The profit derived by the Bank from such issue is made from the securities which bear interest. The profit is, however, divided, the Government receiving £200,000.

The money market is affected when gold is taken from the Bank of England, and we shall see how it affects the rate of interest when we consider the causes of the fluctuations. If, however, as Mr. Bagehot suggested, the department was removed to Somerset House, it is a question whether the loss of a million or two of gold would affect market rates like what takes place under the present conditions.

The weekly reports of the banking department are, however, of greater importance to the outer market, and these reports are keenly scrutinised in order to ascertain what are the forces which might affect the value of money.

We see in the daily papers an analysis in the following form:

Issue Department

Those who study the figures very closely are able to guess more or less accurately what has taken place during the preceding week. For example, if we take this particular week as an illustration, we note that the reserve in the banking department has decreased, which would show a greater demand for capital. We shall discuss in the next section the fluctuations of this reserve, and endeavour to understand how far the rate of interest is governed by its amount.

Although the Bank issues these weekly balance sheets, the directors do not state their reasons for making alterations. Sometimes an error of judgment occurs, but it is soon rectified, because the Bank cannot control the value of money. As the late Mr. Bonamy Price observed, "A banker is the interpreter of the forces at work, and he makes a trial of the rate which those forces prescribe".

In connection with the history of the Bank, we have already noticed a gradual growth of deposits, which shows that the public have great confidence in its management.

Although there has been a gradual growth of deposits, the Bank's position in the money market as a lender of capital has materially altered. Thus if we compare the total amount of capital lent by the banks of the United Kingdom with the amount lent by the Bank of England, we find the proportion is very small, viz.: In 1874 total lent by banks of the United Kingdom = £535,500,000; Bank of England = £10,800,000, or only 2 per cent. Again, its liabilities are small in comparison with the liabilities of the London joint-stock banks.

Again, in 1854, the proportion of capital to the liabilities of the Bank of England was 14 per cent., but in 1874 the 1ll proportion was reduced to 9 per cent. The Bank recognised the fact that its rate of interest was not always the market value, and consequently a few years ago informed the public that, although the minimum rate was published, yet under certain conditions it would discount bills below such rate.

Naturally this privilege would be granted to its own customers rather than to large financial houses which compete against it. The large borrowers of money in fact avoid the Bank if they can possibly do so, because it will only lend money for ten days, and sometimes charges 1 per cent. above the published rate.

In recent years the Bank has reduced the limit of loans from ten to seven days, but it reserves the right to state for what period the loan shall be made.

We have seen how the Bank gradually assumed a leading position in the money market, through its large paid-up capital, its large deposits, its being the bankers' bank, and finally by its holding the Government balances. There is, however, one important point in connection with its history, and that is, it assumed a great responsibility over the money market. In times of commercial crises and panics it undertook to lend capital to any one who was possessed of good security.

In 1825 the directors stated that the Bank had taken a firm and deliberate resolution to make common cause with the country. Mr. Hankey has said that the Bank ought never to have encouraged this opinion, but we cannot see how any other system could succeed when we consider its unique position. The only institution in this country which holds a gold reserve must of necessity be the final resource of the mercantile community.

During these periods of commercial disaster, the amount of capital advanced by the Bank of England has been very large. The usual proportion of 30 to 50 percent, of reserve against liabilities has not been kept, in fact the reserve at one time was so low as 6 per cent.

We will illustrate this policy on the part of the Bank by giving the amounts advanced during the great crises of the present century. With an increased demand for capital, the Bank at such periods naturally charged a high rate of interest, viz., from 6 to 10 per cent.

In 1857 the Bank stated that advances would only be made to bill brokers at certain seasons when the public deposits were particularly large, but at other times an application for an advance would be considered exceptional. The Bank, however, in the panic year of 1866, disregarded this rule.

The policy of the Bank during the critical years of 1872-3 and 1878-9 has been ably defended by Mr. Birch, the late governor. He says: "In 1872-3 an enormous amount of bills were created with a view of withdrawing gold from England to assist in the payment of the French indemnity to Germany. The Bank recognised the danger which might arise from this being carried to too great an extent, and then crippling the ordinary business of the country, and rapidly raised the rate of discount. I find that in 1872 we had seventeen changes in our rates of discount; in 1873 we had twenty-four changes. The bank rate varied from 3 per cent. to 9 per cent., and from 10 per cent. to 12 per cent. was charged in the latter period on advances, not with a view of making large profits, but with a view of telling people that it was a class of business the Bank would do everything in its power to keep within reasonable bounds."