What I have to deal with is, for the present, ample enough.  The Bank of England must keep a reserve of ‘legal tender’ to be used for foreign payments if itself fit, and to be used in obtaining bullion if itself unfit.  And foreign payments are sometimes very large, and often very sudden.  The ‘cotton drain,’ as it is called—­the drain to the East to pay for Indian cotton during the American Civil War took many millions from this country for a series of years.  A bad harvest must take millions in a single year.  In order to find such great sums, the Bank of England requires the steady use of an effectual instrument.

That instrument is the elevation of the rate of interest.  If the interest of money be raised, it is proved by experience that money does come to Lombard Street, and theory shows that it ought to come.  To fully explain the matter I must go deep into the theory of the exchanges, but the general notion is plain enough.  Loanable capital, like every other commodity, comes where there is most to be made of it.  Continental bankers and others instantly send great sums here, as soon as the rate of interest shows that it can be done profitably.  While English credit is good, a rise of the value of money in Lombard Street immediately by a banking operation brings money to Lombard Street.  And there is also a slower mercantile operation.  The rise in the rate of discount acts immediately on the trade of this country.  Prices fall here; in consequence imports are diminished, exports are increased, and, therefore, there is more likelihood of a balance in bullion coming to this country after the rise in the rate than there was before.

Whatever personsone bank or many banksin any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion.

This duty, up to about the year 1860, the Bank of England did not perform at all, as I shall show farther on.  A more miserable history can hardly be found than that of the attempts of the Bankif indeed they can be called attempts—­to keep a reserve and to manage a foreign drain between the year 1819 (when cash payments were resumed by the Bank, and when our modern Money Market may be said to begin) and the year 1857.  The panic of that year for the first time taught the Bank directors wisdom, and converted them to sound principles.  The present policy of the Bank is an infinite improvement on the policy before 1857:  the two must not be for an instant confounded; but nevertheless, as I shall hereafter show, the present policy is now still most defective, and much discussion and much effort. will be wanted before that policy becomes what it ought to be.

A domestic drain is very different.  Such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain.  Times without number the public have been alarmed mainly because they saw that the Banking reserve was already low, and that it was daily getting lower.  The two maladiesan external drain and an internal-often attack the money market at once.  What then ought to be done?