CHAPTER XV

THE THEORETIC LINE OF SAFETY

It will be clear, I think, from the analyses in the foregoing chapters that banks have not only a delicate, but a most difficult task to perform. So difficult is the task that it is impossible to give satisfaction to all classes of the community. They have to give satisfaction to borrowers, to their depositors, to their shareholders and, at the same time, to the critics who say they are ever alert and watchful that they are trading within safe limits.

What critics mean when they talk of safe limits they would not find it easy themselves to define with exactness. They know what they mean by sound principles of banking so far as lending on sound security goes. They know what they mean when they say that a bank must not engage in speculation, and that it must carefully scrutinize every class of wealth on which it lends. This seems to me a tacit acknowledgment that banks do not create credit in the sense that many suppose. It would come nearer the conception of credit creation if banks were allowed to speculate and attempt to create wealth out of nothing.

These critics lay it down as a first principle that a bank must have adequate gold reserves. If they do not have adequate gold reserves they put too great a strain upon the credit structure. But they cannot agree, they cannot even dogmatize, as to what an adequate reserve is. Yet the banks are adjured to give all the help they can to the trade and commerce of the country. If they refuse that help they come in for severe condemnation. They are condemned by the academic critics and they are criticized by the traders and criticized by their shareholders, and had not nature fortunately given bank managers very thick skins--which thicken daily in the environment in which they live--they would be deserving objects of commiseration. As it is, no one pities them, and in time they become accustomed to an atmosphere unwarmed by mercy. I have, indeed, met people who regard bank managers as little removed from callous brutes, men utterly indifferent to the appeals of those seeking to make their bit in a highly civilized community.

After all, the lot of a banker, like a policeman’s, is a hard one, and he is very roughly handled at times by friend and foe alike: the friend beseeching him to look to his reserves, the foe caring for nothing so long as he can get his loan.

Why does the friend beseech him always to have an adequate gold reserve? Because the hour may come, suddenly, swiftly, without warning, when the phlegmatic Britisher will be in the grip of madness. The man who has calmly and resolutely faced the greatest crisis in his life; the man who has laughed at Zeppelins and air craft, whose courage has risen with his danger, is in a moment, in the twinkling of an eye, to lose his reason and go amok amongst the banks of the country, smashing everything in ungovernable fury. There will be no restraining him in that mad hour. No force will be powerful enough to bind him. He will wreck, and the populace will gaze on helplessly, until all are buried beneath the ruins of a once beautiful and mighty fabric.

It is because we fear this mad Samson will pull down the pillars, that we would make those pillars too strong even for his mighty strength. He would strain himself against them in vain. They would defy even the supernatural strength of madness.

It is feared that the reserves will not be large enough to meet an outbreak of panic. As the banks are bound by law to repay deposits in gold, or legal tender, if they have insufficient gold or legal tender, they will come to smash. And if one great bank falls, all will fall. The mighty structure will then be a heap of ruins.

Let us, then, assume that some day, we know not when, it may be to-morrow or it may be generations after we are dead and forgotten, a panic _may_ come. It is said that the panic will surely be hastened if the highly-strung, emotional, fear-stricken Briton _thinks_ the gold reserve is falling too low. He may never know for certain whether or not it is too low. But in some unfortunate moment, when, perhaps, he is a little out of sorts, he may _think_ it is too low, and then it will be too late. Without staying to reason, without staying even to consider whether his disorder is physical or mental, or whether a sluggish liver has blurred his vision, he is at the bank doors before the maid has had time to bring in his breakfast. And when his mighty fists smash at those doors the doom of the nation has come.

What it is necessary to do, therefore, is to calm this nervous gentleman; to talk confidently and assuringly to him, to talk about politics, philosophy, poetry, the arts, anything but banking and bank reserves, and then when he is smiling to take him out and give him a good lunch.

This is John Bull as some people picture him. It may be a caricature, and John may resent it as a libel upon his traits and temperament, but we must accept it as a serious fact that some people have no faith in John Bull’s common sense.

Regarding John, therefore, as a highly nervous old gentleman, who can never rest because of that bank balance of his, wondering day and night whether it is safe or not, and spoiling the peace of the household by his restlessness, what we must try to do is to convince the old man that his bank balance is perfectly safe. It may seem difficult to do this when we tell him that the bank has only £15 left of his £100; but it might be equally as difficult to set his mind at rest if we tell him that the bank has only £40 of the £100, for he will want to know where the other £60 is. Even £60 is more than John can afford to lose.

Well, all that we wiseacres must do now is to have a little confab together and agree upon the amount we shall tell him the bank actually has intact of his £100. Perhaps we shall agree that £15 is much too little. Perhaps to some £20 may appear to be insufficient. After talking it over and diagnosing in the most up-to-date scientific fashion John’s nervous temperament, we agree that his nervous system can be made quite normal, as normal as our own, if we say the bank has £30 of his £100, or nearly one-third.

Thanks, then, to scientific calculation we have settled this problem. John will be immune now from nervous disorders, he will be able to sleep calmly o’ nights, and will settle down into a nice, comfortable, affable old party, a perfect husband, and an indulgent parent, feeling that nothing now is wanting in the best of all possible banking worlds. Great mathematicians have assured him that the banks will never fail now they have £30 of his £100 in solid gold.

How agreeable it would be if we could settle this matter in a scientific way, calculating with mathematical precision how much strain the banking system will stand, and to a nicety what proportion of the reserve to the liabilities will for ever avert a panic. Unfortunately, mathematics will not help us in this. If we could only lay down a theoretic line of safety, knowing precisely how far to go and where to stop, how happy and contented we could be. The Philosopher’s Stone could perform no greater miracle. The banks would then know exactly how much to lend, exactly how much deposits to receive, irrespective of gold production and wealth production, and the trade and commerce of this country could be governed perfectly in true keeping with our needs and the progress of civilization by that ideal law, rule-o’-thumb. It would be impossible to imagine then to what heights of greatness England would rise, or the reposeful content in which she would live. As, however, scientific precision is impossible, we must rule out this haphazard law.

We must still trust as well as we can to experience. So far experience has not failed us. This much can be said in its favour.

It is impossible to say what proportion of reserve will save banks in a possible panic. Perhaps eighty or ninety per cent, would not save them. Perhaps they might go under with a thirty per cent. proportion, when a thirty-one per cent. would have averted the disaster. Nor must we rule out of consideration when contemplating the theoretic line of safety the composite character of the deposits.

Banks are counselled to adopt two extreme policies. That is to say, to do the impossible. They are asked to lend freely to assist trade, and at the same time are asked not to lend or to lend sparely. During the early weeks of the war, for instance, they were urged to give liberal assistance to commercial men and others, and at the same time to increase their reserves and to be ultra-cautious.

Some critics, and the most distinguished amongst them is Mr. Walter Bagehot, urge them always to keep high reserves against the day of panic, and yet when the panic comes to lend freely. They cannot lend freely and simultaneously maintain high reserves. They cannot have high and low reserves at one and the same time. They cannot lend sparingly and cautiously in the same moment as they lend liberally and incautiously. They must either keep high reserves and assist commerce as sparingly as possible, or they must keep modest reserves and help commerce as liberally as possible. They cannot adopt contrary policies.

What should we say of the farmer who kept his seed in the barn and feared to sow it to-day lest a storm should arise to-morrow and destroy it? He must take his chances of a storm. And the country must take its chances of a panic.

But the chances are not so fearful as some imagine. Quite apart from psychological considerations, there is the country itself, the Government, behind the banking system. The country, the Government, cannot afford to see that system come to ruin. It is not as if the Government would be helpless. The Government has the power, and it should use the power to prevent the ruin. Moreover, it is the duty of the Government to prevent it.

It is the Government’s duty because the Government does not allow free banking in this country. This may seem a startling assertion. Let us examine it.

If the Government enacts that gold shall be legal tender, and that banking deposits must be repaid on demand in their entirety in legal tender, then banking is fettered by law. It is not free banking in the full sense of the term. If banking is fettered by the capricious output of gold, it is not free banking; and if the commerce of the country is fettered by the capricious output of gold, then its freedom of expansion is fettered. If the output of legal tender currency cannot keep pace with the needs and requirements of commerce, then the limitations imposed are not in accord with true notions of freedom. We must work and progress as best we can within those limitations, whether they be wise or unwise.

Since the war the Government appears to me to have recognized this by the issue of Treasury notes. Had these notes not been issued, then it would have been the duty of the Government to have suspended the Bank Act. Having issued these notes, the Government could conscientiously ask the banks to assist in a time of crisis traders and others with the utmost liberality. If they were not so assisted, the bankers justly deserved admonition. But had the Government not have issued the notes and therewith have provided legal tender currency in ample measure, then it could not, conscientiously and justly, have bidden the banks to lend freely irrespective of their gold reserves. If, however, these reserves were to be replenished, then the banks were sufficiently safeguarded. There was no excuse for ultra-caution and timidity then.

I repeat, therefore, that what the Government has done once by way of duty and by way of wisdom and foresight, it can do again, and should do. The country must not come to ruin merely in deference to the apprehensive theories of some people, whose theories so far, though long and tenaciously held, have been like the passing nightmares of affrighted men.

In the days when Mr. Bagehot wrote his immortal work, banking was still in the experimental stage. It was slowly developing and learning from experience. As banking has developed, so has the psychology of the British race changed. As the confines of its knowledge have been enlarged, as each generation has arrived in a new environment, and as each generation has become more familiar with and habituated to banking, so are the probabilities of panic lessened. A panic, after all, has a psychological origin, and if, as I contend, the psychology of our race is on a higher plane, and is more dependable than it was half a century ago, then Mr. Bagehot’s criticisms become less forcible as psychological growth proceeds. They must not be taken, therefore, as our criterion to-day, because the test applied to them now is a different test. As the years go on the criticisms will become feebler, and with his profound instinctive knowledge of human nature, I think, were he alive to-day, Mr. Bagehot would modify those criticisms that deserved more consideration in his days than in ours. He would be the first to acknowledge, not only that the banking system has progressed greatly, but that the system is conducted on safer lines than in the times when he lived.