On the surface there seems a great inconsistency in all this.  First, you establish in some bank or banks a certain reserve; you make of it or them a kind of ultimate treasury, where the last shilling of the country is deposited and kept.  And then you go on to say that this final treasury is also to be the last lending-house; that out of it unbounded, or at any rate immense, advances are to be made when no once else lends.  This seems like saying—­first, that the reserve should be kept, and then that it should not be kept.  But there is no puzzle in the matter.  The ultimate banking reserve of a country (by whomsoever kept) is not kept out of show, but for certain essential purposes, and one of those purposes is the meeting a demand for cash caused by an alarm within the country.  It is not unreasonable that our ultimate treasure in particular cases should be lent; on the contrary, we keep that treasure for the very reason that in particular cases it should be lent.

When reduced to abstract principle, the subject comes to this.  An ‘alarm’ is an opinion that the money of certain persons will not pay their creditors when those creditors want to be paid.  If possible, that alarm is best met by enabling those persons to pay their creditors to the very moment.  For this purpose only a little money is wanted.  If that alarm is not so met, it aggravates into a panic, which is an opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money.  No one has enough money, or anything like enough, but the holders of the bank reserve.

Not that the help so given by the banks holding that reserve necessarily diminishes it.  Very commonly the panic extends as far, or almost as far, as the bank or banks which hold the reserve, but does not touch it or them at all.  In this case it is enough if the dominant bank or banks, so to speak, pledge their credit for those who want it.  Under our present system it is often quite enough that a merchant or a banker gets the advance made to him put to his credit in the books of the Bank of England; he may never draw a cheque on it, or, if he does, that cheque may come in again to the credit of some other customer, who lets it remain on his account.  An increase of loans at such times is often an increase of the liabilities of the bank, not a diminution of its reserve.  Just so before 1844, an issue of notes, as in to quell a panic entirely internal did not diminish the bullion reserve.  The notes went out, but they did not return.  They were issued as loans to the public, but the public wanted no more; they never presented them for payment; they never asked that sovereigns should be given for them.  But the acceptance of a great liability during an augmenting alarm, though not as bad as an equal advance of cash, is the thing next worst.  At any moment the cash may be demanded.  Supposing the panic to grow, it will be demanded, and the reserve will be lessened accordingly.