Front Page Titles (by Subject) SECTION IX.: MONETARY PANICS. - A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
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SECTION IX.: MONETARY PANICS. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 2 A History of Banking in Great Britain, the Russian Empire, and Savings-Banks in the U.S.
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The Panics of 1764, 1772, 1782, 1793—Remarkable Remedy of the Latter—The Panic of 1797—The Bank Suspends—£1 and £2 Notes Issued—The Famous Panic of 1825—Speculation its Cause—Opposition to £1 and £2 Notes—The Crisis of 1838-39—The Panic of 1847—Its Instant Remedy by Releasing the Bank Restriction—Sir Robert Peel’s Review of the Workings of the New Bank Act—Parliamentary Committee of 1848—The Author’s Currency Discoveries—The Panic of 1857—The Panic of 1866—Overend, Gurney & Co.’s Great Failure—The Crisis of 1890—The Barings’ Suspension.
ALL commercial crises originate, as we have seen in the preceding chapter, in the over-creation of credit, in credit created which cannot be redeemed, and not in spots on the sun’s disc or conjunctions of the planets. It is the express business of merchants and traders to speculate. And in the vast numbers of the mercantile community who are always speculating, a considerable number must speculate badly, especially in times of great changes in price, and consequently over-creations of credit are constantly accumulating, and in process of time they come to a head and burst in a commercial crisis. Commercial crises are, therefore, innate in the colossal system of modern credit and are unavoidable.
A monetary panic is a general run upon bankers for gold. It is not the business of bankers to speculate themselves, but to judge of and control the speculations of others. No doubt bankers are often duped and deceived into supporting bad speculations; but they do not originate them,—which shows the fallacy of Sir Robert Peel’s fancy, that all commercial crises originate in excessive issues of bank notes. But when a commercial crisis attains a certain magnitude and intensity, there is great danger of its developing into a monetary panic, or a general run for gold upon bankers. Monetary panics, in this country at least, have been invariably produced by bad banking legislation, or by bad management of the Bank of England; sometimes by both. Monetary panics are, therefore, generally speaking, avoidable.
Ever since the prodigious development of the system of credit, from the latter end of the seventeenth century, there have been periodical commercial crises which, after a certain degree of tension, have deepened into monetary panics, accompanied by great failures of banks, and very severe runs for gold on those banks which were able to stand their ground. And it has been a subject of sore perplexity to know how these monetary panics are to be controlled, and the proper action of the Bank of England during their continuance. There have been, and still are, two conflicting theories on the subject: 1. That in periods of great commercial crisis, the issues of the Bank of England should be rigorously restricted, and give no aid to commercial houses. This may be called the restrictive theory. 2. That, at such periods of extreme commercial pressure, the issues of the Bank of England should be liberally expanded so as to support all commercial houses which can prove themselves to be solvent. This may be called the expansive theory. In the series of commercial crises and monetary panics which have taken place during the last 140 years, each of these theories has been tried, and we have now to examine the circumstances of each crisis seriatim, and show the effect of each theory upon it. The experience on the subject has now been ample and abundant, so as to enable us to come to a definite conclusion.
THE MONETARY PANIC OF 1764.
The first great monetary panic in modern times which we need notice, took place in 1764 in Holland and neighboring countries. The banks of Amsterdam, Hamburg and Nuremberg did not issue notes in the discount of bills. They were pure examples of what is called by a certain party the “Currency Principle.” That is, those banks did not issue any credit except in exchange for specie. Thus, the credit they issued was exactly equal in amount to the specie it displaced. This principle was that advocated by the supporters of the Bank Act of 1844, and of Sir Robert Peel, who considered it as the panacea for all commercial crises.
The seven years’ war had just come to an end; and changes from peace to war or from war to peace, causing great fluctuations in price, are great promoters of commercial crises. The Neufvilles, two bankers at Amsterdam, were among the principal merchants and speculators, who had connections all over the Continent. At length their embarrassments became so great that the bankers at Amsterdam could no longer support them, and they failed for 330,000 guineas on the 29th July, 1763. Before the news of the actual stoppage reached Hamburg, the bankers of that town were thrown into the utmost consternation by hearing that it was intended at Amsterdam to allow the Neufvilles to fail. On the 4th August, 1763, the bankers at Hamburg met to consider how the tottering state of credit in that town was to be supported. They said: “We received a fatal express with the terrible news that you, the gentlemen of Amsterdam, would leave the Neufvilles to sink, by which we were all thunderstruck; never dreaming that so many men in their senses in your city would take such a step—a step which will infallibly plunge all Europe into an abyss of distress, if not remedied by you while it is time. We therefore send this circular and general letter to you by express, to exhort and conjure you, as soon as you receive this, to undertake still to support the Neufvilles, by furnishing what money they want, and giving them two or three persons of unquestionable probity and skill for curators, that their affairs and their engagements may be concluded and terminated without causing a general ruin, which will otherwise infallibly happen. If you do not, gentlemen, we hereby declare to you that our resolution is taken—that is to say, that though we represent a very respectable body of rich and respectable men, we have unanimously resolved to suspend our own payments, as long as we shall judge it proper and necessary, and that we shall not acquit them or the counter protest that shall come from you, or any whatever. This is the resolution we have unanimously taken, and from which we will not depart, happen what will. The fate of the general commerce of all Europe is, at present, absolutely in your hands; determine, gentlemen, whether you should crush it totally, or support it.”
The letter, however, came too late to exercise any influence, as the Neufvilles had been allowed to fail six days previously. A general failure took place; eighteen houses in Amsterdam immediately stopped payment. A much greater number in Hamburg immediately followed, and no business was transacted for some time except for ready money. The failures were equally general in many of the other chief cities of Germany. This crisis extended to England; and Smith says, that the bank made advances to merchants to the amount of a million. Thus this first great commercial crisis was in direct contradiction to the doctrines of the devisers of the Bank Act of 1844, for it occurred in places where the “currency principle” was in full force; and the Bank of England acted on the expansive theory.
THE MONETARY PANIC OF 1772.
In 1772, the first great monetary panic took place in England, in which the Bank of England was called upon to take a prominent part in supporting commercial credit. The preceding two years had been distinguished by the most extravagant over-trading. On the 10th June, Heale & Co., bankers in Threadneedle street, stopped payment, involving many others. The Bank of England and some merchants came forward to support credit; which had the appearance for a few days of being successful. But, in ten days’ time, a general crash ensued. The whole city was in consternation. There had not been such a prospect of general bankruptcy since the South Sea scheme. By the liberal advances of the Bank of England, the panic was at length allayed. But the bankruptcies of that year amounted to the then unprecedented number of 525. These speculations had been general throughout Europe; and in 1773 the crash extended to Holland. About the beginning of the year, the failures in that country were so alarming, and so extensive, that they threatened a mortal blow to all credit, public and private, throughout Europe. They were caused by great speculative dealings in trade, as well as in the public funds of different countries. The losses were estimated at £10,000,000—an immense sum for that period. Thus, the circumstances of this great crisis were like those of the first, in direct contradiction to the doctrines on which the Bank Act of 1844 is based; because English commerce was only saved by the expansive theory—by liberal advances by the Bank of England; and the crisis extended through countries in which the currency principle was in full force.
THE MONETARY PANIC OF 1782.
As we have remarked at pages 17 and 18, in 1782, the unhappy war with America was fortunately terminated, and immediately a prodigious extension of the foreign commerce, which had previously been unusually restricted, took place. The enormous markets thrown open to the merchants led to the most extravagant overtrading, which was greatly fostered by very incautious issues by the bank; and this led to a very alarming drain of specie from the bank, which produced a crisis, threatening to compel them to stop payment. The directors, however, considered that if they could only restrain their issues for a short period the returns in specie in payment of the exports would soon set in in a more rapid manner than they went out. They determined therefore to make no communication to the Government, but for the present to contract their issues until the exchanges turned in their favor. The alarm felt by the bank was greatest in May, 1783. They then refused to make any advances to the Government on the loan of that year, but they did not make any demand for payment of their other advances to Government, which were then between nine and ten millions. They continued this policy up to October, when at length the drain had ceased from the country, and money had begun to flow in from abroad. At length, in the autumn, when the favorable signs had begun to appear, they advanced to Government freely on the loan; although, at that time, the cash in the bank was actually lower than at the time when they had felt the greatest alarm. It was reduced to £473,000. The doctrine which Mr. Bosanquet stated guided the directors was this: That while the drain was going on, their issues should be contracted as much as possible; but as soon as the tide had given signs of ceasing and turning the other way, it was safe to extend their issues freely. This was the policy they acted upon, and it was entirely successful, and the credit of the bank was saved.
THE MONETARY PANIC OF 1793.
Mr. Tooke states from his own personal recollection that there had been an enormous and undue extension of commercial speculation, not only in the internal trade and banking of this country, but also throughout Europe and the United States, for some years previous to 1792. The amount of bank notes in circulation, which was under six millions in 1784, had increased to nearly eleven millions and a-half in 1792. At length, in the autumn of 1792, commercial failures began both here and abroad, as well as in America. The average of bankruptcies during the ten months had been fifty, in November they suddenly rose to 105. This unusual number created much uneasiness, but they diminished greatly in December. In January, 1793, they rose again. The French Revolution was now advancing with rapid strides; the King had been a prisoner ever since the 10th August. In November, the convention published what was tantamount to a declaration of war against every established government in Europe. Great Britain thought it time to arm. The militia were called out; on the 13th December Parliament met; and the King called the attention of the Houses to the increasing political ferment of the country, which had shown itself in acts of riot and rebellion. He said that the agitators were evidently acting in concert with persons abroad, and that it was impossible to see without the most serious uneasiness the evident intention of the French to excite disturbances in foreign countries, wholly contrary to the law of nations. Under these circumstances, it became necessary to augment the military and naval forces of the country. An angry correspondence inflamed the passions of both nations; and on the execution of the King, the British Government expelled the French Ambassador, and the convention instantly declared war. The declaration of war, though it must evidently have been foreseen, gave a shock to credit, which was already staggering. On the 15th of February, a house of considerable magnitude, deep in corn speculations, failed; and on the 19th the bank refused the paper of Lane, Son & Fraser, who stopped next morning, to the amount of nearly one million, involving a great number of other respectable houses. In the meantime the panic spread to the bankers. It began at Newcastle. The partners in the banks at Newcastle were opulent, but their private fortunes were locked up. They issued notes which allowed interest to commence at some months after date; and then they were payable on demand; when the run came they were unable to realize, and stopped payment. The panic immediately spread throughout the country. It was computed that there were nearly 400 country banks at that time; of these 300 were much shaken, and upwards of 100 stopped payment. The Banks of Exeter and the west of England almost alone stood their ground. They issued notes payable at twenty days’ sight; with interest commencing at the date of the note, and ceasing on the day of acceptance. The best contemporary authorities are unanimous in attributing this terrible disaster to the inordinate multiplication and reckless operations of these country “bankers,” which had been established in almost every town and even village in the country.
This great pressure extended to the London bankers as well as those of the country. One of them says that the extraordinary state of credit had obliged every person connected with trade and money transactions to gather in and husband every resource to meet all demands. That for six weeks back every man of money and resources had been straining every nerve to support himself and immediate friends, and could not give that support to others which they would have been disposed to do. All these circumstances naturally produced a demand on the Bank of England for support and discounts. But the bank being thoroughly alarmed, resolved to contract its issues. Bankruptcies multiplied with frightful rapidity. The Government urged the bank to come forward and support credit; but they resolutely refused. Sir Francis Baring greatly blames the directors for their action on the occasion. He says that they first accommodated themselves to the crisis; but their nerves could not stand the daily demand for guineas; and, for the purpose of checking the demand, they curtailed their discounts to a point never before experienced; and that, if they determined to reduce their issues, they should have done it more gradually. Their determination and the extent to which they carried it, came like an electric shock.
He says that there are three different causes for a great demand for guineas: 1. For export; 2. For the purpose of hoarding, from want of confidence in the Government and in the circulating paper; and 3. To enable country banks to discharge their demands while confidence in the Government and in the bank remained entire.
That every measure ought to be taken to prevent and mitigate the first cause except prohibition and bankruptcy. We may reserve the second till we come to 1797. That the third ought to be viewed not with indifference, but with a disposition to spend almost their last guinea. He shows, from the state of the exchanges, that it was quite impossible that the guineas could have left the country, as the loss on exporting them to Amsterdam was £3 6s. 3d.; and to Hamburg, £4 2s. 6d. per cent.; and it was notorious that large quantities of gold and silver were coming in from France. The cause of this was the continued depreciation of the assignats. Under these circumstances, he says that the directors acted quite wrongly; they ought to have seen that the guineas would have very soon come back to them, and that, in fact, they ought to have followed the precedent of 1783, which had been so successful.
When the bank adopted this perverse course, universal failure seemed imminent. Sir John Sinclair remembered the precedent of 1697, when Montague had invented exchequer bills to sustain public credit, and thought that a similar plan might be followed in this crisis. The Minister desired him to propose a scheme for the purpose, which he presented on the 16th April. A committee of the House of Commons was immediately appointed. In the meantime a director of the Royal Bank of Scotland came up with the most alarming news from Scotland. The public banks were wholly unable, with due regard to their own safety, to furnish the accommodation necessary to support commercial houses and the country bankers; that unless they received immediate assistance from Government general failure was inevitable. Numerous houses which were perfectly solvent must fall unless they could obtain temporary relief. Mr. Macdonald, M. P. for Glasgow, stated that the commercial houses and manufactories there were in the greatest distress from the total destruction of credit; that this distress arose from the refusal of the Glasgow, Paisley and Greenock banks to discount, as their notes were poured in upon them for gold.
The committee recommended that exchequer bills to the amount of £5,000,000 should be issued under the directions of a board of commissioners appointed for that purpose, in sums of £100, £50 and £20, and under proper regulations. After considerable doubts were expressed by Mr. Fox and Mr. Grey as to the policy of this extraordinary measure, which was unknown to the constitution, and might subvert our liberties, the bill passed. No sooner was the act passed than the committee set to work. A large sum of money (£70,000) was sent down to Manchester and Glasgow, on the strength of the exchequer bills, which were not yet issued. This most timely supply, coming so much earlier than was expected, operated like magic, and had a greater effect in restoring credit than ten times the sum would have had at a later period. When the whole business was concluded, a report was presented to the Treasury. It stated that the knowledge that the loans might be had operated in many instances to prevent them being required. The whole number of applications was 332, and the sum applied for was £3,855,624; of which 238 were granted, amounting to £2,202,000; forty-five for sums to the amount of £1,215,100 were withdrawn, and forty-nine rejected. The whole sum advanced was repaid; two only of the parties assisted became bankrupt; all the others were ultimately solvent, and in many instances possessed of great property. A considerable part of the sum was repaid before it was due, and all the rest with the utmost punctuality. So much scrupulous care was taken to preserve secrecy as to the names of the applicants, that they were not known to that hour except to the commissioners and their own sureties. After all expenses were paid, the transaction left a clear profit to the Government of £4,348.
Whatever were the prognostications of its futility and danger before it was done, its success was perfect and complete. The contemporary writers all bear witness to the extraordinary effects produced. Macpherson says that the very intimation of the intention of the Legislature to support the merchants operated like a charm all over the country; and in a great degree superseded the necessity of the relief by an almost instantaneous restoration of confidence. Sir Francis Baring concurs in this view, and adduces the remarkable success of the measure as an argument to show the mistaken policy of the bank. The panic was at length happily stayed. The failures up to July had been 932; in the remaining five months they were reduced to 372. Gold continued to flow in; and in the last six months of 1793, and during the two following years, money became as plentiful as in time of peace, and four per cent. interest could scarcely be got.
After careful deliberation, the Bullion Report warmly approved of it, censured the proceedings of the Bank of England, and especially cite it as an illustration of the principle they laid down, that an enlarged accommodation is the true remedy for that occasional failure of confidence in the country districts to which our system of paper credit is unavoidably exposed. Notwithstanding all this weight of testimony, practical and theoretical, in favor of the happy effects of this measure, some rigid doctrinaires afterwards condemned the proceedings as a violation of the true principles of economics. Even some who helped to devise it afterwards changed their opinion on the subject. Lord Sidmouth, in 1811, observed that he was, on consideration, inclined to doubt of its wisdom and policy. Lord Grenville also said, from experience and reflection, he was convinced the measure was founded on wrong policy; as one of those who were concerned in the measure, he was perfectly ready to avow his error; for he was perfectly satisfied in his own mind that it was unwise and impolitic.
The reply to these objections seems to us to be perfectly plain and simple. In the first place, if it were a violation of the true principles of economics, it immediately resolves itself into a question of loss of capital. It is quite easy to show that all great errors in economics are destructive of capital. They may be estimated in money. Was this measure a pecuniary loss to the country? But what would have been the loss to the country if it had not been adopted? The simple result would have been that every bank in the country would have stopped payment, and nineteen out of every twenty merchants would have been ruined. Who can estimate the destruction of capital that would have ensued in the general wreck of public credit? It might have endangered the safety of the State. But there are other arguments which appear to us to be conclusive as to its propriety. The general loss of credit was chiefly caused by a thorough want of confidence in the circulating medium, or the currency of the country. The miserable notes of the majority of country bankers were utterly blown upon. The indispensable necessity was a solid currency. Now, what was it that caused such an unsafe currency to be in circulation? It was nothing but the unjustifiable monopoly of the Bank of England. It was this monopoly, which was itself the most flagrant violation of the true principles of economics, which was the cause of the bad state of the circulating medium. This monopoly prevented the formation of solid banks in the country. Consequently, the measure of the Government in providing a solid currency, in which everybody had confidence, was merely the correction of the error which led to these deplorable results. An undesirable one it may be, but yet no better one was possible under the circumstances. The superior wisdom of the Bullion Report, one of the wisest and most masterly reports ever presented to Parliament, and one of the great landmarks of economics, corroborated by the subsequent series of monetary panics, infinitely outweighs the morbid doctrinairism of Lord Sidmouth and Lord Grenville. This crisis alone is amply sufficient to decide between the merits of the restrictive theory and the expansive theory. While the restrictive theory, if it had been persevered in, would have involved the whole mercantile and banking community in absolute ruin, the expansive theory instantly saved them. We shall find the experience of this monetary panic amply borne out by the experience of all subsequent monetary panics.
It was at this period, as far as we can ascertain, that London bankers introduced a slight, and to all appearance, an unimportant change in the method of doing business, which was yet followed by the most momentous consequence in the history of banking. The panic extended, as we have seen, to London bankers. Now, when bankers issue notes in a dense population like London, it gives great facilities to their enemies to work them injury. Their enemies had only to go and buy up their notes in all directions, and then go and present them suddenly for payment, and the bankers, not being prepared for such a sudden demand, may be ruined. Now, in that unique and unrivalled collection of banking documents in the possession of Messrs. Child and Co., the latest note of a London banker in it is dated April, 1793. From this time, London bankers wholly ceased to issue their own notes; and exclusively allowed their customers to circulate their bank credits by means of cheques. This slight change in the method of doing business ultimately produced a result which no one could have foreseen. The business of “banking” was considered so essentially to consist in issuing notes, that to prevent persons from issuing notes was considered as effectual to prevent them from “banking.” Accordingly, the monopoly clauses of the Bank Charter Act conferred upon the bank the monopoly of issuing notes. But about thirty years after London bankers had shown that banking business could be carried on in London without issuing notes, persons began to scrutinize the privileges of the Bank of England, and they maintained that its privileges were exclusively confined to issuing notes.
By a fortunate accident, the opportunity which this method offered of circumventing the monopoly of the bank was not discovered for many years afterwards. If it had been, there cannot be any doubt but that Parliament would have put it down very quickly. When it was discovered and acted upon, the age of such monopolies had passed away, and the demand of the bank to have it provided against was refused.
THE MONETARY PANIC OF 1797.
We must now be very minute in detailing the circumstances of the monetary panic of 1797, in which the restrictive theory was carried out to the bitter end, and resulted in the stoppage of the bank. Sir Francis Baring and Mr. Tooke, two financial authorities of the very highest eminence, both agree that nothing could be more satisfactory than the financial condition of the country during 1794 and part of 1795. Both agree that the circumstances of the embarrassments which led to the catastrophe in 1797 began in the latter part of 1795. Mr. Tooke places the commencement rather earlier than Sir Francis Baring. He states that the winter of 1794-95 was one of the severest on record; and that in the spring or summer of 1795 apprehensions began to be felt for the growing crops. The prices of all sorts of corn advanced rapidly. The spring of 1795 was very cold and backward, the summer wet and stormy, and the harvest unusually late. Wheat, which was at 55s. in January, rose to 108s. in August. The same scarcity was general throughout Europe and America. France was in a still worse position than England; and the Government, still further to embarrass her and afford relief to England, seized all neutral vessels laden with corn and bound for France. It also employed agents to buy corn in the Baltic ports, where its price had already been greatly raised in consequence of large purchases on account of the French Government.
Sir Francis Baring also states that the method in which the Government contracted the loan that year tended much to aggravate the evil. He says, that in former wars it had been usual for the Government to contract with none but the most respectable moneyed men, who had the undoubted power to fulfill their engagements. On this occasion the Minister contracted with men who did not possess those powers; and, in order to make good their payments, they were obliged to have recourse to operations on foreign places, which deranged the exchanges, and had a still greater effect in raising the rate of interest in this country. These causes alone were sufficient to create a monetary pressure; but though they were inconvenient, there would have been nothing to create alarm in them. They were, however, aggravated and intensified by other circumstances, which we must now relate.
The enormous abuses which might be perpetrated by an unscrupulous government, and the dangerous power which so potent an engine as the Bank of England would confer upon them, had been clearly foreseen by its antagonists at the time of its foundation, and had inspired them with a well-grounded jealousy. Stringent precautions were taken in the first Act of 1695 to prohibit the bank from making any advances to Government without the express permission of Parliament. It had been the custom, however, time out of mind, to advance for the amount of such Treasury bills as were made payable on the bank, up to the amount of £20,000 or £30,000, when it was usual for the Treasury to send down orders to set off such advances against the accounts to which they properly belonged. If ever these advances reached £50,000, it was a subject of complaint. In the American war these limits had been much exceeded, and sometimes reached £150,000. Mr. Bosanquet was governor of the bank in 1793, and the legality of such proceedings excited grave doubts in his mind. After consulting with his brother directors, they agreed that it was a serious question whether the penalties provided in the act did not extend to such transactions. They, therefore, thought it would be expedient to apply to the Government to obtain an act of indemnity to relieve them from any penalties they might have incurred, and to permit such transactions to a certain limited amount. Mr. Bosanquet, who conducted the negotiation with Mr. Pitt, expressly says that Mr. Pitt proposed to bring in a clause which should indemnify the directors to advance to a limited amount. He says that it was originally intended that the penalty should be taken off only in case the advance on Treasury bills should be restrained within a limited sum. This limited amount was intended to be fixed at £50,000 or £100,000. Mr. Bosanquet, however, went out of office, and was unable to attend further to the negotiation. Mr. Pitt was much too keen not to see at once the enormous facilities Government would obtain if this act was passed. Accordingly, he pressed it quickly through Parliament; but he took care to omit any clause of limitation (Act, Statute 1793, c. 32). Never had such a formidable engine been placed in the hands of a Minister. He was now armed with the unbounded power of drawing upon the bank; with nothing to restrain him, unless the directors should take the audacious step of dishonoring his bills. The bank was henceforth almost at his mercy, and then he plunged headlong into that reckless career of scattering English gold broadcast over Europe.
No sooner had Mr. Pitt obtained this surreptitious power over the bank than he set all bounds of moderation at defiance; and, sure of being able to command unlimited supplies at home, he proceeded to send over enormous amounts of specie to foreign powers. In 1793, the subsidies and sums paid to foreign governments amounted to £701,475. In 1794, the foreign subsidies were £2,641,053; in 1795 they amounted to £6,253,140. Thus, in three years, the sums sent abroad amounted to upwards of nine millions and a-half. These were, however, not the totals of the specie sent abroad on other accounts. In 1793, it was £2,715,232; in 1794, £8,335,592; in 1795, £11,040,236. These great remittances had the inevitable effect of making the foreign exchanges adverse, and excited the greatest alarm in the bank parlor. At the same time that this great drain of specie was going on, the Treasury bills increased to an unprecedented amount, and the demands for accommodation from the commercial world were equally pressing. Nothing could be more unpleasant than the position of the directors, placed between these powerful parties contending for accommodation, which it was daily becoming less in their power to give. So early as the 11th December, 1794, the directors foresaw the ensuing pressure, and made representations to Mr. Pitt. In January, 1795, it became necessary to adopt a firmer attitude; and, on the 15th, they passed a resolution that a foreign loan of six millions and a home one of eighteen millions being about to be raised, the Chancellor of the Exchequer must be requested to make his financial arrangements for the year without requiring further assistance from them; and more particularly, that they could not allow the advances on Treasury bills at any one time to exceed £500,000. Mr. Pitt promised to reduce them to that amount by payments out of the first loan. He, however, paid little regard to these remonstrances; and, on the 16th April, they were compelled to remind him that he had not kept his promise, that the sum should be reduced. They told him that they had come to a resolution that they would not, in future, permit the advances to exceed the stipulated sum. Mr. Pitt pretended that he had forgotten the circumstance in the multiplicity of business, and promised that the sum should be immediately paid. Nevertheless, no reduction took place in the amount; another remonstrance was equally ineffectual, and on the 30th July, the directors informed him that they intended, after a certain day, to give orders to their cashiers to refuse payment of all bills, when the amount exceeded £500,000. Mr. Pitt was not prepared to comply with this request, and on the 6th of August he applied to them for another advance of two millions and a-half; but they refused to take his letter into consideration until he had made satisfactory arrangements with them for the repayment of the other advances. After some further communication, he persuaded them to agree to the loan for £2,000,000.
The act of Mr. Pitt had, in fact, deprived the directors of all control over the bank. The foreign exchanges began to fall rapidly towards the end of 1794, and in May, 1795, had reached such a depression as to make it profitable to export bullion; and this circumstance, as well as the knowledge that several foreign loans were in progress, should have warned the directors of the necessity of contracting their issues. Such was the course of the directors in 1783. Instead of that, their issues were greatly extended. In the quarter, from January to March, 1795, they stood higher than they had ever done before; though we must, in common fairness, acquit the directors of the whole blame. The amount of their issues, in August, 1794, was little more than ten millions; in February, 1795, it had increased to fourteen millions; but this was chiefly caused by the bills which were drawn on the Treasury on behalf of foreign governments and made payable at the bank. The directors had then to choose between endangering their own safety, or making the Government bankrupt.
All these concurrent causes began to produce their full effect in the autumn of 1795. The drain commenced in September, and proceeded with alarming rapidity. On the 8th October the bank made a formal communication to Government, that it excited such serious apprehensions in their minds as to suggest an absolute necessity that the advances to Government must be reduced. They reminded him of the warning they had given in the beginning of the year as to the danger of the foreign loans, which had been fully verified, and that numerous other payments must be shortly provided for. That the market price of gold was then £4 4s. per ounce. Under these circumstances, the bank could lend no further assistance to the Government. On the 23rd of the same month, the directors, having heard of a new loan, waited on Mr. Pitt, who professed that he had not at the time the most distant idea of one. On the 18th November, the governor informed Mr. Pitt that the drain continued with unabated severity; and that the market price of gold was £4 2s. per ounce; and said that rumors were in circulation that another loan was intended, notwithstanding Mr. Pitt’s denial of it so lately. Mr. Pitt said that, since their last interview, the successes of the Austrians had been so great against the French, that he was of opinion that it would highly conduce to the common cause to aid them with another loan not exceeding two millions; but he added that if such a course would be hazardous to the bank, every other consideration should be overlooked and the loan abandoned.
Parliament met on the 29th October, in the midst of great public excitement and dissatisfaction. The King was saluted with loud groanings and hootings, and volleys of stones were flung at his carriage, as he went to open the session. The speech said that for some time past he had observed with the greatest anxiety the very high price of grain, and that this anxiety was much increased by the deficiency of the harvest this year. A committee of the House of Commons was immediately afterwards appointed to consider the high price of corn. In December the House came to strong resolutions as to the necessity of diminishing the consumption of wheat as much as possible, and the members of both Houses signed an engagement to diminish the quantity by at least one-third, and to use their influence to persuade others to do the same; and an act was passed offering heavy bounties on the importation of corn.
The project of a loan going on, and it now being proposed to be £3,000,000, the directors, after a very solemn deliberation on the 3d of December, came to the unanimous resolution that, if the loan proceeded, they had the most cogent reasons to apprehend very momentous and alarming consequences from the actual effects of the last loan, and the continued drain of specie and bullion. In answer to this representation, Mr. Pitt solemnly promised them that he would lay aside all thought of it, unless the situation of the bank should so alter as to render such a loan of no importance to them.
The directors at last found it necessary to choose between making the Government bankrupt, and taking stringent measures to restrict their accommodation to the merchants. They resolved to fix beforehand the amount of advances they could make day by day; and gave notice that if the applications on any day exceeded the sum so resolved to be advanced, a pro rata proportion of each applicant’s bills should be returned, without regard to the respectability of the party or the solidity of the bills. As matters continued to get worse, the directors had several communications with Mr. Pitt in January and February, 1796; but the project of the foreign loan being much dwelt upon with great earnestness by Mr. Pitt, on the 11th February they came to a resolution which was communicated to him the same day: “That it is the opinion of the court, founded upon its experience of the effects of the late Imperial loan, that if any further loan or advance of money to the Emperor, or other foreign State, should, in the present state of affairs take place, it will, in all probability, prove fatal to the Bank of England. The court of directors do, therefore, most earnestly deprecate the adoption of any such measure, and they solemnly protest against any responsibility for the calamitous consequences that may follow thereupon.” Mr. Pitt replied that after the repeated promises he had made that no further loan should be made without communication with the bank, and a consideration of their circumstances, he saw no occasion for these resolutions, and that he should consider them as having been made in a moment of needless alarm.
We have already seen from Mr. Pitt’s conduct with respect to the affair of the clause relating to the advance on Treasury bills, that he was not bound by any very scrupulous notions of honor. On this occasion, he departed still more widely from the right path; for, notwithstanding all his solemn promises, so frequently and emphatically made, the directors discovered that remittances were still continuing to be clandestinely made. In several interviews with him, the governor of the bank stated that he apprehended these remittances were being made. Mr. Pitt did not offer any explanation, and it was afterwards ascertained that they were being made.
The stringent measures adopted by the bank to contract its issues, caused much complaint amongst mercantile men, and a meeting of bankers and merchants was held at the London Tavern, on the 2d of April, who resolved that an alarming scarcity of money existed in the city of London, which was caused chiefly, if not entirely, by an increase in the commerce of the country, and the great diminution of mercantile discounts by the bank. They resolved that if means could be found to augment the circulating medium without infringing the privileges of the Bank of England, so as to restore the amount to what it was before the contraction of discounts, it was the duty of every friend of trade to give such a plan the most earnest support. The meeting appointed a committee to prepare a plan for such a purpose. Mr. Boyd drew up a long report on behalf of the committee, which proposed that a board of twenty-five members should be appointed by Parliament, who should be authorized to issue promissory notes, payable at six months after date, bearing interest at 1 1-4d. per £100 per day, upon receiving the value in gold, silver, Bank of England notes, or bills of exchange having not more than three months to run. The committee had an interview with the Chancellor of the Exchequer on the subject, and he informed them that the directors of the bank had proposed as a remedy that the floating debt should be funded, which plan he determined to try before adopting their scheme.
Mr. Pitt had never fulfilled his promise so often repeated to the directors, that the advances on Treasury bills should be reduced to £500,000; on the 14th June they were as much as £1,232,649. At the end of July he sent an earnest request to have £800,000 more at once, and a similar sum in August. They were induced to consent to the first, but refused the second advance. Mr. Pitt said that the first advance without the second would be of no use to him, and begged them to reconsider their decision. The directors, thus pressed, were driven to assent to it, but they accompanied it with a most serious and solemn remonstrance, which they desired should be laid before the Cabinet. They said that nothing under present circumstances could induce them to comply with the demand, except the dread of a worse evil following the refusal; and they said that this advance would incapacitate them from granting any further assistance during the year. They closed their remonstrance by saying: “They likewise consent to the measure in a firm reliance that the repeated promises so frequently made to them, that the advances on the Treasury bills should be completely done away, may be actually fulfilled at the next meeting of Parliament, and the necessary arrangements taken to prevent the same from ever happening again, as they conceive it to be an unconstitutional mode of raising money, which they are not warranted by the charter to consent to, and an advance always extremely inconvenient to themselves.”
However, in November, Mr. Pitt made a fresh demand on them for £2,750,000 on the security of the land and malt taxes of 1797, which was granted on condition that the advances on Treasury bills, amounting to £1,613,345 were paid out of it. Mr. Pitt took the money, but never paid off the bills. The directors sent again on the 1st February, 1797, to demand payment of them, as they then amounted to £1,554,635, and would in a few days be increased by £300,000 more. Mr. Pitt made many excuses for the non-payment, and promised to make an endeavor to do so; but he dropped a hint that another large sum of bills had come in from St. Domingo. Upon being pressed as to the amount, he said that it was about £700,000. The governor expressed the greatest apprehensions, and begged him to delay the acceptance as long as he could. Mr. Pitt then hinted that he should want a large sum for Ireland, which he said would be about £200,000. The governor assured him that the drain of cash had been continuous and severe of late, and that such a demand would be very dangerous.
The enormous failures of the country bankers in 1793 had been followed by a diminution of the issues of country banks to a very large extent. Mr. Henry Thornton, after instituting extensive inquiries in different parts of the country, stated as the result that the country bank notes were reduced by at least one-half, and that the wants of commerce had caused a very large quantity of guineas to be drawn into the country to supply their place. Meantime, as we have already observed, although the foreign exchanges had become favorable, the bank still continued to adhere, with the utmost severity, to its policy of restriction throughout the autumn of 1796; and during the last three months of that year they were no higher than they had been in 1782, though commerce was many times larger than it had been in that year. Commercial payments had to be made in some medium in which the public had confidence. As the public could not get notes, they made a steady and continuous demand for guineas. The bullion in the bank in March, 1796, was £2,972,000; in September, £2,532,004; and in December, £2,508,000, when a drain set in more severely than ever.
At this period, the political situation of the country was in the most gloomy condition. The warlike combinations of Mr. Pitt had totally failed, and all Europe was now smarting under the consequences of their suicidal policy in meddling with the French republic. Mr. Burke had pronounced, in 1790, that France was, in a political light, expunged from the system of Europe. That it was doubtful whether she would ever appear on it again. That Gallos quoque in bellis floruisse audivimus would possibly be the language of the next generation. So much for political prophecy! That country which had been supposed to offer so easy a prey to surrounding nations, and whose epitaph Mr. Burke had so kindly and sagaciously suggested, was now the most powerful State in Europe. She had quelled internal dissensions in oceans of blood, and poured forth her armies in resistless torrents to avenge herself on the haughty States which had presumed to meddle with her internal condition. Great Britain, which had commenced the war with every other State in Europe as her ally, was now left alone. The Directory had subdued Spain by artifice and negotiation, and concluded a treaty with her, offensive and defensive, at St. Ildefonso, on the 19th of August. The campaign of Napoleon in the north of Italy in 1796 is generally allowed to be equal, if not superior, in brilliancy to any subsequent one. By a series of marvellous victories he drove the Austrians out of Italy, and in the beginning of 1797 Rome was only saved from conquest by absolute submission at Tolentino, and within a month Venice was annihilated, and Austria sued for peace at Leoben. This great reverse of circumstances had strengthened the party which had always been advocates for peace in England, and Mr. Pitt was compelled to make overtures for peace in October, 1796. A British Envoy was sent to treat with the Directory, and he stayed in Paris for two months; but, as neither party was sincere, the treaty came to nothing. The fact was that peace was the furthest thing possible from the thoughts of the Directory. After the conquest of La Vendée, they had an army of 100,000 men set free under a general who is usually acknowledged to have been the equal of Napoleon in military talent, and who was burning to emulate his exploits in Italy. While the pretended negotiations for peace were going on, the Directory were organizing an immense expedition for the invasion of Ireland. The orders to sail were transmitted to it several weeks before the British Envoy was expelled from Paris, and it actually sailed two days before he left. Fortunately this great Armada was, like its predecessor, dispersed by a tempest; a few straggling vessels reached Ireland in the last week of December, but the rest were obliged to put back to France.
This terrible menace, which had been so long hanging over the country, and whose destination it was vain to conceal, inspired the utmost alarm, and there was a continual demand for guineas for Ireland. The year 1797 commenced with the most gloomy apprehensions and depression. The country bankers discerned that the first burst of the tempest would fall on them, and determined to provide for it, by obtaining as much specie as they could from London; and, accordingly, the drain from the bank continued with increased rapidity after the beginning of the year. Mr. Pitt had hinted in his interview with the governor of the bank, on the first of February, that a loan for Ireland would probably be required, which was not likely to exceed £200,000; but soon afterwards, the directors were struck with dismay on hearing that the amount required was £1,500,000. On the 10th of February, the directors came to a resolution that, before they could entertain any proposal for the Irish loan, the Government must pay off the debts to them amounting to £7,186,445, of which they handed him in the details. At that time, the banks of Newcastle had a more than usual demand upon them for cash. In addition to the manufactories and collieries, the number of troops stationed in that part of the country had been considerably augmented. The banks had imported an extra supply of cash to meet their purposes, and were negotiating for more, when an event happened which brought on the crisis. A French frigate ran into one of the Welsh harbors and landed 1,200 men. At the same time an order came down from the Government to take an inventory of the stock of the farmers all along the coast, and to drive it into the interior if necessary. These circumstances created a perfect panic among the farmers. On Saturday, the 18th day of February, being market day, the farmers, who at that time of the year had the principal part of their rents in their hands, actuated by the terror of an immediate invasion, hurried into Newcastle the produce of their farms, which they sold at very low prices; and immediately rushed to the banks to demand specie. Seeing the universal panic, the banks came to an agreement to stop payment on the Monday, which they accordingly did. On the 21st February the state of the bank became so alarming, that the directors resolved that the time had come when they must make a communication to the Government. The quantity of bullion had been rapidly diminishing, and the constant calls of the bankers from all parts of the town for cash showed them that there must be some extraordinary reason for it. Mr. Pitt was aware that this proceeded from the general fear of invasion, which he thought was magnified much beyond anything to warrant it. It was agreed that a frigate should be sent over to Hamburg to purchase specie. On the 24th of February the drain became worse than ever, and inspired them with such alarm for the safety of the house that they sent a deputation to Mr. Pitt to ask him how long he considered that the bank should continue to pay cash, and when he should think it necessary to interfere. Mr. Pitt said it would be necessary to prepare a proclamation to put a stop to cash payments, and to give Parliamentary security for the notes. But in that case it would be necessary to appoint a secret committee of the House to look into the affairs of the bank. The deputation assured him that the bank would readily agree to this, and it was resolved to call a meeting of the chief bankers and merchants of London to come to some resolution to support public credit in this alarming crisis.
The news of the stoppage of the Newcastle banks spread like wildfire throughout the country, and soon reached the metropolis. The drain upon the bankers’ coffers now became a run. The first serious apprehensions that danger was imminent were felt on the 21st of February; but the drain then became unexampled, till on Saturday, the 25th, the cash was reduced to £1,272,000. Before this the directors, in utter bewilderment at the state of the country, had used the most violent efforts to contract their issues. In five weeks they had reduced them by £2,000,000. On the 21st of January the issues were £10,550,830; on the 25th of February they were £8,640,250. But even this gave no true idea of the curtailment of mercantile accommodation; for the private bankers were obliged for their own security to follow the example of the bank. In order to meet their payments, persons were obliged to sell their stock of all descriptions at an enormous sacrifice. The three per cents. fell to 51, and other stock in proportion. On Saturday, the 25th, the court felt that the fatal hour was at last come, when they must for the first time since the institution of the bank come to a total suspension of payments. A meeting of the Cabinet was held on Sunday at Whitehall, and an order in council was issued, requiring the directors of the Bank of England to suspend all payments in cash, until the sense of Parliament could be taken on the subject. The King the next day sent a message to Parliament to inform them of the step that had been taken; and recommended the subject to their most serious and immediate attention. Mr. Pitt moved that the message should be taken into consideration next day; and he should propose that a select committee be appointed to investigate the state of the bank’s affairs, which he believed were in the most solid condition. The directors of the bank had the order in council printed and widely circulated, and issued a notice of their own to say that the general concerns of the bank were in the most affluent and prosperous condition, and such as to preclude every doubt as to the security of the notes. At this time the cash in the bank was reduced to £1,086,170. The relief produced at the instant, by the definite determination to suspend cash payments and extend their issues of paper, was very great. Within one week it increased its accommodation by nearly two millions. On the same day, a resolution was entered into by 4000 of the merchants in the city to combine to support the credit of the notes.
Both Houses of Parliament appointed committees to examine into the affairs of the bank. The committee of the House of Commons reported that the outstanding obligations of the bank on the 25th of February were £13,770,390, and the total amount of their assets were £17,597,280; leaving a surplus of £3,126,890 over and above the debts of the Government, amounting to £11,686,800, which paid them three per cent. Both Houses reported that it was advisable, in the public interest, that the suspension of cash payments should be continued for a limited time, and a bill for that purpose was accordingly brought in. After some debates, which threw very little light on the subject, the Act, Statute 1797, c. 45, was passed. Its chief provisions were: 1. A clause of indemnity to the bank and all connected with it for anything done in pursuance of the order in council. 2. The bank was forbidden to make any payments in cash to any creditors, except in certain cases, and protected from all law proceedings. 3. The bank might issue cash in payments for the army, navy or ordnance, in pursuance of an order from the Privy Council. 4. The bank was to make no advance above £600,000 for the public service, in cash or notes, during the restriction. 5. If any person deposited any sum, not less than £500, in gold, in exchange for notes in the bank, it might repay three-fourths of the amount. 6. It might advance £100,000 in cash to the bankers of London, Westminster and Southwark, and to the Bank of Scotland and the Royal Bank of Scotland, £25,000 each. 7. Payment of debts in bank notes to be deemed as payment in cash, if offered and accepted as such. 8. No debtor was to be held to special bail unless the affidavit stated that payment in bank notes had not been offered. 9. Bank notes were to be received at par in payment of taxes. 10. The bank might issue any cash it received since the 26th of February, upon giving notice to the Speaker of the House of Commons and advertising in the “London Gazette” and on the Royal Exchange. 11. The act to continue to the 24th of June.
An act was also passed to enable the bank to issue notes under £5 (Statute 1797, c. 28), and, by chapter 32, this was extended to the country banks; but they were to continue liable to pay money on demand for them; and on failure of doing so within three days after demand any justice of the peace might cause the amount and costs to be levied by distress. All banking companies and bankers in Scotland might issue notes payable to bearer on demand for any sum under 20s.
An event of such portentous magnitude as the suspension of cash payments by the Bank of England could not fail to give rise to the most conflicting opinions as to the necessity of the measure, of the course of conduct of the directors which led to it, and as to the policy which ought to have been adopted under the drain which occurred in the last week of February, 1797. Many men of great eminence and ability changed their opinions in after times, when they came to look back upon the subsequent events. In examining this question, so as to form a just estimate of the conduct of the directors, we must remember that they were not masters of their own policy. They were distracted by two antagonistic claims, both of which they conceived it impossible to satisfy at the same time—namely, that of the Chancellor of the Exchequer and the demands of commerce. They considered that if they advanced to the Government they must contract their issues to the merchants; and, as the Minister was the more powerful and imperious party of the two, they were obliged to yield to his power.
Several of the directors, being examined before the committees, unanimously attributed the necessity of stopping payment to the enormous amount of their advances to Government, and gave it as their decided opinion that if the Government had repaid those advances, as they ought to have done, the great catastrophe would have been avoided. It may, therefore, be taken as admitted on all hands that, if they had been repaid by Government, they would have very greatly extended their advances to the merchants. The real question therefore is whether, considering that they were under such advances to Government, it would have been prudent to be more liberal in their accommodation to merchants? Mr. Henry Thornton was very strongly of opinion that the excessive contraction of the bank notes had produced the most injurious effects in shaking public credit of all descriptions; that the excessive reduction of notes had caused an unusually severe demand for guineas; that the great public distrust was directed against country bank notes, and that the bank ought to have extended its issues to supply the place of the country notes. Mr. Walter Boyd, an eminent merchant and financial agent, was very clearly of opinion that the restriction of the issue of notes by the bank was the chief cause of the forced sale and depreciation of the public securities; and if the bank had only maintained its issues at the same height as they were in December, 1795, the drain of specie from the bank, as well as the embarrassments of the mercantile world, would have been avoided, and a great portion of the fall which public securities had experienced would have been prevented. Mr. George Ellison, who was secretary to an association of a large number of country banks, considered that the quantity of coin in the country was greater than it was in 1793, but that a very considerable part was hoarded away, owing to the public alarms that were abroad. He attributed the great public distrust to the remembrance of the conduct of the bank in 1793, when it suddenly contracted its discounts just at the period when they were most wanted.
The Committee of the Lords called the attention of the House very strongly to these opinions, but they did not venture themselves to pronounce an opinion on their justness. The Committee of the Commons went considerably nearer to approving of them. In the year 1810, the governor of the bank being examined before the Bullion Committee, stated that after the experience of their policy of restriction, many of the directors repented of the measure, and the Bullion Committee explicitly condemned the policy of the bank both in 1793 and 1797.
The directors of the bank, acting in the midst of such unprecedented circumstances and so tremendous an emergency, are entitled to have their conduct examined with all forbearance. But, taking all these circumstances into consideration, we cannot fail to acquiesce in the opinion expressed by so many eminent bankers and merchants at the time, by the subsequent avowal that experience had led many of the directors to repent of the policy they then pursued, and by the emphatic judgment of the Bullion Committee, that the policy pursued by the bank in this momentous crisis was erroneous, and that the severe restrictions they attempted to place upon commerce very greatly contributed to bring on the calamity which subsequently overwhelmed them. Nothing, in short, could be more unhappy than their management of their issues. When the exchanges were violently adverse, so that it was extremely profitable to export gold, they enlarged them to an extravagant extent; and when the exchanges were extremely favorable, so that gold was flowing in, they restricted them with merciless severity. The issues of notes, which were £14,000,000 when the exchanges were against the country, were reduced to £8,640,250 when the exchanges had for several months been eminently favorable. It is perfectly certain that the directors who managed the bank in 1783 would have acted very differently to the directors who managed it in 1797. In 1783, as soon as the exchanges became favorable, the directors expanded their issues, though the cash in the bank then was less than half what it was in 1797. It appears from the entire evidence in the reports, that it was this excessive restriction of notes which drained their vaults during the autumn of 1796, and that if they had been more liberal in their issues, their vaults would have been much better replenished with cash. It was a pregnant instance of the truth well known to all bankers, that an excessive restriction of credit causes and produces a drain of gold.
This great catastrophe was the second notable penalty which the country paid in four years for the unjustifiable monopoly of the bank. Never was there a more unfortunate example of monopolizing selfishness. It would neither establish branches of its own in the country, nor would it permit any other private company, of power and solidity, to do so, whose credit might have interposed and aided in sustaining its own. Moreover, when a failure of confidence was felt in the country notes, it refused to issue notes of its own to supply their place. The power of issuing, which plays so important a part in commerce, was absolutely forbidden to powerful and wealthy companies, and left in unbounded freedom to private persons—a vast number of them nothing but small shopkeepers, with no adequate capital or property to support their issues, and whose credit vanished like a puff of smoke in any public danger. The bank consequently was left alone to bear the whole brunt of the crisis, solitary and unsupported, and finally succumbed.
From the foregoing considerations, as well as the weight of authority on the subject, we can scarcely doubt that the suspension of cash payments was brought about at that particular time by the erroneous policy of the directors. But it appears open to much doubt whether any management, however skilful, could have prevented such an event at some period of the war. Several of those who concurred in the measure at the time, after their judgment had been corrected by subsequent experience, expressed their regret at having done so. Sir Robert Peel, in 1844, said it was a “fatal” measure. Notwithstanding, however, the concurrence of so many weighty authorities—and this is peculiarly a case where great authorities carry much weight—we cannot help thinking that it was fortunate that it occurred at this early period. The alarm and dangers which preceded its stoppage were comparatively slight compared with those which menaced the country after that event. The mutinies in the fleet, the rebellion in Ireland, a great army being gathered together, avowedly for the invasion of England, under the command of a more fortunate, though probably not a greater soldier than Hoche, were probably dangers of such portentous magnitude as to render it in the last degree improbable that any paper currency convertible into gold could have survived them.
That Montague was a greater financier than Pitt can, we think, scarcely be doubted, and the carrying through the recoinage of the silver, in the midst of so much public distress, was a financial operation of which the skill, audacity and success must ever be regarded with admiration. But it must be remembered that the crisis in that reign lasted a much shorter time than the revolutionary war, and was never fraught with so much real danger to the independence of the country. At that period, there was no paper credit except the notes of the Bank of England and a few London bankers; and William was at the head of a great European confederacy against one overgrown power. So that the circumstances of the two periods were in no way parallel, but rather, we may say, reversed. The confederacy against England at the latter period was far more menacing and formidable than the alliance against France. The fortunes of the British Empire were apparently at their lowest ebb in 1798; the state of Venice in the war of Chiozza was scarcely more desperate; and there seemed to be but one thing wanting to complete the destruction of the country—the loss of public credit. However great and invaluable are the blessings of a solid paper currency in the time of peace, there does not appear to be any instance of its having successfully withstood the danger of an invasion by a foreign enemy. The banks at Edinburgh, no doubt, survived two rebellions; but they took refuge in the impregnable fortress of the Castle of Edinburgh, which the insurgents were never able to capture. And at a later period, when banking was confessedly founded on a better system, and obtained the confidence of the country to a much greater degree, it could not have withstood the dread of invasion if it had not been for the timely assistance of the Bank of England. And if it could not do so in that country, where the danger was remote, it is morally certain that it could not have done so in England, where not only was it of much inferior stability, but was the very part of the Empire aimed at, and the first exposed to danger. Moreover, the constant power of producing public embarrassments by demands for gold, would have been a powerful weapon in the hands of the enemy, in which they would have found many to support them from political sympathy.
The scarcity of guineas, which led to the supposed necessity of issuing the order in council, also rendered a more abundant supply of the circulating medium necessary, and an act was immediately passed suspending till the first of May the Act, Statute 1775, c. 51, restraining the negotiation of small promissory notes. In a few days the bank caused to be prepared and issued £1 and £2 notes; and to supply still further the demand for small currency, they issued a notice that they had imported a large number of Spanish dollars, which were to be current at 4s. 6d. However, it was discovered that the dollars were undervalued by 2d. each, so their current value was enhanced by 3d. These dollars were stamped with a small king’s head. The bank having put the dollars into circulation at 1d. each above their market value, the bullion merchants were not slow in seizing the advantage and imported an immense quantity of similar dollars, which they stamped in a similar manner. They were called in on the 31st October, 1797, by which time the bank had put 2,325,099 into circulation. It at first attempted to refuse payment of the illegitimate ones, but they were executed in so close an imitation of the legitimate ones, that it was impossible to detect them, and they were obliged to pay them all.
Parliament met again on the 2d of November, and on the 15th the House of Commons appointed a secret committee to inquire whether it was expedient to continue the restriction. They presented a resolution of the directors stating that the condition of the bank’s affairs was such that it could with safety resume its usual functions. The committee, however, recommended that, in consequence of the state of public affairs, it was advisable that the restriction should be continued for a further period. After a short debate an act was passed to continue the restriction until one month after the conclusion of a definite treaty of peace.
THE MONETARY PANIC OF 1825.
The monetary panic of 1825 was the next instance in which the two conflicting theories—the restrictive theory and the expansive theory—were brought into contrast. The harvest of 1823 was deficient both in quantity and quality, and prices rose considerably in the beginning of 1824, old wheat being then at 78s.; later in the year, however, they declined; but the harvest of 1824 being inferior, they rose again. The bank had for some years been accumulating treasure to meet the anticipated deficiency of the country issues expected to follow the suppression of the £1 notes. When the unhappy change in the policy of the Government took place this great amount of bullion was rendered comparatively useless, and the country banks began to extend their issues in 1824; and in 1825 they exceeded what they were in 1818. In January, 1824, the bullion in the bank was £14,200,000.
During the preceding year an adjustment of rents, to meet the altered state of prices, had taken place; and the old stocks having been gradually worked off, the energy of the people began to revive. The enormous amount of cash in the bank, for which there was no immediate use, enabled the Government to carry through a great financial operation—the reduction of the interest upon nearly one-quarter of the public debt. The navy five per cents. were reduced to four per cent., and the four per cent. stock was reduced to three and a-half. This operation, only equalled and exceeded in our own time by the vast and successful transaction carried through by Mr. Goschen, had a very considerable influence in curtailing the incomes of many persons who could ill afford it to a very inconvenient extent, and prepared them to look out for more favorable investments for their money. Notwithstanding the unhappy and severe distress of the agricultural portion of the community, Mr. Tooke says that the trading and manufacturing interests had never been in a more regular, sound and satisfactory state than in the interval from 1821 to 1824. At the close of the session of 1823, the King congratulated Parliament on the flourishing condition of all branches of our commerce and manufactures and the gradual abatement of agricultural distress.
At the close of 1824 the seeds of the disasters which ensued at the end of 1825 were sown. The royal speech opened Parliament with the same strain of congratulation as had closed the preceding session; and the same congratulations were used at the close of the session of 1824. Towards the end of that year, it became visible that in some of the leading articles of consumption the supply was falling short of the demand, which gave rise to a spirit of speculation; and, as in all similar cases, a few early purchases which were successful induced extensive imitation. At the end of 1824 and in the beginning of 1825, this had amounted to positive infection, numbers of persons being induced to go out of their own line of business to speculate in articles with which they had no concern whatever, but induced by representations of their brokers to do so in hopes of realizing great and immediate gains. Just at this period occurred one of those events which have so often lured the commercial world to their destruction. The long contest between Spain and her South American colonies had now finally terminated in favor of the colonies. We have already noticed the great commercial catastrophe brought about in 1810 by the extravagant speculations on the opening of Brazil to British trade. Precisely the same course occurred in 1824. The recognition of the independence of the South American States and Mexico opened out a boundless field for speculation and for the consumption of British manufactures. The spirit of speculation was aggravated to the utmost by the visions of wealth which was to be extracted from the gold and silver producing countries; and immense schemes were formed for working the mines with British capital. However, the long struggle for independence had inspired the British people with much sympathy for the juvenile republics; and when they wanted to borrow money to support their public credit the British were only too eager to lend it. It was alleged that £150,000,000 of British capital was then sunk in different ways in Mexico and South America.
Although the symptoms of a coming mercantile catastrophe were plainly evident in the beginning of 1825, the speech put into the King’s mouth declared the utmost gratification at the continuance and the progressive increase of the public prosperity. “There never was a period,” it said, “in the history of this country when all the great interests of the nation were at the same time in so thriving a condition, or when a feeling of content and satisfaction was more widely diffused through all classes of the British people.” The speech of Lord Dudley and Ward was exactly in the same strain. After contrasting the suffering the nation had gone through during the last thirty years, he said it was his good fortune to ask their lordships to carry to the foot of the throne their unmixed aid and, he hoped, their unanimous congratulations upon a state of prosperity such as he believed was unequalled in this country and had never been surpassed in any age or nation. And yet, though the whole debate was in this strain, no sooner was it ended than the Lord Chancellor called the attention of the House to the dangerous extent to which the mania for joint-stock companies had gone, and said he would move for leave to bring in a bill to restrain the system. Within seven weeks after that Lord Lauderdale called the attention of the House to the “fury for joint-stock companies which had taken possession of the people,” and said that the schemes already subscribed for amounted to £200,000,000.
The following extract from the Annual Register of 1824 contains a description of the rising of the joint-stock mania. After stating that the “mines of Mexico” was a phrase which opened visions of boundless wealth to the imagination, and how the mania spread from foreign enterprises to home ones, it says: “In all these speculations only a small instalment, seldom exceeding five per cent., was paid at first, so that a very moderate rise in the price of the shares produced a large profit on the sum actually invested. If, for instance, shares of £100 on which £5 had been paid rose to a premium of £40, this yielded on every share a profit equal to eight times the amount of the money which had been paid. This possibility of enormous profit, by risking so small a sum, was a bait too tempting to be resisted. All the gambling propensities of human nature were constantly solicited into action, and crowds of individuals of every description—the credulous, the suspicious; the crafty and the bold; the raw and the experienced; the intelligent and the ignorant; princes, nobles, politicians, placemen, patriots, lawyers, physicians, divines, philosophers, poets, intermingled with women of all ranks and degrees, spinsters, wives and widows—hastened to venture some portion of their property in schemes of which scarcely anything was known except the name.” As a specimen of the madness of the speculations, we may quote the price of mining shares. The Anglo-Mexican, on which £10 was paid, were at £43 on the 10th of December, 1824; on the 11th of January, 1825, they were at £150. The Real del Monte, with £70 paid, were at £550 in December and at £1350 in January, and others in similar proportion. The price of most other commodities doubled and trebled.
Now what was the conduct of the Bank of England during this period? The bullion which stood above £14,000,000 in the beginning of January, 1824, was reduced to £11,600,000 in October. The exchange on Paris had been falling ever since the close of 1823. The last time it was above par was in June, 1823, and since then the fall had been continuous. The decrease in bullion had been steady, uniform and rapid ever since March, 1824. Now, when it was known that immense sums were leaving the country, and the exchange falling lower, what did the bank do? It increased its issues. During the month of October, 1824, they were increased by £2,300,000. While every consideration of common sense and prudence demanded a rapid contraction when the speculative fever was plainly declared, instead of doing what they could to check it, they added fuel to the flames. But the directors seemed determined to set all the principles of the Bullion Report at defiance, and the drain upon them proceeded with increased severity. In April, 1825, the bullion was diminished by upwards of £4,000,000; and their issues were £3,600,000 higher when they had only £6,650,000 of bullion than when they had £14,000,000.
The speculative fever was at its height in the first four months of 1825, when it had spent its force and came to an end in the natural course of things. Vast numbers of persons who had embarked in these wild schemes, with the hope of selling out of them before the inevitable crash came, were now called upon for their subscriptions. Vast quantities of capital having been already absorbed, had the inevitable effect of raising the rate of interest. Successive calls compelled the weaker holders to realize; and while the calls for ready money were immediate and pressing, the prospect of returns was distant and uncertain. Accordingly, after May and June, the decline was rapid. The South American loans and the Mexican mining schemes proved almost universally total losses. In the meantime, that slack water which, as Mr. Tooke observes, always precedes a great turn in the tide of prices, took place. The increase of commodities, which speculation had caused, could no longer be kept from being realized; prices fell as rapidly as they had risen. The obligations of the speculators now became due, and the sale of commodities had to be forced to meet them. Universal discredit now succeeded; goods became unsalable; so that stocks which are usually held in anticipation of demand, were wholly unavailable to meet the pecuniary engagements of the holders. Merchants, who had accepted bills for only half the value of the goods consigned to them, were unable to realize even that half, or even to obtain advances on security of the bills of lading; and even the advances already made were peremptorily called in. The usury laws, which limited interest to five per cent., greatly aggravated the distress; nobody would lend money at five per cent. when its real value was so much greater; hence, numbers who would gladly have paid eight or ten per cent. interest, were obliged to sell goods at a difference of thirty per cent. for cash, compared with the price for time.
The bankers in the country had followed exactly in the steps of the Bank of England. While the fever was raging, they had increased their issues and liabilities by speculative advances on commodities. The persons to whom these advances had been made had no means of repaying them, but “the promises to pay” the bankers had advanced them remained in circulation and must be met. The bankers foresaw the coming storm and endeavored to provide funds to meet it. The Bank of England itself had its eyes open to the suicidal career it was following in May, and then endeavored violently to contract its issues. This sudden change of policy only aggravated the general feeling of discredit. During the autumn, everything portended the approach of the impending catastrophe.
The following table shows the progressive decrease in the bullion at the bank during 1824 and 1825:
The inevitable contre coup of the undue expansion of credit in the spring began to press heavily on the country banks in the autumn of 1825. It gradually became severer during the month of November. On the 29th of November it was announced in the London papers that Sir William Elford’s, a large bank at Plymouth, had failed, and that was immediately followed by the fall of Wentworth & Co., a great Yorkshire firm. By the 3d of December the panic had fairly set in, and the whole city was thrown into the most violent state of alarm and consternation. On that day (Saturday) some of the directors were informed that Pole, Thornton & Co., one of the leading city banking houses, was in difficulties; and at a hurried meeting held the next day it was resolved to place £300,000 at their disposal upon proper security. During that week, the utmost attention was paid to the position of that house, which fought it through the following week, though it was privately known to the governor that, if the storm did not abate, they must fail on the following Monday morning. Instead of abating, however, it became more furious than ever on Monday; and Pole & Co. stopped payment, and the ruin of forty country banks, which were connected with them, was expected. The fall of this great banking house was the signal for a general run upon the London bankers; and three or four more gave way, and spread universal consternation among the country banks, sixty-three of which stopped payment; though several paid 20s. in the pound, and eventually resumed business.
From Monday, the 12th, to Saturday, the 17th December, was the height of the crisis in London. Mr. Richards, the deputy governor of the bank at that time, said: “On Monday morning the storm began, and till Saturday night it raged with an intensity that it is impossible for me to describe. On the Saturday night it had somewhat abated. The bank had taken a firm and deliberate resolution to make common cause with the country as far as their humble efforts would go; and on Saturday night it was my happiness when I went up to the Cabinet, reeling with fatigue, to be able just to call out to my Lord Liverpool, and to the members of his Majesty’s Government then present, that all was well; that was, I believe, on the evening of Saturday, the 17th of December. Then, in the following week, things began to get a little more steady; and by the 24th, what with the £1 notes that had gone out and other things, people began to be satisfied; and then it was, for the first time in a fortnight, that those who had been busied in that terrible scene could recollect that they had families who had some claim on their attention.”
As the crisis was evidently approaching, at the end of November, the papers discussed the probable policy of the bank, and it was generally anticipated that it would continue to contract its issues, and let the evil work its own cure by the fall of those houses which had been imprudent in their speculations; and this was the course adopted by the bank, and to which they adhered as matters grew worse; and they were supported in it by public opinion. On the day after Pole & Co. fell, another house of equal magnitude, Williams, Burgess & Co., stopped payment. The panic then became universal; and the directors thought that they would certainly have to stop payment; they sounded the Government as to a restriction act; but the Government absolutely refused it, and it was resolved that the bank should pay away its last sovereign. The Mint was kept constantly at work day and night; but it could not supply coin with sufficient rapidity, so that it kept constantly diminishing. On the Saturday, the coin in the bank’s vaults scarcely exceeded one million; but fortunately, when the Saturday evening came, the tide had receded, and the directors were able to assure the Ministry that all danger was over. The great pressure had produced its necessary effect in such circumstances. The great increase in the value of money here had turned the exchanges in favor of the country; the directors expected remittances from Paris, and they fortunately came earlier than was expected. On the Monday following, the 19th, about £400,000 came from France; and the demand having sensibly abated, the supplies from the Mint fully equalled the sums drawn out of the bank—or rather exceeded them.
Mr. Huskisson said afterwards in the House of Commons that, during forty-eight hours, Monday and Tuesday, December 12th and 13th, it was impossible to convert into money to any extent the best securities of the Government. Persons could not sell exchequer bills, nor bank stock, nor East India stock, nor the public funds. Mr. Baring said, that men would not part with their money on any terms, nor for any security. The extent to which the distress had reached was melancholy to the last degree. Persons of undoubted wealth were seen walking about the streets of London, not knowing whether they should be able to meet their engagements for the next day. The exchanges had, however, turned in favor of the country; and on Wednesday, the 14th, the bank totally changed their policy, and discounted with the utmost profuseness. They made very large advances on exchequer bills and securities of all sorts. Mr. Harman said: “We lent by every possible means and in modes we had never adopted before. We took in stock as security; we purchased exchequer bills, and we made advances on exchequer bills; we not only discounted outright, but we made advances on deposit of bills of exchange to an immense amount; in short, by every possible means consistent with the safety of the bank; and we were not on some occasions over-nice; seeing the dreadful state in which the public were, we rendered every assistance in our power.” This audacious but prudent policy was crowned with the most complete success; the panic was stayed almost immediately. On Friday evening, the 16th, the “Courier” said: “We are happy to think that the worst is over, though there are still great demands upon the bank, particularly from the country.” On the next day the same paper said: “Although public confidence is on the return in the metropolis, and things are resuming their usual course, yet, as might be expected, this has not yet communicated itself to the country.” In fact, the London panic was completely allayed in this week by the profuse issue of bank notes. Between Wednesday, the 14th, and Saturday, the 17th, the bank issued £5,000,000 of notes.
The waves of discredit, however, were propagated through the country, and throughout the following week the demand still continued great from the London bankers for their country correspondents. During the course of it, it came to the remembrance of some of the directors that there was a chest of their £1 notes which had never been used. As soon as this was discovered, it occurred to them that they might be used to stay the panic in the country districts and the discredit of the country notes. Upon communicating this idea to the London bankers, it was eagerly approved of and the sanction of the Government asked for the experiment. The Government consented and the notes were sent off to the country bankers without delay, and produced instantaneous relief. At Norwich, when the Gurneys showed upon their counter piles of bank notes, it at once stopped the run in that part of the country. By the 24th of December the panic was completely allayed all over the country, and the amount of the £1 notes which the bank issued was under £500,000. By the beginning of 1826 the credit of the banking world was completely restored.
The circumstances of this famous crisis are the most complete and triumphant examples of the unquestionable truth of the principles of the Bullion Report and of Sir Francis Baring, already quoted. When the drain of treasure from the bank was severe and increasing, and notoriously for exportation on account of foreign loans, the bank, with infatuated obstinacy, had extended their issues instead of contracting them, in defiance of the clearest warnings of the Bullion Report. After six months’ continuance of this fatal policy, they at last reversed their course and greatly contracted their issues. In the course of the autumn the drain for exportation ceased, but continued for internal purposes; the demand for gold was entirely to support the tottering credit of the country bank notes. Now, as the country bankers were only too glad to withdraw their own notes and substitute gold for them, there was not the slightest danger of an increase of Bank of England notes adding to the general amount of paper currency in the country, but just the reverse; consequently, it was just the precise case in which Sir Francis Baring and the Bullion Committee said that it was the duty of the Bank of England to extend its issues of paper to support general credit. There was not the smallest danger that an extension of issues would, under such circumstances, turn the foreign exchanges against the country. The character of the demand was declared in the most unmistakable manner. On Thursday, the 15th, a meeting of merchants and others took place at the Mansion House, when it was stated that Sir P. Pole & Co. had a surplus of £170,000 after payment of all claims against them, besides large landed property belonging to Sir Peter Pole, and about £100,000 the private property of other members of the firm. Williams & Burgess had enough to pay 40s. in the pound.
Now, if the course which was adopted on the Wednesday had been adopted on the Monday, the whole of that terrific crisis might have been saved. Mr. Vincent Stuckey, one of the most eminent of the country bankers in the kingdom, says: “My opinion was that the crisis at that time was brought on by excessive issues; but when the panic came country bank paper was bought in for Bank of England paper, and therefore all that was immediately wanted was an exchange of paper. I stated in a letter I wrote upon the subject to the bank on the 14th of December, 1825, that they would not have to increase the sum total of circulation, but that all they would have to do was to exchange A for B; and in my letter I recommended them to issue a million of paper a day, which they did; for otherwise most of the banks in London as well as in the country must have stopped.” And, accordingly, they did issue, and all contemporary evidence proves that it was this profuse issue of £5,000,000 of paper in a few days that stopped the panic and saved the whole banking and mercantile community from ruin. If they had persevered in the restrictive policy for three days longer, the total and entire destruction of commercial credit would infallibly have ensued. In short, if they had followed the precedents of 1793 and 1797, so strongly condemned by the Bullion Report, all credit, both banking and mercantile, would have been destroyed. They followed the principles laid down in the Bullion Report, and the country was saved. This panic adds another to the previously conclusive ones of the truth of the expansive theory in a monetary panic, and the mischief and fatal erroneousness of the restrictive theory.
When the causes of this terrible calamity came to be discussed, there were not wanting many who laid the whole blame on the excessive issues of the bank as well as the excessive issues of the country banks. But, though it is indisputable that the bank acted on the most erroneous principles, in not contracting its issues when the great drain of bullion was going on, it is a mere delusion for men to attribute the consequences of their own wild and extravagant mania to the Bank of England or to any bank. The errors of all the banks put together were trivial, compared to the outbreaks of speculative insanity which seized upon all classes. Was it the issues of some banks which led a respectable bookselling firm to risk £100,000 in a speculation in hops and ruin themselves, and drag down Sir Walter Scott along with them?
The bank had committed many errors before, as serious as those of 1825, without leading to any such disaster. In fact, it was the nature of the speculations which men had rushed into headlong, that must inevitably have brought about that great catastrophe, if there had not been a bank note in existence. The speculative mania of 1694 took place before the bank was founded; the great South Sea Bubble mania took place when there were no country banks at all; and no one accused the Bank of England or the London bankers of having made too profuse issues then. The great railway mania of 1845-46 took place after it was fondly supposed that the Bank Act of 1844 had effectually secured the country against the recurrence of similar calamities. The worthless character of a great portion of the country paper had greatly aggravated the intensity of the calamity; in fact, it began with the country banks; and the great commercial failures did not commence until after the banking panic had subsided. The Government and the bank, at last learning wisdom from repeated convulsions, which seemed to recur periodically, became sensible that it was imperatively necessary to provide a currency of a more solid description for the country; and that the frightful evils of the monopoly of the Bank of England must come to an end.
Parliament met on the 3d of February, 1826, and six paragraphs of the speech from the throne were occupied with the commercial catastrophe. It said that part of the remedies to be applied consisted in placing the currency and circulating credit of the country on a firmer foundation. Lord King said that the causes of the calamity were partly to be attributed to the Government; in a greater degree to the country banks; and in a still greater degree to the monopoly of the Bank of England. There was no period of distress during the last thirty or forty years in which the conduct of that establishment had not been injurious, and in every way aggravated it. It was a most faulty machine. It was impossible that a bank so incorporated could do good. If the purpose was to erect an establishment to do mischief, they would erect it on the very principles of the bank. They would give it a monopoly; remove from it all fear of rivalry; and connect it with the Government. He lamented that the pressure of the country gentlemen and the country bankers had been too powerful to be resisted by the Ministry in 1822, and had forced them to continue the issues of £1 and £2 notes to keep up prices and encourage speculation. The Earl of Liverpool chiefly blamed the excessive issues of the country bankers, and said that the small notes must be gradually withdrawn and a metallic currency substituted. He said that he was perfectly satisfied, and had entertained the conviction for years, that the country had grown too large, and that its concerns had become too extensive to allow of the exclusive privilege of the Bank of England. Its privileges had operated in a most extraordinary, and, as he thought, unfortunate manner for the country. Any small tradesman, a cheesemonger, a butcher, or a shoemaker, might open a country bank, but a set of persons with a fortune sufficient to carry on the concern with safety were not permitted to do so.
The Ministry took upon themselves to prohibit any more stamps being issued to the country banks for £1 and £2 notes. The Chancellor of the Exchequer said that these notes were to be deprecated as an infringement of the Act of 1819, which no one could deny was passed, if ever any act was, with the unanimous approbation of all the parties of which Parliament was composed; an act which had solemnly been resolved upon as the only measure which could enable the country to meet any future danger by placing the circulating medium on a permanent and stable footing. No man could insinuate that that act was not the result of the deliberate conviction of almost every individual of every party in that House. He then detailed the continual evil and insecurity of the small notes, and said that he always had regretted, and still regretted, the step taken by Parliament, in 1822, which permitted them. The intention of the Government was, therefore, to suppress them as soon as possible in England, and subsequently in Scotland and Ireland. He moved a resolution that no fresh notes were to be issued by country bankers in England under £5; and that those printed before the 5th February, 1826, might be issued, re-issued and circulated until the 5th April, 1829, and no longer.
The opinions as to the causes of this great catastrophe, expressed in Parliament and the country, were, of course, most conflicting, but the great preponderance of opinion was adverse to the small note issues. Mr. Baring, who defended the country bankers from the accusations levelled against them, said that their small notes were bad as a permanent system, and they ought to be called in. Even although they might sometimes be of almost indispensable use to the country, still, if the misery which had been caused by their use among the poorer classes was taken into consideration it was a sufficient reason why the nuisance should be abated, and it was his opinion that the House had not got rid of this deluge of paper at the time when it had the power to do so, and that it had not resisted, as it ought to have resisted, the importunity of the country bankers, that these small notes should be abolished as soon as practicable.
Mr. Huskisson described the frightful nature of the panic during forty-eight hours (Monday and Tuesday, December 13th and 14th), and said that it had been truly observed that the bank, by its prompt and efficacious assistance, had put an end to the panic and averted the ruin which threatened all the banking establishments in London, and, through them, the banking establishments and moneyed men all over the country. The conduct of the bank had been most praiseworthy, and had, in a great degree, saved the country from a general convulsion. The bank, through its prompt, efficacious and public-spirited conduct, had had the countenance, advice and particular recommendation of the Premier and Chancellor of the Exchequer. He admitted that the commercial distress in Scotland was very great, but that did not prove that the system of Scotch banking did not afford greater securities than the English system, and that it was desirable to introduce it into this country. He then described the wild spirit of speculation which had seized the country, and which produced a rise of prices so rapid as had never been equalled. He might mention, as an instance, the price of nutmegs, which rose in one month from 2s. 6d. to 12s. 6d. a pound; and speculation in other spices caused a corresponding rise in their prices. The mania extended equally to other articles of consumption; merchants, traders, shop-keepers, clerks and apprentices partook equally of the frenzy of vieing with each other in their endeavors to secure a monopoly of each article. And this state of things took its rise, not among the wild, insane and bedlamite schemers, but among those who were considered the sober, steady merchants and traders of the metropolis. And all this took place at a time when money was rapidly leaving the country. Now, if when it was leaving the country so rapidly, it was still hawked about at a greatly lowered rate of interest, that showed that there must be something wrong in the currency. And to what would any sober man say such a state of things must come at last? The bank at last was obliged to provide for its own safety by narrowing its issues, which checked the spirit of speculation, and, as a necessary result, those country banks which had been most rash and immoderate in aiding these speculations by advances were ruined. The ruin of these bad and unstable banks had affected even the stability of the most solvent ones. A general panic ensued, and seven or eight hundred country banks had asked for assistance from the Bank of England. She had 700 or 800 drains for gold suddenly opened upon her. Was this a safe or proper condition to leave the country in? Certainly not. It was his opinion—an opinion not hastily formed, but the result of long and anxious observation—that a permanent state of cash payments and a circulation of £1 and £2 notes could not co-exist. If there were in any country a paper and a coin currency of the same denomination, the paper and the coin could not circulate together—the paper would drive out the coin. Let crown notes be made, and a crown piece would never be seen; make half-crown notes, and no half-crown would remain in circulation. Allow £1 notes to circulate, and we should never see a sovereign. One of the great evils they were called on to correct was the excessive issue of paper. This had been the cause of the greatest distress; it had caused the ruin of thousands of innocent persons. Nothing but disgrace and danger could attend the deviation from the true principles of currency, which Parliament had solemnly recognized. If they wished to prove the value of a steady, unchangeable currency, they had it in the example of France, which had twice been invaded by a foreign army, her capital had been taken, and she had been obliged to pay a large sum to foreign countries for corn, but she had a steady metallic currency; and, however the great contractors might have suffered, the great body of the people had remained uninjured. This was due to the excellent footing upon which the currency of that country was established. If this measure was adopted, every country banker would be obliged to have as great a regard to the exchanges as the Bank of England, and be compelled to provide for his own safety, without leaning on the bank in times of danger. Now was the time to withdraw these small notes, when the bankers were smarting under the consequences of their over-issues. They had, at present, a large amount of gold and bank notes; if they allowed the favorable time to pass by, the small notes would soon be issued again. It would be advantageous to the public to have chartered joint-stock banks, established under a proper system, with only a limited liability. This would, no doubt, induce many persons of great fortune and credit to take shares in them; but the bank objected to the extension of limited liability, and stipulated that the banks of Scotland and Ireland should not have this privilege. Some thought that the currency should be even more purely metallic than was now proposed, and that notes of a higher denomination should be suppressed. For himself, he entirely differed from Mr. Ricardo as to the true basis of the currency; and he believed that if Mr. Ricardo, ingenious as he was, had been sole director of the Bank of England, it would, before now, have stopped payment. He thought Mr. Ricardo’s view of the currency quite erroneous.
Sir John Newport, as a banker himself, considered the issue of small notes to be most injurious to all connected with them, as affording the most dangerous facilities for extravagant speculation. It had been said that a considerable portion of the commerce of the country could not be carried on if these notes were abolished. He was quite willing to accept that alternative and abandon a portion of our commerce rather than continue them. He did not believe that such would be the case. Now was the best time to abolish this pernicious system, when so many of the country bankers had failed.
Mr. Secretary Peel was convinced that the root of the evil lay in the monopoly of the Bank of England, and that if, in the year 1793, a set of banks had existed in this country on the Scotch system, it would have escaped the danger it was then involved in, as well as the calamity which had just occurred. In 1793, upwards of 100 banks had failed. In seven years, from 1810 to 1817, 157 commissions in bankruptcy were issued against country bankers; in the crisis which had just occurred, seventy-six failures had taken place. But from the different ways of making compositions, etc., the number of failures should probably be estimated at four times the number of the commissions of bankruptcy. What system could be worse or more prejudicial to every interest in the country than one which admitted such an enormous amount of failures? Contrast what had been the case in Scotland, under a different system. Mr. Gilchrist, a manager of one of the Scotch banks, had been asked by the committee of 1819 how many failures there had been in Scotland in his recollection, and said, there had only been one; that the creditors had been paid 14s. in the pound immediately, and finally the whole of their claims. These facts were a strong presumptive proof that the Scotch system, if not quite perfect, was, at least, far superior to the one existing in England. The present system of country banking was most prejudicial in every point of view. He then described the terrible misery caused by the failure of the country banks. He trusted that the institution of joint-stock banks would place the currency on a firmer footing. He most sincerely trusted that the want of a charter, the great obstacle to the proposed institutions, would be removed. He hoped the directors of the Bank of England would seriously consider what advantage they would derive from refusing charters to these banks. He himself could not imagine what benefit they would derive from it; they, no doubt, had the right to prevent such charters being granted, but he hoped that they would refrain from exercising such right. He eulogized highly the conduct of the directors during the late crisis; he could not conceive it possible for any body of men to have acted better; or to have exercised more judgment, discretion and liberality than they had done—of which he hoped they would give a further instance, by not opposing the grants of charters to the proposed new banks. He fully concurred with Mr. Huskisson, that it was impossible to maintain coin in circulation if paper of the same denomination were allowed to circulate along with it. Now was the most favorable opportunity of getting rid of the small notes. It would be impolitic and unsafe to wait the moment of returning prosperity, as the country bankers would be more reluctant to agree to it, and more able to oppose it. To stand gazing on the bank, in idle expectation, now that the river was passable, would be an irreparable mistake. The Ministers carried their proposals by 222 to 39; and a motion to continue the small notes of the Bank of England was rejected by 66 to 7.
THE MONETARY CRISIS OF 1838-9.
In 1827, the directors of the bank had become convinced of the truth of the principles laid down by the Bullion Committee for regulating their issues of paper, and had formally rescinded the resolution of the directors of 1819 condemnatory of them. Mr. Horsley Palmer, the governor of the bank, being asked by the Committee on the Bank Charter Act, in 1832, by what principle in ordinary times the bank was guided in the regulation of its issues, said, that in a period of full currency, and consequently with a par of exchange, the bank considered it desirable to invest two-thirds of its liabilities of all sorts in interest-bearing securities and one-third in bullion. The circulation of the country being then regulated by the action of the foreign exchanges, the bank was extremely desirous to avoid using any active power of regulating the circulation, but to leave that entirely in the hands of the public. The action of the public was fully sufficient to rectify the exchanges without any forced action of the bank in buying and selling securities. He thought it desirable to keep the securities very nearly at the same amount; because, then the public could always act for themselves in returning notes for bullion for exportation when the exchanges were unfavorable; and, if there was a great influx of gold, the bank could always reassume its proportion by transferring part of the bullion into securities. He considered that the discount of private paper was one of the worst means which the bank could adopt for regulating its notes, as it tended to produce a very prejudicial extension of them. He condemned strongly the practice of the bank, during the restriction, with respect to the extensive discounts of mercantile paper at five per cent. when the market rate was so much higher, which necessarily led to an excessive issue.
For several years after the renewal of the bank charter, in 1833, the harvests were unusually abundant, which caused all sorts of agricultural produce to be ruinously depressed. Wheat fell continuously through 1834 and 1835, till in the last week in December, 1835, its price was 36s. the imperial quarter. As all agricultural contracts were framed on the expectation that wheat would not be much less than 70s. a quarter, this long-continued depression produced the most severe distress. At the same time, however, all the manufacturing interests were in a state of unexampled prosperity from the abundance and cheapness of food. The continued low price of corn caused less to be sown in 1835, and the spring of 1836 was unfavorable. From these causes, the price of wheat rose in 1836, and the harvest time being wet and cold, wheat rose to 61s. 9d. in the autumn.
The extraordinary prosperity enjoyed by the commercial interests in 1833-34-35, gave rise to an immense amount of speculation and dabbling in foreign loans, as if people had forgotten 1825. The unexpected success of the first railway gave rise to a considerable amount of speculation in the formation of railways. An immense extension of the joint-stock banking system multiplied banking credits to an enormous extent, reduced the rate of interest, and immensely extended credit. On the 14th August, 1834, Lord Wharncliffe called the attention of the Ministry to the prodigious extension of joint-stock banks and their branches, and the insufficient capital they were trading with. The important subject of joint-stock banking was brought before the House of Commons in 1836, and a committee was appointed to inquire into it. The committee sat during the session and made two reports. The fever of speculation reached its acme in the spring of 1836.
Mr. Poulet Thompson, President of the Board of Trade, said in the House of Commons on the 6th of May, 1836: “It is impossible not to be struck with the spirit of speculation which now exists in the country, but I believe that there is a great difference in the state of things from what took place in 1825. The spirit of speculation was then turned to foreign adventure of the most extraordinary description; but now speculation is directed to home objects, which, if pushed too far, may be very mischievous, though the consequences may not be quite so mischievous as in 1825. But, really, on turning to any newspaper or any price current, and observing the advertisements of joint-stock companies upon every possible subject, however unfit to be carried on in the present state of society, every man must be struck with astonishment at the fever which rages at this moment for these speculations. I felt it my duty some time ago to direct a register to be kept, taking the names merely from the London and a few country newspapers of the different joint-stock companies, and of the nominal amount of capital proposed to be embarked in them. The nominal capital to be raised by subscription amounts to nearly £200,000,000, and the number of companies to between 300 and 400. * * * The greater part of these companies are got up by speculators for the purpose of selling their shares. They bring up their shares to a premium, and then sell them, leaving the unfortunate purchasers who are foolish enough to invest their money in them to shift for themselves. I have seen also with great regret the extent to which joint-stock banks have sprung up in different parts of the country. I believe, indeed, that great good has arisen from joint-stock banks, but the observations I have made with regard to other companies are equally applicable to many of the joint-stock banks that are springing up in different parts of the country, and the existence of which can only be attended with mischief.”
The Bank of England had adopted the principles of the Bullion Report in 1827. The method they adopted of carrying them into effect was, to keep their “securities” as nearly as possible even; and to keep their bullion and cash equal to one-half of the securities—the bullion, cash and securities, being together equal to their liabilities. The bank was got into this normal condition in October, 1833, when its liabilities, i. e., its notes and deposits, were £32,900,000; the securities were £24,200,000, and the bullion, £10,900,000. Some transactions with the East India Company and speculations in South American stock occurred to derange these proportions in 1834, and caused an export of specie; but in 1835 the foreign exchanges became favorable, and the drain was arrested. But, in the meantime, the bank had totally lost all power of preserving the proportion between the bullion, securities, and liabilities it had professed to adhere to. The following table, taken at intervals, exhibits this very clearly:
This was the lowest point which the amount of bullion reached, and the drain was arrested. The above table shows how totally deranged the proportions were to what the directors considered to be a proper position for the bank. From that time bullion continued to flow in, till in March, 1836, it slightly exceeded eight millions; but even then, the securities were three times the bullion, instead of twice, as they ought to have been. The amount of bullion in the bank was at its height in March, 1836, and then began steadily to decline again; in the middle of July it had fallen below six millions, when the bank thought it necessary to endeavor to stop it; and it raised the rate of discount to four and a-half per cent. This however had no effect in stopping the demand for discount. In September the bullion barely exceeded five millions and the bank raised the rate of discount to five per cent. Now the bubbles blown in the preceding year and spring of 1836 were fast bursting on all hands.
The drain on the coffers of the bank proceeded at a rapid rate, both from external and internal causes. President Jackson had determined that the charter of the National Bank of the United States, which expired in 1836, should not be renewed, and that the currency of that country should be placed on a sounder footing than it had hitherto been by forming a sound metallic basis. Operations to effect this purpose soon commenced. Immense quantities of American securities of all sorts were imported into England, and negotiated for the purpose of remitting the specie to America. The improperly low rate of discount in this country, favored by the inordinate multiplication of banks, enabled a great quantity of these securities of various descriptions to be realized in England, and the cash was remitted to America.
The joint-stock banks had been blowing the bubble of credit to the utmost tenuity, by re-discounting most of the bills they discounted. This most objectionable practice, which renders the position of the bank which adopts it dependent on the good will of the discounter, adds greatly to any peril in times of discredit. The Bank of England at length (but too tardily, as has almost invariably been the case) awoke to the impending danger, and determined to strike a blow at the distended state of credit. It not only raised the rate of discount to five per cent. in August, but absolutely refused to discount any bills indorsed by any joint-stock bank of issue. This was a great blow at the vast amount of American securities afloat in the country, as most of these bills had been purchased by the joint-stock banks, and re-issued with their endorsement upon them. In the autumn of 1836, the symptoms of the coming storm were very apparent, especially in Ireland. One very large joint-stock bank, the Agricultural and Commercial, was known to be in difficulties early in the autumn, and it made several applications to the other joint-stock banks in Ireland and England and Scotland for assistance, which they all refused. It also made a call upon its shareholders, which was not responded to. The other Irish banks, foreseeing a stoppage of the Agricultural and Commercial, had been laying in a stock of gold to meet the run which would necessarily follow the failure of a bank with so many ramifications. The sum in gold which the Irish banks laid in to provide for the run was estimated to be not less than £2,000,000, all of which came from the Bank of England. Much of this was required on account of the extraordinary differences of opinion, which were given by the most eminent counsel, as to whether Bank of England notes were legal tender in Ireland. Three very eminent lawyers held that they were legal tender, and three equally eminent held that they were not. The Bank of Ireland itself thought that they were not, and were still less inclined to make the experiment, when there was such a difference of opinion among the lawyers. The other banks followed the example of the Bank of Ireland and provided gold.
The catastrophe which had been foreseen took place on the 14th of November, when the Agricultural and Commercial Bank stopped payment, which was immediately followed by a general run upon all the banks in Ireland; but it was well met, from the care which had been previously taken to provide specie. So great was the state of discredit, that even Bank of England notes were at a heavy discount in Dublin. The Bank of Ireland would only take them in very small quantities from their customers at a discount of 2s. 6d. each. During all this time the diminution of bullion in the Bank of England had been going on rapidly. At the beginning of October it had £5,035,000 in bullion to meet £29,869,000 of liabilities; at the end of November its liabilities were £30,941,000, and its bullion £3,640,000. During December its bullion slightly increased, and in January diminished again. In November, the Northern and Central Bank, with its head office in Manchester, and thirty-nine branches in the manufacturing districts, became seriously embarrassed, and applied to the Bank of England for assistance, which the bank at first refused; but, upon consulting the leading bankers in London, their opinion was that the stoppage of so extensive a concern in the manufacturing districts would very probably bring on a general panic. The bank, therefore, determined to advance the sum of £500,000 to enable it to meet its engagements; which, upon suddenly discovering that these were more extensive than had at first been represented, was further increased to £1,370,000.
Early in January, a London banking house applied for assistance to the bank, and on the other London bankers giving their guarantee to the bank, it made advances sufficient to enable that house to meet its engagements. The difficulties attending the American houses, both in London and Liverpool, became now so pressing, that they also were obliged to apply to the bank. Persons were appointed to look into their affairs, who represented that if assistance were given to them to meet their outstanding engagements, they would ultimately prove solvent. As an additional reason for granting this assistance, it was stated, that if these American houses were permitted to stop payment, their concerns were so vast and so extended through the north of England, that a general destruction of credit would ensue. After full consideration, the bank determined to attempt to carry these houses through their embarrassments, and for this purpose it advanced the enormous sum of £6,000,000. This great operation was, however, successful, though the final liquidation of the account was retarded by the great prostration of American credit in 1839. The advance made to the banking interests in England were all repaid, principal and interest, with one very trifling exception. The bank thus followed, for a second time, the principles of the Bullion Report, and there can be no doubt averted a calamity only second in magnitude to the catastrophe of 1825.
The assistance of the bank was only intended to be of a temporary nature, to give time for the withdrawal of the great mass of unsound paper from circulation. This having been effected to a large extent, the result followed which always has been the case—a great influx of gold to fill the vacuum caused by the great annihilation of this unsound paper currency. During the whole of 1837, bullion rapidly flowed into the bank, and in December it reached the sum of £10,500,000. The position of the bank on the 13th of March, 1838, was as follows: Liabilities, £31,573,000; securities, £21,046,000; bullion, £10,527,000.
Thus, after the long period of nearly five years, the bank was at length brought back again into what the directors had laid down for themselves as the normal position; and it enabled credit to pass through a crisis which would have been tenfold more severe, and would infallibly have ended in a monetary panic, if it had not been met by that “judicious increase of accommodation” which the Bullion Report declared to be the proper remedy for a temporary failure of credit. Thus was seen the most magnificent triumph of the principles of the Bullion Report and of the truth of the expansive theory in a commercial crisis. After, no doubt, many errors of management, when the great commercial crisis at length declared itself, the bank met it boldly and promptly by the most audacious application of the expansive theory, and averted a monetary panic.
THE MONETARY CRISIS OF 1839.
From 1832 to 1837, there had been a series of seasons of remarkable abundance. For some years a series followed of extreme scarcity. The crop of 1838 was the worst which had been known since 1816; that of 1839 was scarcely, if at all, better. This great deficiency rendered it necessary to import foreign corn to the value of £10,000,000; a considerable portion of this required to be remitted in specie. But, just at this period, a number of concurrent causes happened to create a great demand for gold for foreign countries. During the preceding years, America, France and Belgium had carried the extension of paper credit to most extravagant lengths. In America, the fatal system of issuing bank notes upon “property” and “securities” had been carried to a length almost worthy of Law. In France and Belgium, joint-stock banks had been extensively formed. This great extension of paper currency had the very same effect as the excessive issues of paper in England had; it drove bullion out of those countries, and was one of the great causes which, together with the fortunate destruction of the extravagant paper credit in England in 1837, caused such an influx of gold to this country up to March, 1838. But in this year these bubbles burst. In the autumn of 1838 the Bank of Belgium failed; and a severe run upon the banks in Paris took place. This revulsion of credit and extinction of paper issues in those countries caused a current of bullion to set in towards them which came from the Bank of England. In the beginning of 1838, when the bullion in the bank had been rapidly increasing for several months, the commercial world thought it was time for the bank to make use of the treasure in its vaults. And with extraordinary fatuity, although the exchanges were unfavorable, it reduced the rate of interest from five to four per cent., and while every one else was exporting bullion to America in consequence of the destruction of paper in that country, it conceived the extraordinary idea of doing a little business on its own account and exported a million to America, when every consideration of common sense showed that it ought to have kept the tightest grip possible upon its bullion. Of all acts of mismanagement in the whole history of the bank, this is probably the most astounding.
The bullion in the bank kept a pretty even amount till December, 1838. On the 18th of that month the liabilities were £28,120,000; the securities, £20,776,000, and the bullion, £9,794,000. From this date a rapid and steady drain set in, which continued with unabated severity till October, 1839. When the bank lowered its rate of discount to four per cent. in February, 1838, the market rate had fallen lower still, and in summer was about three per cent. From that time forward it began to rise, and at the end of autumn was level with the bank. While everything was symptomatic of an impending drain of bullion, the bank on the 29th of November suddenly lowered its rate to 3 1-2 per cent. for advances upon bills of exchange, East India bonds, exchequer bills and other approved securities. The market rate of interest was now decidedly higher than that of the bank, and the consequence was an immediate pressure for accommodation on the bank. The securities which in December, 1838, were £19,536,000, mounted up in January, 1839, to £27,594,000, and the bullion fell from £9,522,000 to £8,826,000. The following table exhibits the progressive diminution of bullion:
Up to this time the bank seemed to have been struck with actual paralysis. Notwithstanding the continuous rise in the market rate of interest and the unmistakable drain of bullion that had set in, they, on the 28th of February, issued a notice continuing the same rates on the same securities as in the previous November. And it was not until the 16th of May that they suddenly raised it to five per cent. The above figures show how completely the directors had belied their own principles of keeping the bullion at one-third of the liabilities. On the 14th of May, 1839, instead of being one-third, it was less than one-sixth. The market rate had advanced considerably more rapidly, so that the bank rate was yet below it. The drain still continued. On the 28th of May the bullion stood at £3,910,000, and the liabilities were upwards of £24,500,000. But the directors seemed so utterly blind that on the 30th of May, the time for shutting the books for the dividends, they still offered advances at five per cent. till the 23d of July, on the same securities as have been last mentioned. However, on the 20th of June they at last became alarmed, and issued notices that the rate of discount would be 5 1-2 per cent., and no securities would be received except bills of exchange. On the 16th of July the liabilities were £28,860,000, the securities were £28,846,000 and the bullion £2,987,000. The directors at last awoke to the fact that the bank was rapidly drifting into bankruptcy. On the 13th of July they gave notice that they would be ready to receive tenders for the purchases of some terminable annuities, but the minimum price they fixed was so high that no sale took place.
Besides raising the rate of discount in May, the bank sold public securities to the amount of £760,000, and it authorized bills upon Paris to be drawn on its account to the amount of £600,000. These measures had the effect of arresting the drain for a short time. But when these bills became due the bank was in no better position to meet them, and it then became necessary to create a larger credit in Paris to meet the first. The position of the bank was, of course, well known to all the foreign dealers in exchange; and in June it was generally expected abroad that the bank would have to suspend payments in specie. In consequence of this, all long-dated bills upon this country were sent over for immediate realization and the values withdrawn as speedily as possible. To counteract this drain, as well as to meet the payments of the first credit which had been created on behalf of the bank, it was obliged in July to organize a measure of a much larger nature. The house of Baring entered into an agreement with twelve of the leading bankers in Paris to draw bills upon them to the amount of £2,000,000; and as each of them had only a fixed credit at the Bank of France that bank agreed to honor their acceptances in case they should be presented there and exceed their usual limits. An operation of a similar one to the amount of £900,000 was organized with Hamburg. As soon as any bill was drawn on account of one of these operations the bank transferred an equal amount of the annuities it had offered for sale in July to two trustees, one for the drawers and the other for the acceptor. Out of this second credit, the bills which fell due from the creation of the first credit were paid. This measure had the effect of gradually arresting the drain of bullion, which reached its lowest point in the week ending the 2d of September, 1839, when it was reduced to £2,406,000. From that time, it began slowly to increase, and in the last week of the year it stood at £4,532,000; the liabilities being £23,864,000 and the securities £22,098,000. The operations ensuing from this foreign credit extended over nine months—from July, 1839, to April, 1840; and the highest amount operated upon was in November, 1839, when it was £2,900,000.
The figures we have quoted, showing the proportion between the bullion and the liabilities of the bank, are sufficient to show either that there was some natural impossibility in adhering to the rule the directors had laid down for themselves in 1832, or that they had not sufficient firmness to contract their securities in time of pressure to maintain it. The flagrant disproportion which these figures had assumed, which would scarcely be safe in an ordinary banking house, but which were to the last degree perilous in the Bank of England, which was known to be the last resource of every bank in the kingdom in times of difficulty, turned the attention of writers to devise some plan by which, if possible, the bank should be compelled to maintain the proper proportion between bullion and liabilities. Colonel Torrens appears to have been the originator of the idea, which was eventually adopted, of dividing the bank into two distinct departments, independent of each other—one for the purpose of issuing a regulated amount of notes and the other for carrying on the business of banking. This plan was first started in 1837, and was much canvassed and discussed by several eminent writers on the subject, such as Mr. Tooke, Mr. Norman and others, and was the prominent feature in the Bank Charter Act of 1844.
The great commercial and monetary crisis the country had passed through within the few preceding years attracted much public attention, and several petitions were presented to Parliament; and, in 1840, the Government determined to institute an inquiry into the whole system of paper issues. On the 10th of March the Chancellor of the Exchequer moved for a committee for that purpose. He reminded the House that the bank charter would terminate in 1844, and he thought it expedient that they should not postpone inquiry into the subject until the last moment. That, whatever might be the difference of opinion among the most intelligent men as to what part of the difficulties they had gone through were to be attributed to the Bank of England or other banks, still they were very strongly of opinion that the present system required revision and alteration. Leaving out of consideration former transactions, the difficulties and embarrassments which the country had gone through within the last few years had led the most important bodies and the largest of the manufacturing towns to make complaints, in calm and temperate language, and to express an anxiety that the House should institute an investigation into their complaints and endeavor to provide adequate remedies.
The chief points of interest connected with the report and evidence were: 1. The principle propounded in 1832 for the management of the bank, for the purpose of carrying into effect the principles of the Bullion Report, was totally condemned. 2. The great modern heresy that bills of exchange form no part of the circulating medium or currency, which was first asserted before a Parliamentary committee in 1832, was now maintained by the great majority of the commercial and banking witnesses. 3. This seems to have been the first adoption by mercantile men of what became the reigning banking fallacy for a time, but which is now utterly exploded, of what is known by the name of the “Currency Principle.” This principle is: “That when bank notes are permitted to be issued, the number in circulation should always be exactly equal to the coin which would be in circulation if they did not exist.”
The advocates of this principle maintain that it is the only true method of regulating a paper currency and of preserving the paper of equal value with the gold coin. This theory sounds remarkably specious and plausible, and from the eminence of the persons who adopted it, acquired for a time much importance. Nevertheless, there never was a greater delusion palmed off upon the credulity of mankind, and could never have emanated from or been believed in by any one who had an accurate knowledge of the mechanism of banking.
THE MONETARY PANIC OF 1847.
The Bank Charter Act of 1844 was passed amid universal applause, and was supposed to have put an end forever to commercial crises and monetary panics. We have now to see how these hopes were realized. The harvests of 1842-3-4 were extremely abundant; the bullion in the bank accumulated very rapidly in these years, and a very large quantity of money which the nation must otherwise have spent in food was set free for commercial purposes. Other circumstances occurred at the same time to liberate a large quantity of the capital of the country from its accustomed use and to render it applicable to commercial purposes, which have been very clearly and ably pointed out by Mr. James Wilson. He shows that the rapidity and certainty of conveyance reduces very greatly the amount of stock it is necessary at all times to keep on hand when communications are slow and uncertain; that the amount of goods in transit is much larger with a slow conveyance than with a quick one. For example: When Manchester supplies London with manufactured goods, if it takes seven days by canal for these goods to reach London, it is clear that there must always be seven days’ consumption of goods on the way. If the same transit is accomplished by railway in one day, it is only necessary to have one day’s consumption on the way; and the capital employed in producing the other six days’ consumption is liberated and may be employed in promoting other commercial operations. When we consider the enormous economy of capital required in the same amount of business which was effected by the introduction of more rapid modes of communication, whether by railways or steamers, we shall understand how greatly they increased the national resources. There can be no doubt that the economy of national capital effected by the extension of railways far exceeded the losses which occurred from unsuccessful speculation in them. Now, these operations were beginning to have their full effect in saving the national capital simultaneously with the good harvests of 1842-3-4, and helped to swell the quantity of disposable capital to an unprecedented extent.
An attentive consideration of these circumstances is absolutely necessary, because they show the fallacy of the doctrine that the price of goods must vary exactly with any increase or decrease of the amount of the currency, whereas there is no necessary relation between the two whatever. The particular methods of doing business have the most important influence on the quantity of currency necessary to carry it on with; and a clumsy or more ingenious method of transacting business may make the most important changes in the quantity of money necessary to circulate any given amount of commodities without causing any alteration in the price of these commodities. The Act of 1844 having placed an absolute limit upon the discretion of the bank in issuing notes, Sir Robert Peel said that he thought that banking business could not be too free and unrestrained. The extraordinary accumulation of capital arising from the circumstances we have just detailed lowered the market rate of discount to one and three-quarters and two and a-half per cent. on the best bills, and the Bank of England immediately conformed to the market rate on the passing of the act, and reduced its rate from four per cent. to two and a-half for the best bills. The day the act came into operation, indeed, the whole of the discounts were done at one and three-quarters; and they continued at that rate for a fortnight, when some were done at two per cent.; and up to the 26th October a considerable portion were done at two and a-quarter. From this date, however, up to October, 1845, the rate was two and a-half. In November, 1845, the rate was suddenly raised to three and a-half, and continued at that figure till August, 1846, when it was lowered to three per cent.; these rates being governed by the flow of bullion, which diminished from fifteen and a-half millions when the Act of 1844 passed, to thirteen and a-half millions in November, 1845; after which it increased again to above sixteen millions in August, 1846, and then began steadily to decline till it reached its minimum in the great crisis of October, 1847.
The first failure of the potato crops in Ireland, in 1845, and the railway mania of that year, are too well known to need repetition here; nor had they anything to do properly with the management of the bank, whose sole proper duty it was to look after its own affairs and preserve its own stability. The calamity of 1846 was far more severe and extensive than that of the preceding year. It was absolutely certain that an immense quantity of bullion would require to be exported in payment of the grain which it would be necessary to import. Accordingly, from the middle of September, 1846, a steady and continuous drain of bullion set in, but the bank made no alteration in the rate of discount until the 16th January, 1847; when the bullion had fallen to £13,949,000, it raised the rate of discount to three and a-half; and on the 23d, the bullion having been further diminished by £500,000, it raised the rate to four per cent. Henceforth, the drain continued rapidly, but the bank still continued to make no alteration until the 10th April, when, its treasure being reduced to £9,867,000, the rate of discount was raised to five per cent. Here we have the same inveterate blunder committed by the bank as on so many previous occasions—an immense drain of bullion, and yet none but the most feeble, inefficient and puerile means taken by the bank to raise the value of money here. But the operation of the bank at this time is an excellent example of the self-acting nature of the Act of 1844. We need only observe that the banking capital of the bank was £14,000,000 of notes based upon public securities, together with notes representing as much bullion as there is in the issue department. Consequently, the notes held in reserve must always be equal to the difference between the notes in circulation, or held by the public, and the sum of £14,000,000 added to the quantity of bullion.
Now, we have seen that the intention of the framers of the Act of 1844 was that, as the bullion diminished, the notes in the hands of the public should be diminished in conformity with the “currency principle.” Let us now see: 1. How the bank was inclined to act on the principle. 2. Supposing that they were disinclined to do so, how far the act, by its own self-acting principles, compelled them to do so.
The table on the following page shows the utter futility of the idea that, as the bullion diminished, the act could compel a reduction of notes in the hands of the public; for the notes in circulation were within an insignificant trifle as large in amount when the bullion was only £9,867,000 as when it was £16,366,000. Consequently, nothing could be a more total and complete failure of the Act of 1844, on the very first occasion on which its services were required.
Now, let us recall to our readers’ attention what Mr. S. J. Loyd had pointed out as the fatal defect of the bank rule of 1832, which we have just given. He said that under it the whole bullion in the bank might be drained
out without any contraction in the circulation, and it was especially supposed that the Bank Act of 1844 had distinctly provided against this defect. In fact, the whole theory of the framers of the act was, that for every five sovereigns which left the country, a £5 note should be withdrawn from circulation; and that if the directors failed to do so of their own accord, the “mechanical” action of the act would compel them to do so. But what was the actual result? The bank had lost £7,000,000 of treasure, and its notes in circulation were only reduced by £200,000; the whole of the reduction had been thrown on its own reserves. Hence, the Bank Act of 1844 was open to exactly the same charge as the bank rule of 1832! Mr. F. T. Baring, ex-Chancellor of the Exchequer, who maintained that the act had been successful on several points, yet allowed that it had completely failed on this point:* “I find that the amount of bullion in the bank on September 12, 1846, was £16,354,000; and on the 17th of April, 1847, it was reduced to £9,330,000, being a diminution of £7,024,000. Now, I take the same dates with respect to the circulation of notes, and I find that on September 12, 1846, the amount was £20,982,000, and on April 17, 1847, it was £21,228,000, being an increase of £246,000. * * * I must say that I never entertained the idea that it would have been possible under the operation of this act to have shown such a set of figures. * * * I believe, if we look back, we shall find that the operation of the deposits and the question of the reserve was not sufficiently considered, either by those who were favorable or those who were opposed to the bill. I cannot find in the evidence before the committee of 1840 more than a few sentences leading me to suppose that danger arising from such a cause was contemplated or referred to; yet this was a most important consideration; for it was by the reserve the bank was enabled to do what was contrary to the spirit of the bill when gold was running out, not to reduce their circulation by a single pound. I do not think that the system works satisfactorily in this respect; and in fact, the point did not receive anything like a sufficient consideration. Perhaps it was impossible before the bill was in practical operation to see how the reserve of notes would operate; but it certainly never entered into the contemplation of anyone then considering the subject that £7,000,000 in gold should run off, and yet that the notes in the hands of the public would rather increase than diminish.”
The number of notes held in reserve in the banking department, under the system of 1844, correspond to the amount of bullion held by the bank before the division. When, therefore, the public saw that the whole banking resources of the bank were reduced to £2,558,000, a complete panic seized both the public and the directors. The latter adopted severe measures to check the demand for notes. The rate was not only raised to five per cent., but this was only applicable to bills having only a few days to run, and a limit was placed upon the amount of bills discounted, however good they might be. Merchants who had received loans were called upon to repay them without being permitted to renew them. During some days it was impossible to get bills discounted at all. These measures were effectual in stopping the efflux of bullion; and a sum of £100,000 in sovereigns, which had been actually shipped for America, was relanded. During this period, the rate of discount for the best bills rose to nine, ten and twelve per cent. During all this time, the price of wheat continued steadily to rise, notwithstanding the monetary pressure, and at the close of May the price on one occasion reached 131s. in Windsor market. The foreign exchanges, which had been adverse to the country during the latter part of 1846 and the beginning of 1840, from the immense quantity of foreign corn which was imported, became favorable in the middle of April, partly owing to the great monetary pressure. The pressure passed off after the first week in May, having lasted about three weeks, and bullion began to flow in after the 24th of April, until at the end of June it amounted to £10,526,000, the notes in circulation being £18,051,000 and the notes in reserve £5,625,000. The conduct of the bank in keeping down the rate of discount when a rapid drain was going on, and the foreign exchanges unfavorable, was the exact counterpart of what it had done on so many previous occasions, and excited much comment and adverse criticism by the whole commercial community of London. The market rate rose decidedly above it, so that a rush for discounts was made to the bank, which were no sooner granted than the gold was immediately drawn out.
On the 27th of May, the Chancellor of the Exchequer brought the subject of the monetary pressure before the House, and stated that he had numerous deputations to him respecting a suspension of the Act of 1844, which the Government was not prepared to adopt. However, he meant to assist the bank so far as to dispense with the aid the Government usually had from the bank at Quarter day. With this view, he intended to raise the interest on exchequer bills, which were then at a greater depreciation than any other kind of Government security, to 3d. per day. On the 10th, he brought in a resolution to allow all persons who had subscribed to the eight million Irish Ioan a discount of five per cent. on any installment paid in before the 18th of June, and four per cent. if paid in before the 10th September.
On the 9th of August the first of the frightful catalogue of failures began. Leslie, Alexander & Co. stopped payment, with liabilities amounting to £500,000. On Wednesday, the 11th, Coventry & Sheppard stopped for £200,000; and King, Melville & Co. also for £200,000; and several other minor firms made the total failures in the first week amount to £1,200,000. In the next week Giles & Co. failed for £100,000; and the total in the second week was £300,000. In the following week Robinson & Co. failed for £110,000, the senior partner of the firm being the governor of the Bank of England. Week after week followed, each one increasing in severity, until at last the total exceeded £15,000,000. In the middle of September, Saunderson & Co., the eminent bill-brokers, stopped payment, being much involved with the great houses in the corn trade. The exchanges, which had been brought to par in April by the monetary pressure in that month, were, in consequence of the increasing severity of the crisis, become decidedly favorable, and on the 25th September bullion began to flow in. During the whole of September the commercial calamities were falling fast and thick. Almost all the firms connected with the Mauritius, such as Reid, Irving & Co., failed—principally from having their funds locked up in sugar plantations. This was accompanied by immense failures in the India trade, the credit given in that trade being commonly of unusual length, which affords dangerous facilities for stretching it to too great a length. The railway works which had been sanctioned in the session of 1845-46 were now in full operation, causing an immense demand for ready money. Almost every tradesman in the kingdom, from Land’s End to John o’ Groat’s, was deep in railway speculations. The extravagant delirium of prosperity in 1845-46 had caused great numbers of them, not only to go far beyond their means themselves, but to trust their customers beyond the bounds of ordinary credit. There can be no doubt whatever but that commercial credit of all sorts and descriptions, among all classes of traders, was in all probability in a more unhealthy state than it had ever been before; and that an unprecedentedly large portion of the community were entangled in obligations, of which there was no prospect of their ever working themselves free. Sharp and severe as the remedy was, therefore, it unquestionably was the best thing that could happen, that this unhealthy superstructure should be cleared away, and that commerce should be reconstructed upon an improved and renovated basis.
The extreme pressure may be considered to have begun on the 23d of September, when the bank adopted more stringent measures for curtailing the demand upon its resources. Ever since the 25th of June the diminution of bullion had been going on rapidly; on the 2d of October it was reduced to £8,565,000; the notes in circulation being £18,712,000, and the reserve £3,409,000. The rapid diminution of their resources showed the directors that the time had come when they must think of their own safety; and on that day they gave notice that the minimum rate of all bills falling due before the 15th of October would be five and a-half; and they refused altogether to make advances on stock or exchequer bills. This last announcement created a great excitement on the stock exchange. The town and country bankers hastened to sell their public securities to convert them into money. The difference between the price for consols for ready money, and for the account of the 14th October, showed a rate of interest equivalent to fifty per cent. per annum. Exchequer bills were sold at 35s. discount. Everything became worse day by day. On the 18th of October the bank rates of discount varied from five and a-half to nine per cent. At this time the bullion was £8,431,000; the notes in circulation £19,359,000; and in reserve £2,630,000. The following week, from Monday the 18th to Saturday the 23d, was the great crisis. On that Monday, the Royal Bank of Liverpool, with a paid-up capital of £800,000, stopped payment, which caused the funds to fall two per cent. This was followed by the stoppage of the North and South Wales Bank, also of Liverpool; the Liverpool Bank, the Union Bank of Newcastle, heavy runs upon the other banks of the district, and other bank failures at Manchester and in the west of England. As the whole of the commercial world knew that the resources of the banking department were being rapidly exhausted, a complete panic seized them. A complete cessation of private discounts followed. No one would part with the money or notes in his possession. The most exorbitant sums were offered to, and refused by, merchants for their acceptances.
The continued and ever increasing severity of the crisis caused deputation after deputation to be sent to the Government to obtain a relaxation of the act; and on Saturday, the 23d of October, the final determination of the Ministry to authorize the bank to issue notes beyond the limits prescribed by the act was taken and communicated to the bank, who immediately acted upon it, and discounted freely at nine per cent. The letter itself was not actually sent till Monday, the 25th. It stated that the Government had expected that the pressure which had existed for some weeks would have passed away as the one in April had done, by the operation of natural causes; that, being disappointed in this hope, they had come to the conclusion that the time had come when they ought to attempt by some extraordinary and temporary measure to restore confidence to the mercantile community. That, for this purpose, they recommended the directors of the Bank of England in the emergency to enlarge the amount of their discounts and advances upon approved security; but that, to restrain this operation within reasonable limits, a high rate of interest should be charged which, under the circumstances, should not, they thought, be less than eight per cent. That, if such a course should lead to any infringement of the law, they would be prepared to propose to Parliament, on its meeting, a bill of indemnity. This letter was made public about one o’clock on Monday, the 25th, and no sooner was it done than the panic vanished like a dream! Mr. Gurney stated that it produced its effect in ten minutes! No sooner was it known that notes might be had than the want of them ceased! Not only no infringement of the act took place, but the whole issue of notes in consequence of this letter was only £400,000; so that while at one moment the whole credit of Great Britain was in imminent danger of total destruction, within one hour it was saved by the issue of £400,000.
The extraordinary and disastrous state of public credit at this period may be judged of by the aid afforded by the Bank of England to different establishments from the 15th of September to the 15th of November, as follows: 1. It advanced £150,000 to a large firm in London, who were under liabilities to the extent of several millions, on the security of debentures of the Governor and Company of the Copper Miners of England, which prevented them from stopping payment. 2. It advanced £50,000 to a country banker, on the security of real property. 3. It advanced £120,000 to the Governor and Company of the Copper Miners, which prevented them from stopping payment. 4. It advanced £300,000 to the Royal Bank of Liverpool on the security of bills of exchange, over and above their usual discounts; but this was inadequate, and the bank, having no further security to offer, stopped payment. 5. It advanced £100,000 to another joint-stock bank in the country. 6. It advanced £130,000 on real property to a large mercantile house in London. 7. It advanced £50,000 to another mercantile house on the security of approved names. 8. It advanced £50,000 on bills of exchange to a joint-stock bank of issue, which soon after stopped payment. 9. It advanced £15,000 on real property to another mercantile house in London. 10. It saved a large establishment in Liverpool from failing by forbearing to enforce payment of £100,000 of their acceptances falling due. 11. It assisted another very large joint-stock bank in the country by an advance of £800,000 beyond its usual discount limit. 12. It advanced £100,000 to a country banker on real security. 13. It advanced to a Scotch bank £200,000 on the security of local bills and £60,000 on London bills. 14. It assisted another Scotch bank by discounting £100,000 of local and London bills. 15. It advanced £100,000 to a large mercantile house in London on approved personal security. 16. It assisted a large house in Manchester to resume payment by an advance of £40,000 on approved personal security. 17. It advanced £30,000 to a country bank on real property. 18. It assisted many other houses, both in town and country, by advances of smaller sums on securities not usually admitted; and it did not reject in London any one bill offered for discount except on the ground of insufficient security. The far larger portion of this assistance was given before the 23d of October.
A general election had taken place in the autumn of 1847; and the Ministry, having taken upon themselves the responsibility of authorizing the Bank of England to violate the Act of 1844, lost no time in calling a meeting of the new Parliament. It met on the 18th of November, and after a few preliminary days were occupied in swearing in the members, the speech from the throne was delivered on the 23d. The first paragraph stated as a reason for calling them together that the embarrassments of trade were so alarming, that the Queen had authorized the Ministry to recommend to the Bank of England a course which might have led to an infringement of the law. Happily, however, the power given to infringe the law, if necessary, had allayed the panic.
On the 30th of November the Chancellor of the Exchequer moved for a committee to inquire into the causes of the recent commercial distress and how far it had been affected by the Act of 1844. He spoke of the panic in the spring. He said that he had seen no reason to change the opinion he had then expressed, that it was mainly owing to the imprudence of the bank, which, having full warning of the various demands it would have upon it, was too tardy in raising the rate of discount and had lent out, over the period when the dividends became payable, the money they had provided for that purpose, so that they were not in possession of adequate funds when they were required. The low state of their reserve then excited consternation. The bank then took the severe step of reducing the amount of discounts. They pulled up as suddenly as they had unwisely let out their reserve before. With respect to the panic in October, he said that the severe pressure in the money market had abated when the bank failures in Liverpool and the north of England took place, which renewed the alarm. After describing the great pressure on the banks in the country, the Chancellor said:
“The Bank of England were pressed directly for assistance from all parts of the country and indirectly through the London bankers, who were called upon to support their country correspondents. The country banks required a large amount of notes to render them sure against possible demands—not so much for payment of their notes as their deposits. Houses in London were constantly applying to the bank for aid. Two bill-brokers had stopped, and the operations of two others were nearly paralyzed. The whole demand for discount was thrown upon the hands of the Bank of England. Notwithstanding this, the bank never refused a bill which it would have discounted at another time; but still the large mass of bills which, under ordinary circumstances, are discounted by bill brokers, could not be negotiated. During this period we were daily, I may say hourly, in possession of the state of the bank. The governor and deputy governor at last said that they could no longer continue their advances to support the various parties who applied to them; that they could save themselves—that is, they could comply with the law—but that they could not do so without pressing more stringently on the commercial world. At this crisis a feeling as to the necessity of the interposition of Government appeared to be generally entertained; and those conversant with commercial affairs, and least likely to decide in favor of the course we ultimately adopted, unanimously expressed an opinion that, if some measures were not taken by the Government to arrest the evil, the most disastrous consequences must inevitably ensue. Evidence was laid before the Government which proved not only the existence or severe pressure from the causes I have stated, but also that it was aggravated in a very great degree by the hoarding on the part of many persons of gold and bank notes to a very large extent, in consequence of which an amount of circulation which under ordinary circumstances would have been adequate, became insufficient for the wants of the community. It was difficult to establish this beforehand, but the best proof of the fact is in what occurred after we had interfered. As soon as the letter of the 25th October appeared and the panic ceased, thousands and tens of thousands of pounds were taken from the hoards, some from boxes deposited with bankers, although the parties would not leave the notes in their bankers’ hands. Large parcels of notes were returned to the Bank of England cut into halves, as they had been sent down into the country; and so small was the real demand for an additional quantity of notes that the whole amount taken from the bank when the unlimited issue was given was under £400,000. The restoration of confidence released notes from their hoards and no more was wanted, for this trifling quantity of additional notes is hardly worth notice. * * * Parties of every description made application to us with the observation, ‘We do not want notes, but give us confidence.’ They said: ‘We have notes enough, but we have not confidence to use them; say you will stand by us and we shall have all we want; do anything, in short, that will give us confidence. If we think we can get bank notes we shall not want them. Charge any rate of interest you please; ask what you like’—(Mr. Spooner, No! No!) I beg pardon of the honorable gentleman, but I may be permitted to know what was actually said to me. I say that what I have stated was the tenor of the applications made to me. Parties said to me: ‘Let us have notes; charge ten or twelve per cent. for them; we don’t care what the rate of interest is. We don’t mean, indeed, to take the notes, because we shall not want them; only tell us that we can get them, and this will at once restore confidence.’ We have been asked what was the change of circumstances which induced us to act on Saturday, when we declined acting a day or two before. I reply that the accounts which we received on Thursday, Friday and Saturday were of a totally different description from those which had been previously brought to us. It was on Saturday, and not before, that this conviction was forced upon us; and it was not till then that we felt it necessary to sanction a violation of the law.”
The persons applying generally said that it was necessary to place a limit on the amount to be authorized, which they proposed should be £2,000,000 or £3,000,000, but the Government thought that the limit should be placed on the rate of interest, and accordingly this was the method adopted.
Sir Robert Peel felt particularly called upon to defend the Act of 1844. After defending himself from some minor charges, he protested against singling out individual members of Parliament and making them responsible for the acts of the whole Legislature. He said that some persons alleged that the Act of 1844 had been passed without due inquiry; but he recounted the committees that had sat for five years, and had asked, on the whole, upwards of 14,000 questions—questions and answers without end—but with no practical result from those apparently interminable investigations. The last committee had closed its labors without any practical results. At last, the Ministry determined to bring forward a measure on their own responsibility, which had been carried by extraordinary majorities; but, nevertheless, if it could be shown that the Act of 1844 could be amended that it ought to be done. Sir Robert remarked:
“There has been some misrepresentation respecting the objects of this act. I do not deny that one of the objects contemplated by the act was the prevention of the convulsions that had heretofore occurred, in consequence of the neglect of the Bank of England to take early precautions against the withdrawal of its treasure. I did hope that, although there was not imperative obligation on the Bank of England to take those precautions, that the experience of 1825, 1836 and 1839 would have induced that establishment to conform to principles which the directors of the bank acknowledged to be just, and which they had more than once professed to adopt for their own regulation. I am bound to say, that in that hope, that in that object of the bill, I have been disappointed. I am bound to admit, seeing the extent of commercial depression which has prevailed, and the number of houses which have been swept away—some of which, however, I think, were insolvent long before the bill came into operation, and others of which became insolvent in consequence of the failure of those who were connected with them, and were imprudent in their speculations—I am bound to admit that that purpose of the bill of 1844 which sought to impress, if not a legal at least a moral obligation on the bank, to prevent the necessity for measures of extreme stringency by timely precautions, had not been fulfilled. I must contend that it was in the power of the bank, if not to prevent all the evils that have arisen, at least to diminish greatly their force. If the bank had possessed the resolution to meet the coming danger by a contraction of its issues, by raising the rate of discount, by refusing much of the accommodation which they granted between the years 1844 and 1846—if they had been firm and determined in the adoption of these precautions, the necessity for extrinsic interference might have been prevented; it might not then have been necessary for the Government to authorize a violation of the Act of 1844. * * * The bill of 1844 had a triple object. Its first object was that in which I admit it has failed—namely, to prevent by early and gradual, severe and sudden contraction, and the panic and confusion inseparable from it. But the bill had at least two other objects of at least equal importance—the one to maintain and guarantee the convertibility of the paper currency into gold; the other, to prevent the difficulties which arise at all times from undue speculation being aggravated by the abuse of paper credit in the form of promissory notes. In these two objects my belief is that the bill has completely succeeded. My belief is, that you have had a guarantee for the maintenance of the principle of convertibility such as you never had before; my belief also is, that whatever difficulties you are now suffering, from a combination of various causes, the difficulties would have been greatly aggravated if you had not wisely taken the precaution of checking the unlimited issues of the notes of the Bank of England, of joint-stock banks and of private banks.”
Sir Robert Peel then entered into a most able description of the true evils the country was suffering from, which arose from the enormous destruction of capital, by the dearth of food, the unusual absorption of capital in one channel of commerce, and the construction of railroads which were not yet remunerative. He showed the absurdity of having cheap money while capital was scarce. The whole of his remarks are so admirable, that we regret that their length prevents us from giving them entire. He cordially approved of the course the Government had taken in not issuing the letter sooner than they did, and in doing it when they did. The true remedy for the state of things under which the country was suffering was individual exertion, the limitation of engagements, the cessation of all demands which could be postponed; an earlier issue of the latter would have relaxed those exertions. But to that pressure a panic succeeded, which could not be provided against or foreseen by legislation; which could not be reasoned with, and which could only be met by a discretionary assumption of power by the Government suitable to the emergency. Whether any modification of the Act of 1844 was desirable was a question for future consideration. His own opinion was in favor of the maintenance of the great principles of that measure. If the identical restrictions were not imposed upon the bank as were then in force, still there must be some restrictions; for, after the experience of 1825, 1836 and 1839 he, for one, would not be content to leave the regulation of the monetary concerns of this country to the uncontrolled discretion of the bank. In 1844, the general conviction was that it ought not to be so left, and he knew no better mode of imposing restriction than that which was devised by the Act of 1844.
The committee appointed by each House began to sit in February, 1848. The Governor, Mr. Morris, and the Deputy Governor, Mr. Prescott, were examined at great length before each committee, and expressed their unqualified approbation of the Act of 1844, and the manner it had worked. The object of the act was to place the circulation of this country exactly in the same position as it would have been if the currency had been entirely metallic.
Mr. Morris was asked: “Your opinion is, then, that with regard both to the contraction of the currency and the expansion of the currency, they would both have taken place precisely in the same mode, and to the same degree had the currency been purely metallic?” Mr. Morris: “Yes, I have not the slightest doubt upon the subject.” These gentlemen testified that the object of the act was to secure the convertibility of the note, which it had effectually done. That the bank acted erroneously in the spring of 1847 in not raising their rate of discount sooner, which much contributed to the monetary pressure in April. They said that the Government letter of the 25th October was not sought for by them, nor issued in any way at their instance; that they had no fear whatever for the bank, and that it was not required to maintain the solvency of the bank; but, nevertheless, it had the best effects in allaying the commercial panic. That the panic would have inevitably occurred even without the Act of 1844; but the act brought it on sooner, and probably made it less severe. That the great merit of the act was, that when the pressure did come, the bank was in possession of £8,000,000 of treasure; that if the bank had been left free it would probably have followed the course of dangerous liberality, which it had done on so many occasions previously. That though the Government letter did relieve the panic, it would probably have passed away without it. They earnestly deprecated any alteration in the act, except that they thought the permission to issue notes on silver too limited.
Mr. S. Gurney agreed in blaming the management of the bank during the first three months of 1847, and said that if the bank had commenced restrictive measures much earlier, the pressure of April would have been mitigated. He said that in October the rapid diminution of the reserve caused a very general distrust among the public as to how they were to obtain circulating medium. The wealthy and more powerful took care to very largely over-provide themselves, infinitely beyond the necessities of the case. The consequence was that the notes in the hands of the public amounted to nearly £21,000,000, of which he had no doubt that four or five millions were locked up and inoperative, in consequence of the alarm and fear of not being able to get bank notes at all. In illustration of this, he said that his own house was largely called upon for money on Saturday, the 23d, not from the distrust of the house, but from doubts that the bank notes were to be had at all. They applied to the bank for discount to a large amount, which was agreed to, but they were told the rate must be ten per cent. Upon remonstrating with the governor, and saying it would have the worst effect if it became known that their house was paying ten per cent. for money, the rate was finally agreed upon at nine per cent. At this rate they took £200,000. On Monday, the 25th, however, the demand was very heavy, and they took £200,000 more. It was a case of difficulty with the bank, under its reduced reserve and the limitation of the act, and a final decision was postponed until two o’clock. At one o’clock, however, the letter from the Government was announced, authorizing the relaxation. Its effect was immediate. Those who had sent notice for their money in the morning sent word that they did not want it, and that they had only ordered payment by way of precaution. After the notice they only required £100,000 instead of £200,000; the alarm passed off, and by the end of the week they had to ask the bank, as a favor, to be allowed to repay the money they had taken. Mr. Gurney stated that the experience of the last two years had altered his opinion respecting the act, and that he thought it necessary that there should be a relaxing power somewhere.
Thus it is seen that this occasion demonstrated, as all previous ones had done, that the restrictive theory in a very severe commercial crisis brings universal failure; and that the expansive theory is indispensable to preserve the existence of merchants and banks.
THE TRUE AND SUPREME POWER OF CONTROLLING CREDIT AND THE ISSUES OF THE BANK.
It was in the autumn of 1855 that I discovered what I conceive to be the true method of controlling credit and the paper currency; showing how the principles of the Bullion Report are to be carried into practical effect, and thus completing the theory of the paper currency which is now universally accepted. As soon as I came to examine critically the Bank Charter Act of 1844, and the ideas, concepts and theories upon which it is founded. I saw at once—as every mercantile lawyer would—that its very basis, the definition of currency, upon which it is founded, is absurd, and in diametrical contradiction to a whole series of decisions of the courts of law, and to the doctrines previously held by all statesmen and economists. That its very aim and object was to enforce a theory which had been uniformly condemned by all the most eminent financial authorities of former times; by the Bullion Report; by Sir Robert Peel himself on several previous occasions; and confuted by the uniform practical experience of all preceding monetary panics. All preceding financial authorities of the highest eminence—the Bullion Report, Sir Robert Peel himself—had condemned the restrictive theory in a commercial crisis; and had declared that, after it had attained a certain degree of intensity, it was indispensable to adopt the expansive theory to avert universal failure. These doctrines were founded upon irrefragable reasoning, and ample and uniform experience.
In 1764 the bank had advanced a million to support commerce in the great crisis of that year. In 1793 the bank had adopted a rigorously restrictive system, and persevered doggedly in this course in defiance of the repeated advice of the highest financial authorities; at length, when universal failure was imminent, the Government came forward and, following the precedent of Montague in 1697, issued a moderate amount of exchequer bills, and commerce instantly was saved. In 1825, for three days, the bank adopted the rigorously restrictive system; and when it had pulled down several powerful and wealthy banks, and commerce was on the very brink of universal failure, it suddenly adopted the expansive system, and commerce was saved. In 1836-38, when a commercial crisis and a monetary panic were impending as severe as any which had happened before, the bank with great skill, wisdom, courage and audacity at once boldly adopted the expansive system, and the monetary panic was averted. Nevertheless, in defiance of all this unanimous consent of financial authorities, and the uniform experience of commercial crises and monetary panics, Sir Robert Peel, in flat contradiction of his own repeatedly expressed opinions, enforced the restrictive theory by law, by imposing a cast-iron limit on the power of the bank to issue notes. And why did he do this? Because he evolved a fantastic theory out of his own inner consciousness that commercial crises are solely due to the excessive issues of bank notes. Now, any banker and practical man of business would have told him that such an idea was a fond delusion. As a matter of positive fact, one of the most terrible commercial crises of modern times took place at Amsterdam and Hamburg in 1764, where there were no bank notes except those issued in exchange for specie.
The fact is that the Bank Act of 1844 is founded upon a whole nest of definitions and theories which are pure moonshine. In 1847 the whole of Sir Robert Peel’s anticipations and theories were blown to the winds by the monetary pressure in April, and the monetary panic in October, when it was found indispensable to abandon the restrictive theory and to adopt the expansive theory, just in the old, old way; and the mercantile community was saved from universal ruin thereby. Nevertheless, although all the theories upon which the Bank Act is founded are erroneous, and were shattered to pieces by the rude experience of facts, on the very first occasion on which they were really tested, there was one great, solid, practical benefit derived from it. When the monetary panic actually came, the bank possessed an ample store of gold to meet it. In April, 1847, the directors had proceeded exactly in the way of their predecessors. They allowed their gold to ebb away without taking any efficient measures to prevent it. It was evident that at that time they had not perceived the true way of stopping it—i. e., by a bold and rapid raising of the rate of discount. Now, whatever might be the theoretical errors of the act, statesmen saw that at all events it compelled the bank to keep a greater store of gold to meet the panic when it did come, which it was wholly out of their power to touch. And it was hopeless to expect that the Government or Parliament would consent to any alteration of the act while it secured that inestimable practical benefit—or at least until a better method was discovered of attaining the same practical end.
Now let us recall to the reader the state of the question. The witnesses before the Irish Committee of 1804 and the Bullion Committee of 1810 maintained that there is only one cause of an export of bullion—namely, a balance of payments to be made on account of goods imported. But the Bullion Committee showed that there is a second cause—namely, a depreciated paper money. Thus it was established that there are two causes of an export of bullion. The Bullion Report laid down as a doctrine that, in order to prevent the export of bullion on account of a depreciation of the paper money, it was indispensable to regulate the amount of paper money by the market price of bullion and the state of the foreign exchanges. But they gave no rule or principle by which this was to be done. They emphatically laid down that the absolute quantity of paper money was no criterion whether it was excessive or not. The sole criterion was the market price of bullion and the state of the foreign exchanges. In 1819 the directors of the bank repudiated the doctrines of the Bullion Report, and strenuously denied that the amount of their issues could have any effect on the price of gold or on the foreign exchanges. In 1827, however, they became convinced of the truth of the doctrines of the Bullion Report; they expunged the resolution of 1819 from their books, and made an attempt to regulate their issues by them. But the scheme they adopted turned out a complete failure, and was condemned by Lord Overstone, who was no doubt a practical banker of the first eminence; and the proof was that in 1836 and 1839 they brought the bank to the very verge of bankruptcy. The specific indictment which Lord Overstone brought against the scheme of the directors was, that under it every single sovereign might be drawn out of the bank, and yet not a single note be withdrawn from circulation. Then the sect of which Lord Overstone was the most influential member maintained the dogma, which they termed the “currency principle”—which is, that when bank notes payable to bearer on demand are permitted to be issued, they ought to be exactly equal in quantity to the amount of gold they displace; and that for every five sovereigns drawn out of the bank a £5 note ought to be cancelled. This they held to be the sole criterion whether paper was excessive or not. This scheme, it was alleged, would secure the country from all future monetary troubles; it was supposed to be the ne plus ultra of human wisdom; and the Bank Act of 1844 remodeled the bank so as to carry this principle into effect. But the experiences of April and October, 1847, shattered all these theories to pieces. For it was found, on both these occasions, that vast quantities of gold were drained away from the bank, and not a single bank note was withdrawn from circulation. This shows how much easier it is to criticise the schemes of others which are seen in operation than to devise one’s own.
In 1854, I was led to take up the subject of political economy, or economics. On examining the current text-books on the subject, I found that they had not the remotest conception of the juridical and mathematical principles of credit, or of the mechanism of the colossal system of mercantile and banking credit. I therefore undertook to write a treatise on the subject. I carefully studied all the Parliamentary debates and all the Parliamentary reports on the subject, the different principles which the directors had adopted for the management of the bank, and the history of the various commercial crises and monetary panics which had occurred up to that time. On examining the doctrines of the sect which embodied the Act of 1844, and the act itself, I at once perceived—as any mercantile lawyer would—that the definition of currency on which it is founded is absurd—that all the theories on which it is based are pure moonshine—and, furthermore, that the act itself does not carry out the theory it professes to adopt. In order really to carry out the “currency principle” into effect, it would be indispensable to prohibit the bank from discounting bills of exchange; because every time the bank discounts a bill of exchange it violates the “currency principle.” Moreover, its principles were in diametrical contradiction to the doctrines of all the great financial authorities of previous times and of the Bullion Report. The experience of the monetary panic of 1847 proved to demonstration that the doctrines of the Bullion Report are correct, and those of the Bank Act of 1844 erroneous. Nevertheless, there was one inestimable practical merit of the Act of 1844—it insured a store of gold to meet the panic when it did come, and prevented the directors from allowing their gold to be all drained away, as they had uniformly done previously, and as they would have done in 1847, if they had not been stopped by the provisions of the act. In the eyes of practical statesmen this single merit would outweigh all the fantastic theories upon which it is founded.
The problem, therefore, was to discover a method which should protect and preserve the store of gold in the bank as effectually as the Bank Act of 1844 had indisputably done; and at the same time emancipate the bank from the fantastic theories which held it in thraldom, and permit it to act in commercial crises and monetary panics in accordance with the principles of the Bullion Report and of all former financial authorities, which had been proved to be true by uniform experience, and further confirmed by the experience of 1857 and 1866, shortly to be described. In this I claim to have perfectly succeeded. While I was reflecting on this complex problem, and hitherto saw no solution to it, a very sudden and severe monetary drain took place in the autumn of 1855. One day, during this drain, happening to be on duty at the bank, a customer came in and wanted me to do something. Having been only a few months in the bank, and therefore a perfect neophyte in banking, I had not the remotest idea what he wanted me to do; and, accordingly, I set him to talk, in order to give myself time to think. He then made this revelation to me. He said that when the rate of discount between two monetary centres differs by more than sufficient to pay the cost of sending bullion from one to the other—as was the case then between London and Paris—bullion dealers and others, who have had no operations necessitating remittances of gold, fabricate bills for the express purpose of exporting bullion from the cheaper centre to the dearer for the purpose of reaping the profit during the currency of the bills. Not only that, but foreign merchants and bankers hurry over their bills for discount and take away the gold. To take an extreme case. Suppose that London bankers perversely maintained their rate of discount at two per cent., while the rate in Paris was ten per cent. The meaning of that would be that persons could buy gold for two per cent. in London and sell it at ten per cent. in Paris. What would be the consequence? First, every post from foreign parts within a certain distance would bring over shoals of foreign bills to be discounted in London, and the proceeds immediately remitted abroad. Secondly, bullion dealers and others would immediately fabricate bills for the purpose of having them discounted, drawing out the proceeds and remitting them abroad.
Now, both these classes of persons do not want bank notes at all—they want nothing but solid gold. The error upon which the whole theory of the Bank Act made shipwreck was the popular one, that when a banker discounts a bill he hands over bank notes in exchange for it over the counter in the first instance. But a banker never discounts or purchases bills of exchange with bank notes in the first instance. It is the very essence of “banking” that a banker in the first instance purchases a bill of exchange by creating a credit or a deposit in his customer’s favor in his books. Then after, but not before, this credit or deposit has been created in his favor in the banker’s books, the customer may either (1) have notes in exchange for it, or (2) may draw out the gold by means of a cheque. Now, persons engaged in the operations above described have no use for notes; their great object is to obtain credits or deposits in the books of bankers; and as soon as they have succeeded in obtaining these they instantly draw out all the gold and export it. Thus the whole of the gold may be drained away from the banks, and not a single note be withdrawn from circulation; which plays utter havoc with the brain-spun theories of the Bank Act of 1844.
The express object of that act was to compel a £5 note to be withdrawn from circulation for every five sovereigns that were drawn out of the bank. And it was stoutly maintained that, if the directors perversely refused to do this, the mechanical action of the act would compel them to do so. It is now proved decisively, by a simple statement of facts and abundant practical experience, that by a due course of mismanagement every single sovereign may be drawn out of the banking department of the bank, and yet not a single note withdrawn from circulation, as all but happened in the great panic of 1857, and would actually have happened within an hour if the doors of the bank had been opened on the morning of the 13th November, and the act had not been suspended on the previous evening. Thus the Bank Act of 1844 is open to exactly the same fatal defect as the former scheme of the directors. The outside public only see the contests between bankers and merchants on the question of accommodation; but, as a matter of fact, it is the bullion dealers who are the natural enemies of bankers. Bullion dealers import and export bullion for profit, just as merchants do other merchandise. Like every one else, they buy in the cheapest market and sell in the dearest. And if they see that English bankers are willing to sell them their gold at two per cent., when the market price is ten per cent., they are quite ready to fool them to the top of their bent, and buy every ounce of gold they possess; thus draining away the bullion basis of the paper currency, and leaving the entire currency so many pieces of paper. This is so perfectly well understood now that there is no need of giving any further examples. It is very remarkable that, though this circumstance must have been known to hundreds of business men, yet it has never before, that we are aware of, found its way into print; it was never on any occasion alluded to in the Parliamentary debates; it was never mentioned by a single witness before the Parliamentary committees, nor in any Parliamentary report; and yet it is decisive of the whole question, and it gives the key to the solution of the whole difficulty.
It is now demonstrated that instead of there being only one cause of the export of bullion, as maintained by the witnesses before the Bullion Committee—or two, as proved by the Bullion Report—there are in reality three causes: 1. Payments due for goods imported. 2. A depreciated paper money. 3. A difference in the rates of discount between two monetary centres more than sufficient to defray the cost of the transport of bullion from one to the other. This last discovery puts the coping-stone on the theory of the Bullion Report, and renders it absolutely complete; and shows how the principles of the Bullion Report are to be carried into practical application. The theory of credit and the paper currency is now complete.
Ricardo and the Bullion Report utterly denied that the absolute quantity of paper at any time is any criterion of its being defective or excessive. They maintained that the only criterion of the legitimate quantity of paper—i. e., credit—is the market price of bullion and the state of the foreign exchanges. And their doctrines, after having been temporarily submerged by the fantastic theories of Lord Overstone and his sect, who beguiled Sir Robert Peel away from his sager mentors, have now re-emerged triumphant, and are now universally acknowledged to be true by all practical men of business in the world. I published these doctrines in my “Theory and Practice of Banking” in 1856; and from that time forward these principles have been understood and acted upon by the directors of the bank, and they received the most satisfactory confirmation; because in the Committee of the Commons on the great monetary panic of 1857, Mr. Norman, who had been one of the leading supporters of Lord Overstone’s dogmas and of the Bank Act of 1844, candidly acknowledged that the directors of the bank had found the rate of discount amply sufficient means of controlling their issues.
THE MONETARY PANIC OF 1857.
The crisis we have last considered was the inevitable termination of a multiplicity of derangements of the proper course of commerce. No one conversant with commercial history could fail to foresee that the entanglements of so large a portion of the public with railway speculations, and the losses caused by the failures of the harvest, must produce a crisis. We have seen that this panic gave a fatal blow to the prestige of the Bank Act of 1844, which was enacted in express contradiction to the unanimous opinions of the most experienced authorities of former times whom it professed to follow. They had invariably protested against imposing a cast-iron limit on the issues of the bank. The experience of the crisis of 1847, amply confirming that of 1793, 1797 and 1825, and also proving the wisdom of the action of the bank in 1836, showed that such a restriction cannot be maintained in the paroxysm of a great crisis without endangering the existence of the whole mass of commercial credit.
The crisis we are now going to describe was of a very different nature. It burst upon the world in the most unexpected manner. It gave no premonitory symptoms which were apparent to any but very watchful and experienced eyes; and when it did come it revealed a depth of rottenness in the commercial world which appalled every one, and proved to be of much more severe intensity than that of 1847. The supporters of the Act of 1844 were much crestfallen by its failure in 1847, but they took courage again after the Crimean war. The act had been subjected to the test of a great commercial crisis and had failed. It was now subjected to the test of a war, and many of its opponents predicted that it would fail again; but it did not. Its effects during the Crimean war were probably salutary; but the war did not proceed to any such lengths as to test its powers severely. Peace was restored before the resources of the country were in any measure strained.
For several weeks preceding, the “Economist” reported the money market to be as tight as it could well be. But on the 29th December it said: “The money market continues as stringent as it can well be. Paper at long dates cannot be discounted on any terms. The great extent of our trade, as indicated by the returns for November, confirms the suspicion awakened by the continued demand for money, that trade has received no serious check from the advance in the rate of discount, and is still more extensive than prudence warrants, or in the end will be justified.”
In the course of 1855 the directors began to perceive that the rate of discount was the true method of protecting the reserve of the bank. The following table—showing the bullion in the bank and the rate of discount during 1855—shows a most marked difference in the action of the bank in 1855 and during former periods:
This most judicious conduct on the part of the bank, which merited nothing but the most unqualified commendation, excited a great clatter among a certain number of people who think that money is to be created ad libitum by writing “promises to pay” on bits of paper, when there is no money to pay them with, and who think it possible to send one’s money abroad and also to have it at home. The papers were filled for weeks with letters and articles exhibiting all the rank follies which were once prevalent on the subject of the price of corn, and which have been so admirably exposed by Adam Smith. But not many years afterwards a marked change for the better took place. The majority of writers then began to understand that the rate of discount is the true and supreme regulating power of the paper currency; and instead of assailing the bank with howls of execration when it did its duty in raising the rate of discount, they generally commended it. This was great, real and sound progress in the spread of economic science.
At the end of 1855 the Queen exercised the power reserved in the Act of 1844 to enable the Bank of England to extend its issues to not more than two-thirds of the amount of those of any banks of issue that might cease to issue notes. From the passing of the act up to this period, forty-seven banks, whose authorized issues amounted to £712,623, ceased to issue their own notes; and on the 13th December, 1855, the Queen in Council issued an order authorizing the Bank of England to increase its issues to the amount of £475,000 upon public securities. But this is not the bona fide increase in the issuing power of the bank; for in the year 1854 the Clearing House was organized on a better plan; and whereas before that an average amount of £200,000 of bank notes was required to adjust its transactions, by the new system these were totally dispensed with, and no notes at all are now used. Moreover, by the admission of the joint-stock banks to the Clearing House they were saved from keeping an enormous amount of notes to meet the “bankers’ charges,” which no one who was not behind the scenes could estimate. These notes, therefore, now became available to the bank to use for commercial purposes; and consequently are to be considered as so much additional power of issue to the bank, which thus had in reality acquired an increased power of issue far exceeding a million.
For several months after the beginning of 1856 the money market continued in a state of great “tightness” and the bullion in the bank scarcely varied. The lowest was on the 26th of April, when it stood at £9,081,675; after that it gradually rose, and the rate of discount fell in summer to about 4 1-4 to 4 1-2; but in October the bullion fell very considerably again, and discount rose to 7 and 8 per cent., and a pressure followed of about the same severity as in 1855 and continued with very little variation to the end of the year. On December the 4th discount was 6 1-2; on the 18th, 6 per cent., and it continued so till the autumn of 1857. These rates were, of course, very much higher than the average ones of former times, and they were one ground of accusation brought by many against the act; but in truth they were its very merit. The directors had now learned from experience, and it was these very variations which preserved the security of the bank.
In August nothing seemed amiss to the public eye. “Things were then pretty stationary,” said the governor of the bank. “The prospects of the harvest were very good; there was no apprehension that commerce at that time was otherwise than sound. There were certain far-seeing persons who considered that the great stimulus given by the war expenditure, which had created a very large consumption of goods imported from the East and other places, must now occasion some collapse, and still more those who observed that the merchants, notwithstanding the enhanced prices of produce, were nevertheless importing, as they had done successfully in the previous years. But the public certainly viewed the trade as sound, and were little aware that a crisis of any sort was impending, far less that it was so near at hand.” The bullion at this time was £10,606,000, the reserve £6,296,000 and the minimum rate of discount 5 1-2, when on the 17th of August the bank entered into a negotiation with the East India Company to send one million of specie to the East.
Things were in this state when, about the middle of September, news came of a great depreciation of American railway securities. It was found that for a long time they had been carrying on an extravagant system of management and paying dividends not earned by traffic. The system had at last collapsed; and, of course, an enormous depreciation of their stock followed, to the amount of nearly twenty per cent. It was supposed that as much as eighty millions of this stock was held in England, and that the effects of this fall would be very serious. On the 25th of August the Ohio Life and Trust Company, with deposits to the amount of £1,200,000, stopped payment. The panic spread throughout the Union. Discount rose to 18 and 24 per cent. On the 17th of October news came that 150 banks in Pennsylvania, Maryland, Virginia and Rhode Island had stopped payment. The drain was then beginning to be severe on the Bank of England. On the 8th October the bullion was £9,751,000, the reserve £4,931,000, and discount was raised to 6 per cent. On the 12th the rate at Hamburg was 7 3-4, and bullion was flowing to New York; discount was then raised to 7 per cent. About this time rumors strongly affecting the Western Bank of Scotland were abroad. On the 19th discount was raised to 8 per cent. The commercial disasters were increasing in America. In one week the Bank of France lost upwards of a million sterling. The bullion in the bank had sunk to £8,991,000, and the reserve to £4,115,000. Discount was raised to 7 1-2 in Paris and 9 per cent. in Hamburg. On the 20th a deputation from the Western Bank of Scotland applied for assistance, but the bank was afraid to undertake so enormous a concern. The Borough Bank of Liverpool was also in difficulties, and after some time the bank agreed to assist them to the amount of £1,500,000, on condition of their winding up; but the arrangements fell through in consequence of the Liverpool bank closing its doors before it was completed.
On the 13th October a general run took place on the New York banks in consequence of the severe measures of restriction they were obliged to adopt to protect themselves. Eighteen immediately stopped, and soon afterwards, out of sixty-three banks, only one maintained its payments. This immediately reacted on Liverpool and Glasgow, which were much involved with American firms. By the 19th October, the failures began to be numerous in this country. Uneasiness greatly increased in London. On the 28th, the principal discount house applied to the bank for an assurance that they would give them any assistance that they might require. On the 30th, an express came for £50,000 (sovereigns) for a Scotch bank, part of £170,000, and £80,000 for Ireland. On the 5th November discount was raised to 9 per cent. The great house of Dennistoun, with liabilities of nearly two millions, stopped payment on the 7th, and the Western Bank closed its doors on the 9th. Failures in London rapidly increased. Purchases and sales of stock were enormous, much beyond what they had ever been before. The bullion in the bank had sunk to £7,719,000, and the reserve to £2,834,000. On the 9th, discount was raised to 10 per cent. On the 10th of November, a large discount house applied to the bank for £400,000. The Bank of France raised its rate to 8, 9 and 10 per cent. for one, two and three months. Another English bank was assisted. The City of Glasgow Bank then stopped. On that day the discounts at the bank were £1,126,000. On the 10th and 11th, upwards of one million sterling in gold was sent to Scotland, and there was a great demand for Ireland. On the 11th, Sanderson & Co., the great bill-brokers, stopped payment, with deposits of three and a-half millions. On the 12th, the discounts at the bank were £2,373,000. On the 11th, in consequence of these sudden demands for Scotland and Ireland, the bullion was reduced to £6,666,000 and the reserve to £1,462,000.
As the failures in London became more tremendous, discounts became more and more contracted. The stunning news of the stoppage of so many banks created a banking panic. Private banks stopped discounting altogether. The only source of discount was the Bank of England. The public, however, and the directors knew that the precedent of 1847 must be followed; and though they made no direct application to the Government for the suspension of the act, they laid the state of the bank continually before them and continued to discount as if they knew the act must be suspended. Then private persons, being unable to obtain discounts, began to make a run for their balances. When universal ruin was at last impending, the Government, on the 12th of November, sent a letter to the bank to say that, if they should be unable to meet the demands for discounts and advances upon approved securities, without exceeding the limits of their circulation prescribed by the Act of 1844, they would be prepared to propose to Parliament a bill of indemnity for any excess so issued. In order, however, to prevent the temporary relaxation of the act from being extended beyond the necessities of the case, the rate of discount was not to be reduced below the then present rate, ten per cent. The issue of this letter immediately calmed the public excitement. But on the evening of the 12th the total banking reserve of the bank and all its branches was reduced to £581,000.
To show the state the bank was reduced to, the governor gave in a paper to the Parliamentary committee with the following figures, showing its reserve on the 11th and 12th November.
On Wednesday, November 11th, the reserve consisted of:
On Thursday, November 12th, at night, the reserve consisted of:
That is to say, the total reserve in London on the evening of the 12th was £384,144! Such were the resources of the Bank of England to commence business with on the morning of the 13th! “Truly,” said the governor, “it must have entirely ceased discounting, which would have brought an immediate run upon it; and the bankers’ balances alone were £5,458,000. It is easy to see that the bank could not have kept its doors open an hour.” The governor of the bank said that the panic of 1857 was not so great as that of 1847, but that the real commercial pressure was more intense. This is proved by the fact that, while in the former year the issue of the letter immediately allayed the panic, and by that means stopped the demand for notes, and there was only required an issue of £400,000 in notes to surmount all difficulties, which did not exceed the statutory limits; in 1857 the issue of the Government letter produced no cessation of the demand for advances. The statutory limit was £14,475,000 of notes issued on securities, and there were issued in excess of them:
Being a total of £7,376,000.
On the meeting of Parliament, an act was passed permitting a temporary suspension of the Bank Act till February 1st, 1858, provided that the directors did not reduce their discount below ten per cent. On the 24th December they reduced it to eight per cent., thereby reviving the operation of the act.
This great crisis of 1857, far exceeding in intensity that of 1847, added another proof upon proof that, in a great commercial crisis, the restrictive theory will bring about the universal failure of merchants and bankers; and that the expansive theory is the only one which can save both.
THE MONETARY PANIC OF 1866.
In 1858, the inevitable consequence followed from the crash of 1857. The enormous mass of false trading being cleared away, money naturally flowed into the bank, and the quantity of bullion gradually and steadily increased up to the end of the year. The bank now learned to adopt much higher rates of discount than formerly. In 1847, it kept the rate at five per cent. while the bullion was under £10,000,000; in 1858, the rate of five per cent. was maintained till the bullion exceeded £15,000,000—a great advance in sound principle.
In my “Dictionary of Political Economy,” Art. “Banking in England,” § 254, published not long after this great crisis, we said: “This year (1858) passed away in great tranquillity, persons not having forgotten the lesson of 1857. But we cannot doubt, judging from all former experience, that an uneasy spirit will soon be abroad again; we cannot doubt that the brood of speculators are now anxiously casting about to see if they can plant the seeds of the next crisis; and it is the duty of those who are now at the head of monetary affairs to be on the watch to counteract all such attempts as they can detect; and in the meantime, the most interesting question, in a banking point of view, is—What is to be the next mania?
Time in due course gave an answer to this question. There is nothing special to arrest our attention during the next few years. The rates of discount continued generally moderate throughout 1859 and 1860. In February, 1861, it rose for a short time to eight per cent., but soon subsided again. The unhappy civil war in America then being imminent, created natural apprehension as to our cotton supplies, and most persons could foresee that this would lead to monetary complications. These, however, were for the future. During 1861 and 1862, the money market was, generally speaking, extremely easy; the issue of paper by both the belligerent governments having the inevitable effect of driving bullion over to this country; consequently, trade flourished surprisingly, and the price of money was very easy. So things went on until October, 1863, when every one began to foresee a disturbance in the money market. In the first place, the rapid rise in the price of cotton, from the failure of the supply from the Southern States of America, forced up the price to a great height. The world had to be searched to produce the supply. Immense quantities came from the East Indies, from Egypt, from the Brazils, besides other quarters. This vast trade, being suddenly created, had to be paid for in cash. Consequently, a great drain of silver began towards the East, which was obtained from Paris and Hamburg—the great marts for silver as London is for gold. The Italian Government also contracted a loan at this time. The law of limited liability began to operate at the same time, and the number of new companies being formed under it inspired uneasiness. The Bank of France lost great quantities of specie. The Bank of England raised its rate twice in one week from five to six and then to seven. The Bank of France also raised its rate to seven, and spoke of issuing 50-franc notes; on the 2d of December the bank raised its rate to seven, and on the 3d to eight. At the same time a great fall took place in the Russian exchange, in consequence of certain Government measures not having succeeded. In consequence of these circumstances, the reserves of the bank were considerably strengthened after a short time. But in January, 1864, a fresh export of specie began, and continued with great severity till the middle or end of May, so that discount varied from eight to seven and six, and again up to nine. With a few fluctuations, this great pressure continued all through the summer. Having fallen to six per cent. in June, it gradually rose again to nine in September. After that it gradually fell to five per cent. in June, 1865. Already in March, 1864, the number of new companies formed under the limited liability principle gave great uneasiness. Up to that time, it appeared there were 263 companies formed, with a nominal capital of £78,135,000, of which twenty-seven were banks and fourteen discount companies. In August, 1864, the long-dated acceptances of the new financial companies began to press on the market and lay the foundations of the crisis of 1866. In April, the Bank of England was admitted into the Clearing House, thereby still further economizing the use of bank notes. On the 8th of September, the bank raised its rate to nine per cent., and this measure stopped the foreign drain, lowered the price of foreign commodities and strengthened their reserves. The price of cotton was greatly lowered, owing to the expected peace in America; and this rise in the rate of discount, striking on a falling market, produced an immense curtailment of business in all directions. On the 20th of June, 1865, the rate of discount reached its minimum—three per cent. On the 5th of August it was raised to four, and then gradually and continuously, with very slight fluctuations, till it culminated in the crisis of May, 1866. In November, a strong foreign drain began; the exchange fell, and this growing stronger in January, 1866, the bank raised its rate on the 6th. This had some effect in arresting the drain, but it did not bring in fresh supplies from abroad. At this period, the National Provincial Bank transferred its head office to London, and in consequence was, by the Statute of 1826, obliged to give up its issues of notes, which amounted to £442,371. Several other banks having ceased to issue since the Bank of England was last authorized to increase its issues of notes, the bank was now permitted to increase its issues on securities to £15,000,000. The high rate of interest here caused a good deal of foreign money to be invested in long-dated bills.
Towards the end of January, the difficulties began, which brought on the panic of May. In consequence of there having been no Parliamentary inquiry, as might have been expected, the circumstances of this panic have never been fully explained. But it may be stated, generally, that these finance and discount companies had advanced enormous sums of money to promote great enterprises, such as railways and other schemes which could never repay their cost until completed, which might take years. The first company that failed was the Joint Stock Discount Company, in February. This spread a general feeling of alarm, as the doings of this company were merely a type of a large amount of business, which was known to have been engaged in by numerous other companies. In March, Barned’s Bank, at Liverpool, stopped payment, with liabilities of upwards of three and a-half millions. Several great railway contractors suspended, involving in discredit the companies with whom they were known to have “financed.” On the 3d May, the bank raised its rate of discount to seven per cent. Every one now felt that the long-dreaded crisis was at last come. The air was thick with rumors. Every one knew that it was now merely a question of weeks, perhaps of days, when the storm would burst. On the 8th of May, the bank raised its discount to eight per cent. The advocates of the Bank Act, in their usual strain, proclaimed that on no account whatever must the act be suspended. Such a thing was not to be thought of. These wise persons were quite oblivious of 1847 and 1857. Credit was then tottering, and received a blow from the report of the speech of the Emperor Napoleon III., said to have been addressed by him to a meeting at Auxerre, in which he expressed his detestation of the treaties of 1815. This, in the feverish political state of the Continent, was held to mean that he was determined on war.
It is possible that this excitement might have passed off, as the bank had a fair reserve in the Banking Department, and abundance of bullion in the Issue Department. On the 9th of May, the bank revised its discount to ten per cent. On this day, however, occurred the event which it is probable produced the great panic. The Mid-Wales Railway Company had accepted bills of exchange to the amount of £60,000, which were held by three parties—Bateman; Overend, Gurney & Co., and the National Discount Company. The company had dishonored the bills, and actions had been brought against them by the three parties above named. As ill fortune would have it, judgment in these actions was delivered on the 9th of May in the very height of the excitement. The Court of Common Pleas held unanimously that the railway company had no authority whatever to accept such bills; and, consequently, that they were absolutely invalid and so much waste paper. For some time back, it was known that Overend, Gurney & Co. were very deep in with contractors and other parties. Moreover, they held forged bills to a large extent on another firm. Their shares were pressed on the market and were going down. This fall in their shares produced a steady withdrawal of their deposits. The judgment in the case of the Mid-Wales Railway converted this into a complete panic. And on the afternoon of the 10th of May the terrible news spread through London that the great establishment of Overend, Gurney & Co. had stopped payment, with liabilities exceeding £10,000,000—the most stupendous failure that had ever taken place in the city. This news only spread about after banking hours; but every one could foresee what the effects would be next morning. The Chancellor of the Exchequer said next evening, in the House, that the oldest inhabitant in the city declared that the excitement was without a parallel. Early in the evening, he was questioned as to whether Government had authorized the bank to issue notes in excess of the legal limit. The Chancellor replied that he had not yet done so, but that he had received a deputation from the private bankers, and was expecting one from the joint-stock banks on the subject. Very soon afterwards this came, and the members of the Cabinet having retired to a committee room and consulted, the Chancellor, later in the evening, announced, amidst the loudest cheers from all parts of the House, that the Government, following the precedents of 1847 and 1857, had informed the bank that, if they thought proper to make advances beyond the legal limit the Government would bring in a bill of indemnity. He also stated that the bank had advanced £4,000,000 that day.
The announcement of the suspension of the Bank Charter Act produced the best effects next morning. The bank raised its rate to ten per cent., and everything calmed down; and though, subsequently to this, some other stoppages took place, yet the knowledge that the bank had the power to issue notes on good securities abated the panic. On the 18th of May, the Chancellor of the Exchequer stated that the bank had advanced £12,225,000 in five days. The sum that was paid away during the panic will probably never be known, but it was something fabulous. We were informed, on good authority, that one bank alone paid away £2,000,000 in gold in six hours. Establishments, whose names need not be particularized, stopped payment, whose liabilities according to their last published balance sheet amounted to £37,222,716; besides several others whose liabilities were not stated, but which would probably bring up the sum total to £50,000,000. Besides these actual stoppages, several other banks connected with the East confessed to immense losses. Thus, the Bank of Hindostan, China and Japan stated its profits at £23,485, and its losses at £87,796, with a further expected loss of £70,000; the Asiatic Bank stated its profits at £61,494, and its losses at £142,000; the Bank of Queensland stated its profits at £10,373, and its losses at £42,071. What losses the other banks made we, of course, have no means of knowing, but they were probably very heavy.
In the great crisis and panic of 1866, the law that the rate of discount is the most powerful method of controlling the exchanges, seemed for some time to be at fault. From the beginning of that year the difference in the rates of discount at London and Paris was constantly two per cent.; and gradually increased to three, four and even six per cent.; and, while the storm was raging in England the Bank of France was in a state of the greatest serenity. The high rates in England were totally unable to prevent a severe foreign drain; and the Bank of France rapidly gained large quantities of bullion while its rate of discount was only four per cent. This remarkable, and indeed unprecedented, phenomenon led many persons to question the truth of the law; and even to maintain that the rates of discount in different countries ought to be quite independent of each other. But, it is to be remembered that the rate of discount, although in modern times the most powerful, is only one of several causes which influence the flow of bullion which may at any time act in the same or contrary directions. On this occasion, it was for a short period overpowered by other causes. The principal of these was the utter discredit into which England had fallen. It was fully expected that the Bank of England would stop payment, and that there would be a general stoppage of the other banks, involving the whole mercantile community in ruin. The high rate of discount failed to attract supplies, because it was feared that the whole principal would be lost. In consequence, large quantities of long-dated bills on England were hurried over and realized at any sacrifice, and the proceeds remitted abroad. But as soon as these temporary causes had ceased to act, large supplies of bullion poured in, and the equilibrium between credit and bullion was restored. As was well pointed out in a pamphlet by Mr. Fowler at the time, it was only that a longer period than usual was required to produce the effect on the exchanges than had been found needful on former occasions.
With respect to the Bank of France, the explanation is also easy. There was no commercial crisis in France, but strong expectations of war. Consequently, mercantile enterprise was curbed, and specie naturally flowed into the Bank of France. Also, in anticipation of war, the Government of Italy suspended cash payments and issued paper money. This, of course, necessarily drove specie out of the country, and it also naturally went to the Bank of France. Thus, it is seen how necessary it is to have a knowledge of the circumstances at any period to understand the operation of the laws of economics. Thus we see that true science is vindicated by experience. and the history of banking since 1866 has amply confirmed the truth of this doctrine, which was first demonstrated in the first edition of my “Theory and Practice of Banking” in 1856, and has since then made its way to universal acceptance. The Bank of France was exempted from the operation of the usury laws in France to enable it to adopt it, and by a sedulous attention to this principle, the notes of the Bank of France, which were for several years inconvertible after the war of 1870, circulated exactly at par with specie, and in fact every bank in the world is now managed on this principle.
THE CRISIS OF 1890.
The recent crisis, from which we are only now emerging, which was only prevented by the splendid management of the Bank of England from culminating in the most terrible monetary panic recorded in history, amply confirms all the principles and doctrines enunciated in this work.
After the severe crisis of 1878, when the country only escaped a monetary panic by the skin of its teeth, things went pretty smoothly for several years. But soon after that the great Argentine Republic, of immense extent and boundless resources, which was constantly receiving a vast immigration, especially from Italy, got into the hands of an unscrupulous “ring,” who created loan after loan for the ostensible purpose of developing the resources of the country. Most unfortunately, the great house of Baring Brothers & Co., one of the leading merchant-bankers of the world, constituted themselves one of the principal agents for floating these loans with the public. Argentina was advancing by leaps and bounds, and for several years these loans were received with great favor. But when loan after loan was launched with boundless profusion, people began to take alarm, and they ceased to be taken up by the public. Added to this, one of the usual South American revolutions took place; and the crew who were chiefly responsible for the loans, and who according to popular report, had feathered their own nests to the tune of millions, were driven from power, which of course, was a fatal blow to Argentine credit. Rumors and reports got about affecting many great houses, but as yet no one ventured to question the stability of the great house of Baring Brothers & Co. But, at last, on the 8th November, the appalling intelligence was made known to the governor of the bank that this great house was in the extremest danger of stopping payment, with liabilities to the amount of £21,000,000; and that the most energetic measures must be taken without a moment’s delay to avert the catastrophe.
The magnitude of the panic which would have ensued if this house had been allowed to shut its doors, may be gauged by the fact that, in 1866, the liabilities of Overend, Gurney & Co., which was up to that time the most stupendous failure in the city, were only £10,000,000; whereas those of Baring Brothers & Co. were £21,000,000. Moreover, Overend, Gurney & Co.’s liabilities were entirely internal, whereas the paper of Baring Brothers & Co. was held by millions in foreign countries. It is not too much to say that, if this house had been allowed to stop, it would have produced a monetary panic throughout the whole world. Now, at this time, the whole available resources of the bank, under the Bank Act of 1844, to meet the awful calamity, were just about £10,000,000, which would have been nothing but a drop in the bucket. In this emergency, the Chancellor of the Exchequer was summoned in hot haste to give counsel in the city. Popular report attributes the measures taken chiefly to the wisdom of Mr. Lidderdale, the governor. With magnificent energy, the bank itself being utterly unable to meet the crisis unaided, the joint-stock banks in London, the provinces, and in Scotland were summoned to combine, and a guaranteed fund of £15,000,000 was subscribed for.
Moreover, the news of the danger would not improbably have brought on a panic and a run for gold. Vast quantities of stock were thrown on the market, which reduced it lower than it had been for years, and far different from the halcyon days when Mr. Goschen effected his conversion. It is also said that some of the joint-stock banks contemplated ceasing to discount, which would have at once brought on a panic—and were only dissuaded from so doing by the peremptory and energetic remonstrances of the governor. But to insure against a possible panic, it was necessary to have a provision of notes; and as, under the Bank Act of 1844, additional notes could only be issued against an equal amount of gold, several millions of gold were required to be got together without a moment’s delay. The rate of discount was six per cent., and the bank did not dare to raise it higher; because, with its exceedingly restricted power of issue, raising the rate of discount would have been the very thing to aggravate the panic, and bring on the bank a demand for gold and notes. Accordingly, the bank contracted a loan for £3,000,000 for a short period with the Bank of France; and £1,500,000 with St. Petersburg, and obtained £500,000 from other quarters. It had, therefore, the power to issue £5,000,000 in notes and felt itself secure. By these energetic means, in such splendid contrast to the proceedings of the bank on former occasions, it was at length announced that all the liabilities of Baring Brothers & Co. were protected; but at the cost of the liquidation of this world-renowned firm; and the frightful monetary panic was averted, which would have thrown all former ones into the shade.
The nearest parallel to this crisis was that of 1838, when the greatest American houses were in danger, and the bank promptly and instantly advanced £6,000,000 and averted a monetary panic. The circumstances of this great crisis suggest the following reflections:
1. It dissipates the last vestiges of Peel’s hallucination, that all commercial crises are due to excessive issues of bank notes, and that if these could be suppressed commercial crises could be prevented.
2. Although in ordinary times, the rate of discount is the true supreme power of controlling credit and the paper currency, it is utterly too slow to attract millions of gold, if required to be got together in a few days.
3. That while the bank is bound down to such a narrow restriction of its power of issuing notes, raising the rate of discount too much will aggravate the panic, and bring on a run for notes and gold.
4. That to give full play and efficacy to the power of the rate of discount, it must be free and uncontrolled, and trusted as the sole controlling power, without any restriction in the power of issuing notes.
5. It also demonstrates the absurdity of not only restricting the power of issuing notes, but also of locking up half the resources of the bank out of the power of the directors. While the bank was busily scouring the world to scrape up £5,000,000 of gold, it actually had £10,000,000 of gold in its own vaults, which it was unable to touch.
6. It demonstrates that the Bank of England is utterly too small a machine to meet such a crisis alone, when it would have had the whole banking and mercantile community on its shoulders at once. To meet such tremendous crises, as all future ones will be, the Bank of England must act together with all the other banks in the country to support the mercantile community.
7. It proves that while commercial crises in our modern system of credit are unavoidable, monetary panics are preventable, and are brought about by bad banking legislation and bad management of the bank.
8. It gives the coup de grâce to the restrictive theory; and shows that, when a great commercial crisis is imminent, the banks must act together instantly and promptly, and energetically support the mercantile community, and not wait till half the city is in ruins, as on former occasions.
The bank on this occasion was saved by the energetic measures of Mr. Lidderdale, who is entitled to the gratitude of the whole banking and mercantile community in the world for his bold, prompt and energetic measures, which were the only ones possible under the circumstances. But it is too degrading to be repeated. Of course our excellent friends, the French, were jeering and gibing, and mocking at the Bank of England having to be taken in tow by the Bank of France. If the Bank of England had had the whole of its resources at command; if it had had a reserve of £20,000,000 of gold instead of £10,000,000, with unlimited powers of issue, it, with the assistance of the other banks, might have tided over the crisis with perfect security, by means of the rate of discount alone. If the present Bank Act had been in force in 1838, the bank could never have saved the American merchants, and there would have been a panic, as in 1847, 1857 and 1866. All these things show the indispensable necessity of a thorough and scientific reform of the entire banking system of the country.
[* ] Hansard Parl. Debates, Vol. 95, p. 615.