The weakest spot of our system arises from the custom of the cash reserves of the bankers being kept with the Bank of England, that is, the one-reserve system. The total deposits held by the banks of the kingdom may be roughly estimated at one thousand million pounds, and practically the whole of this vast sum is repayable in cash on demand. But banks conduct their business on the law of averages, assuming that the demands for cash will be met by the deposit of cash—that what is paid out to one set of customers will be paid in by another set; and, while keeping sufficient till money to tide over the variations of demand and supply from day to day, they maintain no other reserve of cash, beyond the balance at the Bank of England,—or with a London agent, through whom such balances are in effect passed on to the Bank of England. Thus the Bank of England is the reservoir from which all banks expect to be able to draw cash in time of need.
When we turn to the Bank Return, what cash do we find is retained to meet such a heavy contingent liability? In the figures of the “Return” given in chapter vii., the “Reserve” stands at about twenty-five million pounds only; and with regard to this Reserve, it must be remembered that the Bank is peculiarly open to foreign demands in addition to home demands. Such a reserve is slender, to say the least of it, and the strengthening of the “Reserve” to a figure more in keeping with our increased liabilities is, or should be, constantly before the authorities who have the control of our banks. This matter will have to be faced some day, and the longer action is delayed the more difficult will it become to grapple with it.
Various schemes for increasing our reserve have been put forward from time to time: one suggestion was that banks should retain a safety reserve of gold in their own keeping; another that a bankers’ bank should be established, to hold the reserves of other banks in place of the Bank of England; a third, that each bank should maintain a larger balance with the Bank of England, on the understanding that that institution should increase its reserve in respect of such increased balances. These schemes have each their advocates and opponents, but with each the result to the banks would be a loss of profit, for each would involve more money lying idle. This loss of profit is at the root of the whole difficulty.