Lombard Street : a description of the money market eBook

This eBook from the Gutenberg Project consists of approximately 238 pages of information about Lombard Street .
the public money is particularly large at the bank, and that at other times any application for an advance should be considered excep tonal, and dealt with accordingly.  And the object of that regulation was officially stated to be ’to make them keep their own reserve, and not to be dependent on the Bank of England.’  As might be supposed, this rule was exceedingly unpopular with the brokers, and the greatest of them, Overend, Gurney and Co., resolved on a strange policy in the hope of abolishing it.  They thought they could frighten the Bank of England, and could show that if they were dependent on it, it was also dependent on them.  They accordingly accumulated a large deposit at the Bank to the amount of 3,000,000 L., and then withdrew it all at once.  But this policy had no effect, except that of exciting a distrust of ‘Overends’:  the credit of the Bank of England was not diminished; Overends had to return the money in a few days, and had the dissatisfaction of feeling that they had in vain attempted to assail the solid basis of everyone’s credit, and that everyone disliked them for doing so.  But though this un-conceived attempt failed as it deserved, the rule itself could not be maintained.  The Bank does, in fact, at every period of pressure, advance to the bin-brokers; the case may be considered ‘exceptional,’ but the advance is always made if the security offered is really good.  However much the Bank may dislike to aid their rivals, yet they must aid them; at a crisis they feel that they would only be aggravating incipient demand, and be augmenting the probable pressure on themselves if they refused to do so.

I shall be asked if this anomaly is inevitable, and I am afraid that for practical purposes we must consider it to be so.  It may be lessened; the bill-brokers may, and should, discourage as much as they can the deposit of money with them on demand, and encourage the deposit of it at distant fixed dates or long notice.  This will diminish the anomaly, but it will not cure it.  Practically, bin-brokers cannot refuse to receive money at call.  In every market a dealer must conduct his business according to the custom of the market, or he will not be able to conduct it at all.  All the bin-brokers can do is to offer better rates for more permanent money, and this (though possibly not so much as might be wished) they do at present.  In its essence, this anomaly is, I believe, an inevitable part of the system of banking which history has given us, and which we have only to make the best of, since we cannot alter it.

CHAPTER XII.

The Principles Which Should Regulate the Amount of the Banking Reserve to Be Kept by the Bank of England.

There is a very common notion that the amount of the reserve which the Bank of England ought to keep can be determined at once from the face of their weekly balance sheet.  It is imagined that you have only to take the liabilities of the Banking department, and that a third or some other fixed proportion will in all cases be the amount of reserve which the Bank should keep against those liabilities.  But to this there are several objections, some arising from the general nature of the banking trade, and others from the special position of the Bank of England.

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Lombard Street : a description of the money market from Project Gutenberg. Public domain.
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