4: The Position of the Chancellor of the Exchequer in the Money Market
The author fully supports the notion that banking is "a trade and only a trade," and like all others is best served by a government that leaves those with expertise to manage their business unhindered - to profit by their own prudence, to fail by their own recklessness.
Government is merely a customer of the banking industry, and at that is likened as "a very rich man with very great debts he cannot well pay." As government is in a financial sense much as any other business, which collects revenues and pays expenses, and subject to the same expectations as any other entity: to be held to the terms of the agreements into which it has entered. Its success or failure in doing so leads to an assessment of its creditworthiness.
And as such, government interacts with the money market as does any other customer: it makes deposits and withdrawals, pays interest on any funds it borrows, and earns interest in the periods when its deposits exceed its withdrawals. Because of its immense size, it poses a problem to bankers: the government deposits vast sums collected from its citizens, and may require in excess of 5 million pounds on any given day to pay its expenses.
Where no bank exists that is sufficiently stalwart to manage such a massive account, it is probably much better for government to keep its own money. It would not be feasible to manage many small accounts, and giving all its business to one would result in "a mischievous supremacy" of that bank above all others. Ideally, the government would manage its own affairs to ensure that the receipt of taxation and the outflow of expenses should roughly balance, to ensure the government is solvent, and likewise to ensure that there should not be vast sums of wealth locked up in government coffers - as this is "dead capital" that withholds from citizens the benefit of its circulation.
It would also be detrimental for the government to prop up the banking industry by providing it the custody of the treasury funds. A bank must prove itself steady and reliable in the management of its affairs before it can be trusted by any depositor - and a bank that can only be steady if sustained by the funds of the treasury clearly lacks the competence to be entrusted with the public fund.
When government banks its funds, it gains the benefit of interest, just as any other depositor, and the public gains the ability to use those funds until such time as the government itself has need of them. The author describes an arrangement similar to time deposits, by which the government would deposit funds to a bank with some indication of when they would be withdrawn, to enable the banker to extend credit on them with some forecast of their withdrawal, and as such be better able to manage the funds to be available when needed. The author addresses the notion of emergency situations, in which the government might have a sudden need to withdraw its funds from the banks, and so long as the government pays whatever penalties are agreed upon, this should have no more detrimental effect on the banking system than any large depositor withdrawing his funds.
On the other hand, the government may at times find itself in the position of the borrower, having collected not enough taxes to cover its expenses, and to be able to borrow from the bank in order to meet its obligations and repay with future tax revenues. If the government maintain good credit, there is no reason it should be unable to borrow whatever funds are needed. In this sense, the interest paid by government on sums borrowed is a penalty for its own mismanagement of its cash flows, and encourage better management in future.
Under a good system of banking, a collapse of the financial system would be unlikely to happen, except from revolution or foreign invasion, which would in effect eradicate the government and nullify its ability to repay. It is likely that banks could predict with greater objectivity the stability of a government, and manage their reserves accordingly, and as such provide a harbinger to government to better manage its own affairs: just as a private enterprise must seek to remain creditworthy in order to obtain funds as needed, so would the government seek to remain stable to continue to obtain credit.
However, when Parliament meddles with the money market, granting to government privileges that are not extended to any other borrower, it creates instability in the economy. Whether through intention to misconduct, or out of a desire to have some hand in maintain the security of its own finances, government meddles in the money market to its own advantage, and the disadvantage of all other institutions: the banking industry and the general public who conduct business through those banks.
The author lists four "plain and grave evils" of a system of government-supported banking via tampering with the central reserve:
- Because the central bank was created by the state, it is more likely than a natural system to constantly require assistance of the state to remain solvent
- The consolidation of such massive wealth in a single reserve reduces the cash available in the money market, and as such makes the market the more delicate
- A central reserve places the entirety of the treasury in the management of a single board of directors, rather than mitigating risk by spreading the wealth among multiple banks.
- Because the central bank is a private entity, it is pressed by its shareholders to make a profit, and as such is encouraged to act in its own financial interests rather than the best interest of the public.
These four evils are "inseparable from the system," and are natural consequences of central banking.
In addition to these evils that naturally arise, there is an additional evil inflicted intentionally: not only has government created such a system but it acts in ways that impair it. That is, when the government periodically finds itself in need of more money than it has, it simply refuses to pay its bills and insists on being extended even further credit. This causes concern among the public, and a mistrust of the entirety of the banking system.
While the government is the largest single depositor, the among of private funds and the funds of foreign nations held in a bank far exceed it - and the trust of the owners of those funds is essential to the stability of the banking system. As such, when government acts in reckless manner, the confidence of other depositors and creditors is shaken, and they act in accordance with their perception of this perceived risk.
And this mere apprehension affects their behavior in ways that are detrimental to the system, even when the worst of their fears do not actually come to pass. As such, the stability of the banking system thrives on confidence or suffers from concern - both borne entirely on public opinion rather than matters of fact.