Chapter XV: Appendix: The Gold Reserve

Since the remarks concerning the Gold Reserve were written (chapter xiv.) much interest has been aroused in the matter by a suggestion made by Mr. J. Herbert Tritton, the President of the Institute of Bankers.

At the opening of the last session of the Institute (November, 1903) the President, in his inaugural address, after referring to many current and important topics, passed on to the subject of the visible gold reserves, and made the following novel suggestion. By Mr. Tritton’s courtesy his remarks on this matter are here reproduced in full.

“VISIBLE GOLD RESERVES

“The ever-pressing question of this country’s visible reserves of gold, quiescent during the war, is again attracting attention. Theoretically, everyone would admit that larger reserves of gold in this country are desirable; many would go further and say necessary; but any, even the smallest, step in the direction of action is at once barred on the ground of expense. At whose cost is the reserve to be held? £15,000,000 at 3 per cent. is £450,000 a year, and this must almost inevitably come out of somebody’s pocket. Bank of England stockholders and ordinary bank shareholders would be mulcted, or would think they were, to the extent, say, of a second income tax of 1_s_. in the pound on their dividends. Of course, the question is, in its essence, of national importance, but the Treasury of this country never allows itself to be influenced by considerations of this character—nor, indeed, have the English people for the last fifty years expected either Government help or Government interference in their financial or commercial affairs. Pardon the interjection, but I, for one, say long may this country be not only self-reliant, but free; free to trade as each member of it shall choose, unshackled and uninfluenced by Government restrictions or Government encouragements! We may, perhaps, cherish a faint hope that the new Chancellor of the Exchequer may realise that he has taken with him from the Post Office, liabilities as a banker, £144,605,088 in respect of Post Office Savings Banks, and finds in his new office a further sum of £52,505,081 in respect of Trustee Savings Banks, making together £197,110,169, liable to be repaid in gold; and realising this as a banker, may be less obdurate than his predecessors. But it would not be wise to expect much from Downing Street: if the thing is to be done we must do it ourselves. That a solution of the question is supremely necessary I am convinced, however great the initial difficulties may be; and that it is not beyond attainment if the best energies and the best brains of the banking community be devoted to it, I am also persuaded. Mr. R. H. Inglis Palgrave gives in his new book, _Bank Rate and the Money Market_—a book which every banker should possess and read—page 104, the following table:—

Proportion per
cent. of
Capital, Deposits, Average Reserve, Reserve at
and Circulation. Bank of England. Bank to Liability
as of
all Banks to
the Public.

1872 £584,000,000 £12,100,000 2·06

Deposits, Current
Accounts and Circulation
of all Banks publishing
accounts in the
United Kingdom
were:—

1894 £721,400,000 £25,800,000 3·58
1895 794,600,000 29,900,000 3·75
1896 797,700,000 34,600,000 4·33
1897 816,400,000 25,100,000 3·07
1898 838,300,000 22,900,000 2·73
1899 869,300,000 21,200,000 2·44
1900 889,600,000 21,400,000 2·41
1901 888,100,000 24,046,000 2·71
[5]1902 904,100,000 24,166,000 2·67

[Footnote 5: _Banker’s Magazine._]

“The Bank of England reserve, which constitutes the only real reserve of the country, is shown here in its true light from our present point of view. A further outside reserve of, say, £15,000,000 would only, it is true, serve to restore the proportion to that of the year 1896, but it would ensure the present maximum becoming, in effect, the future minimum, and here would be a great gain in an extra sense of security in troublous times. Should a gold panic at any time seize upon the public, it would matter little whether the ratio of Bank of England reserve to the aggregate liabilities were 2·50 or 5 per cent., suspension of cash payments would ensue. A credit panic, as distinguished from a gold panic, can usually be assuaged by a suspension of the Bank Act and an overissue of bank-notes. A further object of an increased gold reserve is that not only the periodic and well-recognised, but the unexpected and perhaps heavy withdrawals of gold may be met without recourse to violent measures such as those to which the market is too often subjected. If this were clearly seen to be not only the intention, but the practical working of the fund, an objection which, I admit, is of great weight would be fairly met, and minor objections would almost disappear.

“The objection to which I refer is this. Gold is meant to circulate, not to be hoarded, and any proposal permanently to withdraw such an amount as £15,000,000 from circulation and, as it were, entomb it again in the bowels of the earth, stands self-condemned. No such entombment is suggested, as far as I know, but the formation of a fund for use—a fund which, on occasions, would pass into circulation—international, if not national—and would have a steadying effect on the pulse of the Empire, the Bank of England rate. How can we set about securing it? Let us glance at the tabulated bank balance sheets of the country. From which of the items on the assets side could such a sum be withdrawn? Loans and discounts? No. Investments? No. Buildings? No. Money at call? No. Cash in hand and at Bank of England? This, _ex hypothesi_, is the item to be increased. The reasons I need not give, but it appears tolerably plain that no plan involving a permanent diminution of any item on the asset side would meet with a favourable reception from practical men. Is it possible, if these items cannot be conveniently decreased, to obtain the amount by a fresh creation of credit, an addition to loans and discounts, and an equivalent addition to the other side of the account? Please understand that I am considering the case quite apart from the Bank of England.

“Here I am directly and once again challenging critics, who do not agree in my view of the non-elasticity of the Money Market, to show how, in their view, the alleged elasticity of the market may be utilised to produce a fund of £15,000,000. My contention is that only by the increase of the note issue or by increase of capital can it be reached. Suppose the bankers were authorised to issue £15,000,000 of £1 bank-notes. How could these be kept in circulation unless they were legal tender? Of what use would they be if they took the place of gold in our tills? This plan, under which alone could credit be created, would be futile to attain our end. There remains only the creation of new capital, unless our friends, whom I am challenging, and to whom we are looking to give us a discussion which cannot fail to be interesting under the auspices of Mr. A. C. Cole, who has undertaken to read a paper on ‘Notes on the London Money Market,’ can show us some adequate alternative. If each bank of the kingdom increased its paid-up capital 20 per cent. by an issue of a Three per cent. Preference Gold Stock, the fund could be attained. The proceeds should be devoted in each individual case to the acquisition of a corresponding amount of gold, in addition to present holdings, and this gold should be deposited at the Bank of England, but not merged in the Bank figures, so as to stand week by week intact, and shown under a separate heading in one aggregate, though, of course, the absolute property of each bank in detail. Carefully thought out arrangements whereby, under a joint committee of the bankers and the Bank of England, whenever occasion arises, a percentage of each holding should be transferable to the credit of each bank in the books of the Bank of England should be made, the gold thus forming an addition to their reserve until again withdrawn and added to the Bankers’ Gold Fund.”

Needless to say, this suggestion, coming from such an authority, caused much comment in monetary circles, and was generally received as a valuable contribution to the various schemes having for an end the settlement of this important matter.

In certain quarters, however, the scheme was held to be an impracticable one; and at a subsequent meeting of the Institute of Bankers, Mr. Cole, a director of the Bank of England, spoke as follows:—

“As regards the proposal to increase the capital of the
banks, my reply is that the floating of a loan in this
market of £15,000,000, or of £100,000,000, will not add
one single golden sovereign to the bankers’ cash reserves.

“We can only increase our stock of gold in this country by
getting it from abroad. To do that we must offer to the
holders of gold abroad something that they will take in
exchange for their gold.

“A loan in this market to increase the capital of the
banks, to be subscribed for by the public who have
deposits with them, is merely transferring a liability
now existing on the part of the bankers to the public,
from their depositors to their shareholders. The only way
the bankers can increase their cash in hand, or balances
at the Bank of England, is by following the method now
pursued, namely, calling in their short loans so that the
market has to borrow at the Bank of England. To put their
position permanently on a sounder basis they must agree
that instead of calling in their loans temporarily, they
must all keep permanently larger balances at the Bank of
England. Then the gold reserves of the country will be
increased, provided that the Bank of England maintains
its usual ratio of cash to liabilities. Taking that as
45 per cent.—the average proportion for the last twenty
years ending 31st December, 1903, has been 46·6 per
cent.—a permanent increase of £15,000,000 to the bankers’
balances would increase the gold reserve of the country by
£6,750,000, and bring the average holding of the Bank of
England in the Banking and Issue departments combined up
to about £40,000,000. The reason for desiring to have a
rather larger stock of gold at the Bank is that the export
then of a few millions is of relatively less importance.
But we do not want more than is requisite for the easy and
safe working of our system. To sit on a hoard of unused
gold is to do away with the advantages of banking. What
is requisite is for this country to retain the power of
attracting gold when it is required. Neither the system
of banking nor the bankers can give it that power, for it
is dependent, not on them, but on the successful business
energy and activity of the nation. Of course, in order
to attract and retain here the amount of gold mentioned
above, the Bank of England must adjust its rate to
circumstances, but with the increasing supplies of gold,
actual and prospective, a reasonable rate is likely to
suffice.”

These remarks caused some discussion, during which it was pointed out that under Mr. Tritton’s proposal the banks would collectively form a gold fund of £15,000,000, at a cost to themselves of £450,000. Under Mr. Cole’s proposal, however, for the banks to increase their balances at the Bank of England by the sum of £15,000,000, the extra gold held in the country would only be increased by the sum of £6,750,000 (according to the proportion of the reserve held to public liabilities, which has been 45 per cent. on an average for the last twenty years), while the Bank would make a considerable profit from the remainder of the increased balances—a profit earned entirely at the expense of the banks.

It was also pointed out that the requisite gold could be acquired by offering a slightly higher price for it, thus retaining imports of the metal which would otherwise be bought up by exporters. Finally, it was stated by one speaker of eminence in the banking world, that in his opinion the matter was not one for the banks to deal with alone, the additional gold not being required for the sole benefit of the banks, but for the security of the community at large.

The matter here rests for the present, but when it has to be settled, as doubtless it must at some time, the ideas and suggestions contained in these discussions will probably become of importance.

INDEX

Active circulation, 59
Advances to customers, 92, 100
Amalgamations, 80, 164
Arbitrage, 131

Bank Act of 1844:
Main provisions of, 29;
suspensions of, 35, 36, 38
— of France, 127, 149
— paper, 139
— post bills, 69
— rate, 74, 139, 143
— return: the first issued, 32
Bankers’ balances, 65, 90
Banking department, 62
Berlin: specie points, 128
Bill-brokers, 51, 90
— — guarantees, 108
Bills under discount, 92, 100
Board of Trade Returns, 154
Branch banks, 80, 164
Buying gold, 149

Call and short money, 50, 94, 147
Cash payments: suspension of, 12
’Change, 134
Circulation: active, 59
Clearing House, 79, 115
— — Returns, 119, 154
Closing prices, 160
Competition, 163
Continental investment in London bills, 140
Country clearing, 117
Course of exchange, 135

Deficiency bills, 70

Exchange: favourable or unfavourable, 128
— long, 136
— short, 136, 139
Exchequer bills, 51, 92
— — closure of by Charles II., 5
Export specie points, 126

Favourable exchange, 128
Fixed price of issue, 159
Floaters, 111
Fluctuations of exchange rates, 129
Foreign bankers, 46, 54, 110, 139

Gold movements, 123, 142
— reserves, 162, 169
Goldsmiths, 4, 19

Import specie points, 127
Indian Government, 52
— price of silver, 152
Investments, 91, 97, 99
Issue department, 57
— at fixed price, 159
— by tender, 158

Joint-stock banks, 19, 21, 49, 77

Limited liability, 79, 145
Liquid assets, 93
Lombards, 3
Long exchange, 136

Mexican dollars, 152
Money market, 47
Monopoly of joint-stock banking, 10, 15, 23, 76

New York specie points, 128

One-reserve system, 67, 162

Par of exchange, 125
Paris: specie points, 127
Post days, 134
Premises, 93-100

Rediscounting, 110
Reichsbank, 34, 128, 149
Reserve, 73, 143
— capital, 83
— funds, 83, 104
Royal Exchange, 132

Short exchange, 136, 139
— loan fund, 49, 113
Silver, 150
Specie points, 126
Stock Exchange, 52, 96, 156
Suspension of cash payments, 12
— Bank Charter Act, 35, 36, 38

Tender system, 158
Till money, 60, 90
Tower of London: seizure of moneys, 4
Trade bills, 106, 139
Traffic returns, 153
Treasury bills, 51, 148, 158

Unfavourable exchange, 128

Visible gold reserves, 169

Ways and means, 70
Window dressing, 95

W. BRENDON AND SON, LIMITED, PLYMOUTH

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