Lombard Street | Page 8

necessity of continually
resorting to inferior soils, they can undersell countries where profit is
high in all trades needing great capital. And in this theory there is
doubtless much truth, though it can only be applied in practice after a
number of limitations and with a number of deductions of which the
older school of political economists did not take enough notice. But the
same principle plainly and practically applies to England, in
consequence of her habitual use of borrowed capital. 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. The rich man wants the full rate of mercantile profit on the
whole of the capital employed in his trade, but the poor man wants only
the interest of money (perhaps not a third of the rate of profit) on very
much of what he uses, and therefore an income will be an ample
recompense to the poor man which would starve the rich man out of the
trade. All the common notions about the new competition of foreign
countries with England and its dangersnotions in which there is in other
aspects much truth require to be reconsidered in relation to this aspect.
England has a special machinery for getting into trade new men who
will be content with low prices, and this machinery will probably
secure her success, for no other country is soon likely to rival it
effectually.
There are many other points which might be insisted on, but it would
be tedious and useless to elaborate the picture. The main conclusion is
very plainthat 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.
But in exact proportion to the power of this system is its delicacy I
should hardly say too much if I said its danger. Only our familiarity
blinds us to the marvellous nature of the system. There never was so
much borrowed money collected in the world as is now collected in
London. Of the many millions in Lombard street, infinitely the greater

proportion is held by bankers or others on short notice or on demand;
that is to say, the owners could ask for it all any day they please: in a
panic some of them do ask for some of it. If any large fraction of that
money really was demanded, our banking system and our industrial
system too would be in great danger.
Some of those deposits too are of a peculiar and very distinct nature.
Since the Franco-German war, we have become to a much larger extent
than before the Bankers of Europe. A very large sum of foreign money
is on various accounts and for various purposes held here. And in a
time of panic it might be asked for. In 1866 we held only a much
smaller sum of foreign money, but that smaller sum was demanded and
we had to pay it at great cost and suffering, and it would be far worse if
we had to pay the greater sums we now hold, without better resources
than we had then.
It may be replied, that though our instant liabilities are great, our
present means are large; that though we have much we may be asked to
pay at any moment, we have very much always ready to pay it with.
But, on the contrary, there is no country at present, and there never was
any country before, in which the ratio of the cash reserve to the bank
deposits was so small as it is now in England. So far from our being
able to rely on the proportional magnitude of our cash in hand, the
amount of that cash is so exceedingly small that a bystander almost
trembles when he compares its minuteness with the immensity of the
credit which rests upon it.
Again, it may be said that we need not be alarmed at the magnitude of
our credit system or at its refinement, for that we have learned by
experience the way of controlling it, and always manage it with
discretion. But we do not always manage it with discretion. There is the
astounding instance of Overend, Gurney, and Co. to the contrary. Ten
years ago that house stood next to the Bank of England in the City of
London; it was better known abroad than any similar firm known,
perhaps, better than any purely English firm. The partners had great
estates, which had mostly been made in the business. They still derived
an immense income from it. Yet