That such an arrangement is strange must be plain; but its strangeness can only be comprehended when we know what the custody of a national banking reserve means, and how delicate and difficult it is.

II.

Such a reserve as we have seen is kept to meet sudden and unexpected demands.  If the bankers of a country are asked for much more than is commonly wanted, then this reserve must be resorted to.  What then are these extra demands? and how is this extra reserve to be used?  Speaking broadly, these extra demands are of two kind—­sone from abroad to meet foreign payments requisite to pay large and unusual foreign debts, and the other from at home to meet sudden apprehension or panic arising in any manner, rational or irrational.

No country has ever been so exposed as England to a foreign demand on its banking reserve, not only because at present England is a large borrower from foreign nations, but also (and much more) because no nation has ever had a foreign trade of such magnitude, in such varied objects, or so ramified through the world.  The ordinary foreign trade of a country requires no cash; the exports on one side balance the imports on the other.  But a sudden trade of import like the import of foreign corn after a bad harvestor (what is much less common, though there are cases of it) the cessation of any great export, causes a balance to become due, which must be paid in cash.

Now, the only source from which large sums of cash can be withdrawn in countries where banking is at all developed, is a ‘bank reserve.’  In England especially, except a few sums of no very considerable amount held by bullion dealers in the course of their business, there are no sums worth mentioning in cash out of the banks; an ordinary person could hardly pay a serious sum without going to some bank, even if he spent a month in trying.  All persons who wish to pay a large sum in cash trench of necessity on the banking reserve.  But then what is ‘cash?’ Within a country the action of a Government can settle the quantity, and therefore the value, of its currency; but outside its own country, no Government can do so.  Bullion is the cash’ of international trade; paper currencies are of no use there, and coins pass only as they contain more or less bullion.

When then the legal tender of a country is purely metallic, all that is necessary is that banks should keep a sufficient store of that ‘legal tender.’  But when the ‘legal tender’ is partly metal and partly paper, it is necessary that the paper ’legal tender’—­the bank note—­should be convertible into bullion.  And here I should pass my limits, and enter on the theory of Peel’s Act if I began to discuss the conditions of convertibility.  I deal only with the primary pre-requisite of effectual foreign payments—­a sufficient supply of the local legal tender; with the afterstep—­the change of the local legal tender into the universally acceptable commodity cannot deal.