If rupees have to be released hurriedly from the silver portion of the gold standard reserve

I think it is possible to show that such a policy is likely on the whole to have an exactly opposite effect. It may be said to correspond, therefore, to the London rate for some comparatively short period—say for fortnightly loans. My second point affects the kinship of Indian arrangements to those lately developed in other parts of the world. But this case is different: the Governor acted on a wrong system; he took upon himself an unnecessary responsibility:’ and so a Governor who incurred disaster by disregarding his skilled counsellor would be thought a fool in the City for ever. As has been explained, a new man, with a small capital of his own and a large borrowed capital, can undersell a rich man who depends on his own capital only. This would at first naturally cause a reduction in the bankers’ balances; at least that would be its tendency. By supplying these uses, they gained the credit that afterwards enabled them to gain a living as deposit banks.

In return for these substantial benefits the Bank of England received from the Government, either at first or afterwards, three most important privileges. And the difficulty of dealing with a panic (as the administration of the Bank is forced to deal with it) is perhaps a more formidable instant difficulty than presses upon any single minister.

From 1866 to 1870 there was almost an unbroken calm on the money market.

The principal mode in which money is raised by traders is by ‘bills of exchange;’ the estimated certainty of their paying those bills on the day they fall due is the measure of their credit; and those who estimate that liability best, the only persons indeed who can estimate it exceedingly well, are the bill-brokers. If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security–on what is then commonly pledged and easily convertible–the alarm of the solvent merchants and bankers will be stayed. ; and, not unnaturally, the Bank thought it unreasonable that so large an inroad upon their resources should be made by their rivals. The main conclusion is very plain–that English trade is become essentially a trade on borrowed capital, and that it is only by this refinement of our banking system that we are able to do the sort of trade we do, or to get through the quantity of it.

J. But the Bank directors are not afraid. Between 1894 and 1904[115] no new Banks were founded with as much as 5 lakhs of paid–up capital. It cannot let the money market take care of itself because it has deposited much money in that market, and it cannot pay its way if it loses that money.

It is an excellent instance of the consequences of an attempt to control banking by an elaborate Act forty years old. So great was that difficulty that the practice of hoarding was common. What is the underlying significance of this growing tendency on the part of European State Banks to hold a part of their reserves in foreign bills or foreign credits? We saw above that the bank–rate policy of the Bank of England is successful because by indirect means it causes the Money Market to reduce its short–period loans to foreign countries, and thus to turn the balance of immediate indebtedness in our favour.

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