matter for a banker to study is not the movements up and down of his reserve regarded as isolated facts, but the forces which are acting upon it. If he desires to learn the present state and the future prospects of the banking community, it is not the actual figure at which the reserve stands which will instruct him. The real things to learn are the state of his depositors and the state of his borrowers. What is happening to them? are they going on as usual, or are they under exceptional circumstances? and if so, what are those circumstances? Are they likely to increase deposits, or to incur losses which render it difficult, if not impossible, for borrowers, on bills or other securities, to meet their engagements to the bank? These are the vital things to study, and these are the considerations which ought to determine the course which the banker ought to pursue. To the full extent of providing against a run on the bank, the policy of a reserve, however great, is perfectly right and justifiable. But an accumulation of reserve upon a general idea that it is well to have a good stock of gold is a policy destitute of reason.* A very small stock of gold has been found perfectly compatible with safety, as in 1866; at other times, a large reserve has not prevented convulsions in the money market, and even much danger to banks. The gold by itself alone tells little to a banker. In what state is the banking—the deposits and the loans made by the banker-is the master question of the situation.

Nor does the amount of the circulation of gold and notes moving about the country deserve any notice from the banker in determining the magnitude of his reserve. * See Appendix, p. 487.

A strange delusion set in with the Act of 1844-though not countenanced by a single word in the Act itself— that the circulation possessed a power of controlling the movements of banking, and that, if properly handled, it could steady the vicissitudes of the banking market and regulate its rate of discount. There is reason to believe, as has been already remarked, that this idea gave birth to the enactment of that statute. But this idea was a dream of the imagination—a principle built on the sand. The variations in the circulation are a petty trifle by the side of the gigantic operations of banking. A greater or less quantity of small change-of the instrument required for petty transactions of ready money payment-what influence could it have on the events happening daily at the Clearing House? What banker required a stronger reserve to be locked up in his chest, because farmers needed more sovereigns in summer, or travellers were roaming over the land with a supply of notes in their pockets? Or did the Bank of England, or any other bank, ever lower, as a rule, its rate of discount in winter, because a reduced circulation brought cash back to their reserve? The notion is too absurd to need discussion, yet there are thousands who look at the weekly reports of the notes issued in order to learn what events are about to happen. in the banking market.

The City world, and those who write on banking, set up the theory-if that can be called theory which is composed of affirmations only-that the amount of the reserve of the Bank of England, taken in the ratio it bears to the Bank's liabilities, scientifically ought, and practically does, govern the rate of its own discount, and indi

are of the commercial and wen of te poincai ber

won the tate of men i minis, viether atei or min. and ther umillar dements of the smarton. All these drcumstance, according to their character m a given May nay uz with great force in overthrowing a ixed and definite so-called scientific ratio.*

For instance, would the propounders of this doctrine ✅a determinate ratio of reserves to liabilities, maintain If out of a reserve of ten millions dimes being

• See Appendix, p. 487.

quiet, no commotion or alarm in the money market, business running in its accustomed groove and deposits standing much at the same figure-a bad harvest suddenly prompted extensive purchases of corn abroad, whereby five millions were lost to the Bank out of the ten-would, I ask, the ratio theorists affirm that the Bank would be bound by an immutable law of banking to make spasmodic efforts to restore by a violent rate of discount the prescribed size to the reserve? It is impossible to conceive upon what arguments, what facts furnished by an analysis of banking, the existence of such a law and the rationality of such a practice, can be established. That the directors of the Bank of England should deliberately determine at what point the Bank may be in danger of not being able to meet the demands of its depositors is very conceivable indeed, though I do not believe that for many long years they ever did anything of the kind. If they ever did, the quality of the deposits and the circumstances of the hour most assuredly will have entered largely into their judgment. An arbitrary and unalterable ratio between deposits and reserve has no knowledge or science at its foundation.

It might well be, that in the instance here supposed, sudden and large purchases of corn should be accompanied by a considerable rise in the Bank rate of discount, but the propagators of the ratio theory would be grossly in error if they imputed it to an effort to call back gold to the reserve. It would have a very different cause. These purchases would be effected to a very large extent with means borrowed from banks; thus the number of borrowers would be notably increased, and the demand for accommodation in the money market

to only an insignificant amount. Further, we see what deposits really are, debts due by a banker for a power of collecting money which has been lodged with him, and which exists for him in the debts due to him by his borrowers. Iron, coals, and sugar are the whole substance of the banking in this transaction. They are the whole of the money-market also, for this transaction is the exact type of all the others, saving only the shuffling about of these debts amongst the bankers themselves.

The broker character of the banker is very visible in these transactions. He is a medium between the ironmaster and the sugar merchant, and a medium only. The banker is the link between the two, who, so to speak, introduces the one to the other. What can be more obvious? it will be said; a mere truism. If it is a truism, then it is Political Economy of the right sort; only unfortunately it is a truism hourly forgotten in every banking community in the world. The great value of recognising that the banker is in reality a broker only consists in this, that it keeps before the mind the great central fact, a fact of incalculable importance for its consequences, that it is the two principals of the banker, his depositor and his borrower, who possess all the forces of banking, and are the doers of all that occurs in the banking world. The great events of banking, the abundance or scarcity of its resources, its ability to assist trade, high or low rate of discount, panics and crises, depend not on banks and bankers, but on the state of the wealth of the country, and the effects which it produces on the two principals whom the banker has brought together. The banker's one sole function is to