116 PRESIDENTIAL ADDRESS SECTION F. 



not internationally viable, for the only accepted international 

 currency, bullion. The credit of national currencies was estimated 

 in terms of the bullion cover held, and not in terms of the business 

 transacted or to be transacted. The third term to which both sales 

 and purchases were to be reduced split up into two terms — the 

 currency credit of the selling and that of the purchasing nation, 

 thus constituting a sort of economic quaternio ter minor um, which 

 instead of bridging extended the gulf between national currencies. 



To understand the situation which eventuated between cur- 

 rency systems we ma)' compare the banking system under separate 

 and distinct reserves. If banks were to keep in cash all moneys 

 deposited with them business would come to a standstill. If, 

 again, banks were to lend all moneys deposited with them, panic 

 would ensue, and within a short period collapse. Between these 

 extremes lies the middle course — the finding of which means suc- 

 cessful banking. The desirable system is that which enables banks, 

 when necessary, to turn into cash the maximum of their assets 

 with the minimum of general disturbance. Banks usually comply 

 with these conditions by investing their deposits in overdrafts, bills, 

 and short-time loans secured upon scrip. The proved disadvantage 

 of this system of banking is that when it becomes desirable to 

 strengthen their reserves banks call in overdrafts and short loans, 

 and refuse to renew credit instruments, just when their debtors 

 find it most difficult to repay them. Probably the latter even go 

 to a competing bank. Thus the strengthening of one bank's 

 reserve can only be accomplished at the expense of another bank. 

 Practice has shown that in times of threatened crisis overdrafts 

 and scrip loans cannot really be turned into liquid assets. Their 

 withdrawal in times of active trade tends only to precipitate the 

 crisis and causes a heavy destruction of values. Commercial paper 

 without a discount market becomes again a lock-up of value till 

 maturity. The evil effects of the strengthening of reserves by one 

 bank at the expense of another was illustrated by American 

 experience. In America there were frequently recurring crises 

 culminating in the crisis of 1907, which very nearly led to a total 

 collapse of credit. The narrow margin by which complete sus- 

 pension had been missed led to a consideration of the situation and 

 the eventual adoption of the Reserve Bank principle — a banker's 

 hank, which gives to banks the same facilities which banks give to 

 their customers. 



The same characteristic of separate reserves was illustrated in 

 South Africa last year. In one month one bank lost £1,300,000 

 of specie, while another gained £1,000,000. The loss to the first 

 bank meant a reduction of that bank's metallic reserve of 50 per 

 cent. The bank naturally curtailed its business and absolutely 

 refused the most useful and legitimate business of a bank — the 

 financing of produce in course of transit to market. 



In both cases the same remedy has been devised, that of a 

 central banking or central reserve system. Such a reserve bank 

 is not a competitor of the commercial banks. It holds their reserves 

 and only intervenes in times of crisis. Then it extends credit 



