bankers’ balances at their inevitable minimum, the Bank of England must lend.  Every sudden demand on the country causes, in proportion to its magnitude, this peculiar effect.  And this is the reason why the Bank of England ought, I think, to deal most cautiously and delicately with their banking deposits.  They are the symbol of an indefinite liability:  by means of them, as we see, an amount of money so great that it is impossible to assign a limit to it might be abstracted from the Bank of England.  As the Bank of England lends money to keep up the bankers’ balances, at their usual amount, and as by means of that usual amount whatever sum foreigners can get credit for may be taken from us, it is not possible to assign a superior limit (to use the scientific word) to the demands which by means of the bankers’ balances may be made upon the Bank of England.

The result comes round to the simple point, on which this book is a commentary:  the Bank of England, by the effect of a long history, holds the ultimate cash reserve of the country; whatever cash the country has to pay comes out of that reserve, and therefore the Bank of England has to pay it.  And it is as the Bankers’ Bank that the Bank of England has to pay it, for it is by being so that it becomes the keeper of the final cash reserve.

Some persons have been so much impressed with such considerations as these, that they have contended that the Bank of England ought never to lend the ‘bankers’ balances’ at all, that they ought to keep them intact, and as an unused deposit.  I am not sure, indeed, that I have seen that extreme form of the opinion in print, but I have often heard it in Lombard Street, from persons very influential and very qualified to judge; even in print I have seen close approximations to it.  But I am satisfied that the laying down such a ’hard and fast’ rule would be very dangerous; in very important and very changeable business rigid rules are apt to be often dangerous.  In a panic, as has been said, the bankers’ balances greatly augment.  It is true the Bank of England has to lend the money by which they are filled.  The banker calls in his money from the bill-broker, ceases to re-discount for that broker, or borrows on securities, or sells securities; and in one or other of these ways he causes a new demand for money which can only at such times be met from the Bank of England.  Every one else is in want too.  But without inquiring into the origin of the increase at panics, the amount of the bankers’ deposits in fact increases very rapidly; an immense amount of unused money is at such moments often poured by them into the Bank of England.  And nothing can more surely aggravate the panic than to forbid the Bank of England to lend that money.  Just when money is most scarce you happen to have an unusually large fund of this particular species of money, and you should lend it as fast as you can at such moments, for it is ready lending which cures panics, and non-lending or niggardly lending which aggravates them.