At other times, particularly at the quarterly payment of the dividends, an absolute rule which laid down that the bankers’ balances were never to be lent, would be productive of great inconvenience.  A large sum is just then paid from the Government balance to the bankers’ balances, and if you permitted the Bank to lend it while it was still in the hands of the Government, but forbad them to lend it when it came into the hands of the bankers, a great tilt upwards in the value of money would be the consequence, for a most important amount of it would suddenly have become ineffective.

But the idea that the bankers’ balances ought never to be lent is only a natural aggravation of the truth that these balances ought to be used with extreme caution; that as they entail a liability peculiarly great and singularly difficult to foresee, they ought never to be used like a common deposit.

It follows from what has been said that there are always possible and very heavy demands on the Bank of England which are not shown in the account of the Banking department at all:  these demands may be greatest when the liabilities shown by that account are smallest, and lowest when those liabilities are largest.  If, for example, the German Government brings bills or other good securities to this market, obtains money with them, and removes that money from the market in bullion, that money may, if the German Government choose, be taken wholly from the Bank of England.  If the wants of the German Government be urgent, and if the amount of gold ‘arrivals,’ that is, the gold coming here from the mining countries, be but small, that gold will be taken from the Bank of England, for there is no other large store in the country.  The German Government is only a conspicuous example of a foreign power which happens lately to have had an unusual command of good securities, and an unusually continuous wish to use them in England.  Any foreign state hereafter which wants cash will be likely to come here for it; so long as the Bank of France should continue not to pay in specie, a foreign state which wants it must of necessity come to London for it.

And no indication of the likelihood or unlikelihood of that want can be found in the books of the Bank of England.

What is almost a revolution in the policy of the Bank of England necessarily follows:  no certain or fixed proportion of its liabilities can in the present times be laid down as that which the Bank ought to keep in reserve.  The old notion that one-third, or any other such fraction, is in all cases enough, must be abandoned.  The probable demands upon the Bank are so various in amount, and so little disclosed by the figures of the account, that no simple and easy calculation is a sufficient guide.  A definite proportion of the liabilities might often be too small for the reserve, and sometimes too great.  The forces of the enemy being variable, those of the defence cannot always be the same.