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 to 8. 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 began to bank in London, and, in consequence, were obliged by law to give up their issues, which amounted to £442,371. Several other banks having ceased to issue, since the Bank of England had been last authorised to increase its issues, it 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 in 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 to do. The first company that went 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 3 millions. Several great railway contractors suspended, involving in discredit the companies with whom they were known to have "financed."

54. On the 3rd of May the Bank raised its discount to 7 per cent. Every one now felt that the long-dreaded crisis was at last come. The air was thick with rumours. Every one knew now that it was merely a question of weeks, perhaps of days, when the storm should burst. On the 8th of May the Bank raised its discount to 8 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.

Credit was then tottering and received a blow from the report of a 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 raised the rate of discount to 9 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 dishonoured 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 amount of another firm. Their shares had been 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 run; and, on the afternoon of Thursday, May 10th, 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 inhabitants of the City declared that the excitement was without a parallel. Early in the evening he was questioned as to whether Government had authorised 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 limit, the Government would bring in a Bill of Indemnity. He also stated that the Bank had advanced £4,000,000 that day.

55. The announcement of the suspension of the Bank Charter Act produced the best effects next morning. The Bank raised its rate to 10 per cent., and everything calmed down, and though subsequently to this some other stoppages took place, yet the knowledge that the Bank had power to make advances 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 can probably never be known, but it was something perfectly fabulous. It has been said, though, of course, we know not on what authority, that one great bank alone paid away £2,000,000 in six hours. The establishments that stopped payment were as follows, with their liabilities, according to their last published balance-sheet, though, of course, these were greatly diminished during the panic

Besides these stoppages, several other banks connected with

the East confessed to enormous 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 Banking Company 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 heavy.

56. We have already noticed in Chapter VII., § 15, that on this occasion the Rule that a high Rate of Interest will attract bullion from foreign countries seemed for a short time to be at fault, which caused a good many persons to deny its truth altogether. The remarks given in that passage were written at the very time of that crisis, and shew that the Law did not fail as was alleged, but that its effects were for a short time counteracted by other causes. We are happy to say that the truth of our remarks is corroborated by a distinguished banker, Mr. Fowler"I have heard it said that whatever may have been the case in times past, on this occasion, the exaction of a high rate of interest failed to bring gold to the Bank, and thus restore the equilibrium of the currency. We have here to deal with a question of fact, and as I write, bullion is flowing in from all quarters, just as on former occasions, with this distinction, that a longer period was required in order to produce the required effect on the exchanges than had been found needful in other cases. It is not the fact that the usual results have not been experienced, but it is the fact that the operation has been more tedious than usual. Moreover, it must not be forgotten that we received a very large amount of specie from America at the very moment it was most needed, and partly, if not mainly, in consequence of the news of the panic in London having arrived in New York. But, important as is this consideration, there is no doubt that owing to the discredit which fell on all English securities in consequence of the failure of Overend, Gurney, & Co., and other great houses, supplies which would otherwise have been attracted from the continent by a 10 per cent. rate, were delayed, if not altogether withheld, and as a natural result, the recovery from the panic, and the replenishment of the circulation, took place far more slowly than might have been expected." 1

The Crisis of 1866. By Wm. Fowler, p. 42.

Thus we see that true science is vindicated by experience, and the history of banking since 1866 has amply confirmed the truth of this principle, which was first demonstrated in the first edition of this work in 1856, and since then has made its way to universal acceptance by all competent persons. The Usury Laws in France were modified in order to enable the Bank of France to adopt it, and by a sedulous attention to this principle the Notes of the Bank of France, which are inconvertible, circulate exactly at par with specie; and, in fact, every bank in the world is now managed on this principle.

Having brought the history of Banking up to this point, we do not think it necessary to give any further details of events since then. The primary object of the history we have given is to establish PRINCIPLES. We have given an exact history of the different doctrines which have been held as to managing the Bank and the Paper Currency, until at last scientific reasoning and practical experience have equally demonstrated that the true method of controlling Credit and Paper Currency is by means of the RATE of DISCOUNT. We have given ample details of the steps by which this great doctrine gradually established itself in the Banking and Mercantile world. To pursue the subject further would not bring out any new principles, it would only give superfluous illustrations of a principle which is now as firmly established among all competent persons as the Newtonian Law of Gravity is among men of science: and, therefore, prolonging an account would only occupy space without any good object.

VOL. II.