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cases. Nevertheless, if the "run" be serious, all the gold which can be obtained in this way will be inadequate.
Large as is the reserve kept by Scotch banks compared with that of similar establishments in England (the Bank of England excepted), the cashing of it will not suffice to meet a prolonged run for payment of deposits in gold. But there is a special and invariable feature in such runs for gold—namely, that the gold withdrawn from one bank is immediately deposited anew with some other bank. So that, if the position of the menaced bank is fundamentally sound, the difficulty can at once be overcome by means of co-operation on the part of the other banks. All that is needed to check the worst run for gold that ever took place is, that the other banks should return the gold to the menaced bank as fast as it is brought to them.
Such a process is no loss to the other banks; it is a pure gain. They get the new deposits and customers all the same. The gold they do not want-- they have no need for it—it would lie idle in their vaults; and in returning it to the menaced bank, they simply lend it to a solvent customer at a good rate of interest. Thus, while getting the new deposits and customers which they do want, they also get a good loan or investment for the gold which they don't want. By keeping the gold to themselves these other banks would make an immediate lors, and no object would be attained save that of bringing down a rival establishment. All banks, it is true, are willing enough to see a rival brought down, in order to get a share of its business. But for banks to bring down a solvent rival by withholding their aid during a time of panic, is simply to extend the panic and bring the “run ” upon themselves.
This fact has been exemplified in all great monetary crises, and it was very strikingly shown in Scotland in 1857. Then it was that the policy of Banking Co-operation which we propose was first adopted, tardily and reluctantly, it is true, by the Scotch banks; but the complete and immediate success which then attended it ought to establish this system of co-operation as the true remedy to be adopted in all cases of panic-runs upon banks for payment of deposits in gold. No bank of itself can withstand such a run, but by means of co-operation the difficulty is easily overcome.
A domestic drain of specie can be easily remedied. It ought never to constitute a serious difficulty in any well-ordered system of banking. The specie so withdrawn from some banks is immediately deposited in others. A foreign drain of specie constitutes a more serious difficulty: yet it also may be obviated, or at least greatly neutralised, if monetary science were rightly understood and applied to banks of issue.
The disastrous effects of a struggle for gold among the banks of Europe--we may say, of the world—we have already shown. The question now arises, how is this War of the Banks to be obviated ?
Can we not obviate this strife by establishing concert among the banks? Can we not establish in banking, as in other things, the principles of union and co-operation, in lieu of the present system of rivalry and hostility ? Even in international politics, that most unmanageable of all public questions, the principle of a Congress to settle disputes is gaining ground; and one day or other it will be established with at least some measure of success, and with proportionate benefit to the nations. In industry and finance Co-operation is already the order of the day. Mutual assistance, a combining and harmonising of rival interests and resources, is now becoming the great lever of industrial and commercial progress. It is true, Co-operation among the banks of a single country, or even of a single city, is yet but little acknowledged as a principle or developed as a system. Only in rare cases, and at rare intervals, is the
, wisdom and practical expediency of such a principle acknowledged sufficiently to abate the antiquated system of selfishness and isolation —of every bank standing aloof in times of panic and crisis, and keeping its stock of specie, whether needed by it or not, to itself.
The first fact that strikes an observant on-looker is, that at present the banks of all countries not only stand completely isolated from one another, but that they do not even make any effort to relieve the community of their own country from the effects of a drain of specie. They keep their reserve of securities in a form which is not available, and of which certainly they do not avail themselves, to obviate a drain of specie for export. Look, for example, at the Bank of England. The entire reserve of securities kept in its banking department consists of Government Stock, which, whether it sells it or borrows on it, brings it in no specie-the Bank being paid in its own notes, which are a legal tender. The same is the case with the Bank of Franceand, indeed, with the banks of all countries. Accordingly, the first means of improving the present system that suggests itself is, that these great banks should keep a portion of their reserve of securities in the form of foreign Government Stock,—in the Government Stock of those countries to which in the course of trade drains of specie usually flow,—which in our case would be Paris, Calcutta, and New Tork. The cashing, or borrowing upon, that stock would enable the bank to give drafts upon those places equivalent to specie, and thereby, pro tonto, prevent any export of the precious metals.
This would unquestionably be a great improvement upon the present system; and we hope soon to see it adopted. But such a process is clumsy and trifling compared to the improvements which will yet be made in the science of banking. Banking must assume an International form. In all departments this is the tendency of the times. The barriers of seclusion behind which communities have
so long kept themselves apart from their neighbours are being thrown down, In finance—that most cosmopolitan of all trades—we already see the new system of concert freely adopted. English, French, Germans, Russians, Americans, may all be found subscribing to the same loan, or co-operating financially in the same enterprise. Banking will and must follow the same onward course. Financially, at least, Europe is becoming one community; and one of the immediate wants of the times is the establishment of a Bank of Europe.
Let us look at this question, the establishment of a Bank of Europe, in practical fashion. The financial difficulty is nil. The great capitalists of all countries already co-operate together freely. The only substantial difficulty in the establishment of a Bank of Europe is this,—that the great banks make a profit out of this present policy of war: their warfare with one another costs them nothing, while at the same time it is a means by which each exacts a larger portion of the profits of trade in its own country. Well, then, let these great banks themselves establish the Bank of Europe. Let them conduct its management, frame its statutes, and divide its profits among themselves. Let the Bank of Europe be founded by the co-operation, the mutual concert, of the national banks of each country, by the Bank of England, of France, of Holland, of Belgium, of Italy, of Turkey, of St. Petersburg, Berlin, Vienna, &c.—or by such of them as are at once ready to co-operate.
Next, as to the constitution of the bank. The banks of England and of France would probably subscribe nearly one-fourth of the required capital each ; and each of the co-operating banks would be represented in the management, and would share in the profits, in proportion to the amount of capital which it subscribed. As regards the form in which the capital of the bank is to be subscribed and kept, this would mainly depend upon the functions of the bank. It is the natural tendency of all successful financial establishments to extend their functions—to widen not only the extent but the nature of their operations. But let us consider the proposed Bank of Europe in its primary form_namely, not as a bank of deposit, or as a fountain of international paper-money, but simply as a means of conducting international exchanges of capital : as a means of economising our stock of the precious metals, of lessening the ceaseless and transitory ebb and flow of specie, by establishing to a limited extent a mode of international payments in Europe, apart from the export of specie. To attain this object—as we shall see more fully in the sequel—the capital of the bank need only consist of Government securities, as an adequate guarantee of its operations. Its capital would consist of Government securities of the various co-operating countries. Each of the co-operating and associated banks would subscribe its share of the capital in Government securities of its own country,—the value of these securities being reckoned by the market price. At the outset, then—that is to say, as long as the bank exercised only its primary functions, as an agent of international exchange, its capital would consist of so many millions of the various Government securities of Europe, nearly one-half of which would be French and British funds, and the extent of its operations would be limited by the amount of these securities which it held.
Such a bank would be of immense service alike to the industrial, commercial, and monetary interests of Europe. Let us see how it would work during a drain of gold from one country of Europe to another. As long as merchants can get bills wherewith to discharge their debts or make their purchases abroad, they have no need of specie or any other kind of international currency. But when, owing to a bad harvest, or the requirements of trade or finance, the amount of foreign bills in a country becomes inadequate to settle the accounts abroad, merchants and capitalists go to the banks to get specie for export. But it is a troublesome process to export specie; merchants would not have recourse to it if there were a more convenient equivalent. This they would have if a Bank of Europe were established. Instead of taking gold from the bank, they would ask for a draft upon the Bank of Europe, which would serve them better, for they could transmit it as easily as a commercial bill. Suppose, for example, that from any cause our merchants or capitalists hal to transmit to Paris, St. Petersburg, Constantinople, or any other place on the Continent, two millions sterling in excess of the commercial bills which we held upon these places. Our merchants or capitalists, instead of taking gold from the Bank, would get from it a draft upon the Bank of Europe; this they would transmit to the place where the payment had to be made--say Paris ; thereupon the recipients of the draft would take it to the Bank of France, where the amount would be either placed to their credit as a deposit, or paid to them in the notes of the bank. The Bank of France would then send on the draft to the Bank of Europe, where the amount would be withdrawn from the credit of the Bank of England and placed to the credit of the Bank of France, and the transaction would be closed. No specie or money of any kind would be needed. There would simply be a transference in the ledger of the Bank of Europe of two millions sterling from the credit of one of the associated banks to another. The establishment of such an international bank, in fact, would be equivalent to an extension of the Chequesystem and Clearing-house to the banking system of Europe. And the result would be a great economy of specie, just as the cheque system and the clearing-house have immensely economised our currency of all kinds at home.
As these international bank-drafts would be preferred to the trouble
some and more expensive process of exporting specie, little or no gold would be withdrawn for export from the Bank of England (or any other national bank in Europe), until the Bank had drawn to the full amount of its credit at the Bank of Europe. The amount for which it could thus draw would be the amount of capital, in the form of Government securities reckoned at their current price, which it had deposited in the Bank of Europe: and this amount could be increased at need, by the deposit of more Government stock. This would be a source of profit to the great banks; for instead of having to keep the present large amount of unprofitable specie to meet the wants of their customers, they would keep a portion of it (equal to the capital which they had deposited with the Bank of Europe) in the form of interestbearing securities. When any of the associated banks (say the Bank of England or the Bank of France) had issued international drafts to the full amount of its credit at the Bank of Europe, then, but not till then, would the drain of specie upon it commence. And it is hardly conceivable that any bank would subject itself to an embarrassing drain of specie, when it could meet the requirements of its customers more conveniently, and more profitably to itself, by temporarily adding to its deposit of interest-bearing securities in the Bank of Europe. Moreover, when a movement of specie is taking place, if there are countries which have to export specie, there are others which are receiving it in unusual abundance : so that the banks which were receiving the specie, and therefore did not require to issue drafts upon the Bank of Europe, would willingly allow their credit (or amount of securities) in the Bank of Europe to be drawn upon, at interest, by the bank from which the gold was flowing. This, of course, would be an act of the Bank of Europe itself. It would not be a temporary loan of securities from one bank to another : but a loan, or temporary transference of securities from the credit of some of the associated banks to another, to be considered and granted by the general council of the bank.
To those who are conversant with such matters, the effects of the cstablishment of such an International Bank will be fully understood by what we have already said. But for the general reader, let us say a word as to these international drafts. The great currency of the world is commercial bills. Commerce has established for itself an international form of paper-currency, which, when transmitted by post, is quite as efficacious in making foreign payments as if specie had been transmitted to a similar amount. Now these commercial bills, although perfectly sufficient for their purpose, are not convertible into money (save optionally) except at the hands of a certain individual (the accepter), and after the lapse of a certain period. Thus (except optionally) they are not immediately convertible into money; and moreover they circulate simply on the credit of