opposed to their DUTY as Directors of the Bank. And, formerly, it cannot be denied that their sympathy for the body to which they belonged has interfered with their proper course of action as Directors of the Bank, and has been the cause of many errors. The whole principles of the subject have now been brought to strictly scientific demonstration. If, therefore, the Directors find themselves unable to withstand Commercial pressure, and fulfil their undoubted duty, it would seem to raise the question whether some modification of the constitution of the Directorate might not be desirable, and whether a certain portion of them, at least, should not be as unconnected with commerce as private bankers are. There are very good reasons why they should not be exclusively taken from the Commercial body. The overwhelming weight of practical considerations is in favour of restoring the Bank to its original condition, and abolishing the separation of the two departments; which has been shewn was intended to carry out a particular THEORY, but which it wholly fails to do. For while times are quiet, or even during a tolerably severe monetary pressure, the Act is wholly in abeyance, it is utterly inoperative. But when a real commercial crisis takes place, and it totally fails to prevent these, as it was expected to do -and when that crisis has deepened beyond a certain degree of intensity, then the Act springs into action with deadly effect. It prevents by Law the only course being adopted, which the unvarying experience of 100 years has shewn to be indispensable to avert a panic, namely, a timely and liberal assistance to solvent houses then follows wild panic; and if the Act were rigorously maintained, then universal ruin. There is also another circumstance of the greatest importance to be observed, but which has not obtained sufficient notice. By the Bank Act of 1833, Bank Notes are made legal tender only while the Bank pays its Notes in gold on demand. As soon as it ceases to do so, no one can be compelled to take them, any more than any other bank notes. Consequently, if the Bank were compelled to stop payment in a panic, by enforcing the Bank Act of 1844, to its last extremity, as it most certainly would have done in 1847, 1857, and 1866, its Notes immediately cease to be legal tender by the Bank Act of 1833, and their holders could not compel any one to receive them in payment of a debt. 23. In the debate on Mr. Anderson's motion in the House of Commons, on the 25th March, 1873, the Chancellor of the Exchequer, Mr. Lowe, seemed to turn commercial panics into ridicule. He said that we never hear of military panics, or naval panics; why then should we hear of commercial panics? He seemed to consider English merchants as an inferior breed of men to English soldiers and English sailors. For once the Right Honourable Gentleman's acumen was at fault. The analogy is wholly erroneous. It is the duty of military and naval men to face death; it is their profession. But it is not the duty of commercial men to face ruin with equal equanimity. Under the modern system of commerce, discount is as necessary to commercial existence as air is to the life of the body. When the whole commercial community sees the very means of their existence rapidly diminishing before their eyes, they naturally rush to obtain Notes while they can, and on such occasions no raising of the Rate of Discount can check the demand. If they cannot get Notes, they run for Gold. Such a state of things naturally and inevitably produces, and invariably will produce a panic. The analogy of the Black Hole at Calcutta is much more true. shut up for a whole night, in a tropical climate, in a room less than 20 feet square, with only one small window to admit air, they naturally fought and struggled to get near it to preserve their existence. Under such circumstances there was, and there always would be a panic. So in the commercial world, when they see the very means of their existence rapidly diminishing before their eyes, they naturally fight and struggle to get possession of it, and they always will do so under similar circumstances. If the "Currency Principle," were carried out to the last extremity in a Monetary Panic, the survivors of the commercial community would not be proportionately more numerous than the survivors of the Black Hole of Calcutta. When 150 wretched men were Mr. Gladstone also, in the same debate, said that the Government would consider the subject, to see if any amendment could be introduced into the Act. But he said that such an amendment would take the Act as its basis of departure, and would be to strengthen and carry out its principle. But no human ingenuity could do that. The Currency Principle is that 1 is equal to 1. If the present constitution of the Bank be supposed to carry out the Currency Principle, then 2-6 must be held to be equal to 1. There is no possible method of carrying out the "Principle" of the Act, except by taking away all the Bank's powers of making profits. The true object of the Act is to ensure the convertibility of the Bank Note. But the Principle of the Act, or the machinery devised for that purpose, is merely a means to that end, and it has been proved to be defective. A better means of attaining the object of the Act has been ascertained and demonstrated to be true by the strictest scientific reasoning, as well as by abundant experience, since the passing of the Act, which is acknowledged to be efficacious, and, therefore, the Act is no longer necessary. The necessity of passing the Act was a deep discredit to the Directors of the Bank. It was a declaration that they were not competent to manage their own business. But now that they have shewn that they are perfectly able to do so, it is no longer necessary. It may be sometimes necessary to put a patient into a strait-waistcoat; but when the patient is perfectly recovered, and is restored to his right mind, the strait-waistcoat may be removed-especially as it is found that, under certain. circumstances, the strait-waistcoat not only strangles the patient, but scatters death and destruction all around. 24. We thus see that Sir Robert Peel was greatly deceived in his expectation that the limitation of the Bank's power of issue would prevent commercial crises. On this occasion he erred, as so many others have erred, in Economics, by too limited a consideration of facts. It is true that on some occasions the Bank had fostered an over-spirit of speculation by too profuse an issue of notes. But commercial crises occur from other causes besides : they have occurred when there was no profuse issue of notes, and in places where there were no notes beyond bullion. Whenever there are expected to be great fluctuations in prices from whatever cause arising-either from great scarcity or from great abundance-from the transition from peace to war, or from war to peace-from the discovery of new profitable openings of every description-from great disturbance in the usual course of trade the speculative or gambling propensity is sure to be called forth, and lead to a pressure more or less intense. In 1694 the first joint stock mania took place, when there was no excessive credit. In 1720 there was no excessive issue of notes. In 1763 there was no excessive issue of notes, and the great commercial crisis of that year took place at Amsterdam, where the "Currency Principle" was in full operation. In 1772 there were excessive issues of notes, which greatly conduced to the crisis. In 1783 the crisis seems to have been due to the transi tion from war to peace. Before 1793 there were excessive issues of notes by the miserable traders whom the monopoly of the Bank permitted to grow up as bankers. Previous to 1797 the Bank itself had made excessive issues, compelled thereto by Pitt. In 1808 the Bank greatly fostered the spirit of speculation. In 1824 and 1825 the Bank was far too long before it contracted its issues. So also in 1836 and 1839. But in 1847, 1857, and in 1866, the great crises were in no way whatever attributable to excessive issues. In 1847 it was excessive railway speculation. In 1857 it was due to a series of causes wholly irrespective of issues, and in that year the severity of the crisis at Hamburg, where the "Currency Principle" is carried out, and was so great that the Government was obliged to come forward to create a solid credit to support solvent houses. In 1866 there were no excessive issue of notes. The most bigoted opponent of the Bank could by no possibility say that the crises of 1857 and 1866 were in any way whatever attributable to the Bank, or could, by any possibility have been averted by any management of the Bank. The crisis of 1808 was due to the sudden opening of the South American markets. That of 1825 to the anticipated profits on working foreign mines. That of 1836 partly to the rapid extension of Joint Stock Banks. That of 1847 to excessive railway speculations. That of 1857 to excessive trading especially in America. That of 1866 to the too rapid extension of Financial Companies on the limited liability principle. Hence we see that a law made on the supposition that all crises are caused by a single circumstance, and whose operation is only adapted to that cause, must necessarily fail. Sir Robert Peel was further in error in saying, that during periods of commercial crisis private persons make advances. It may, perhaps, happen that here and there a private person may assist a friend, but, as a general rule, it is wholly without foundation. It was observed, before the passing of the Act, VOL. II. 2 B that in times of commercial pressure there was a general tendency to hoard. This was observed in 1825, in 1836, and in 1839. And this tendency was greatly aggravated by the Act of 1844, and was displayed with far greater intensity in 1847. When the public saw that the Bank's reserve was diminishing so rapidly, and no one knew what would be done, a general rush was made at its notes, and they were hoarded away in millions. No sooner was the Act suspended than they came forth in millions from their hiding places, and the panic passed away. Therefore, in this fundamental point, there is no doubt whatever that Sir Robert Peel was entirely wrong, and that the allegation of the opponents of the Act is strictly justified-that, when a pressure reaches a certain point, the Act aggravates and intensifies it into a panic, which can only be allayed by the suspension of the Act. Moreover, Sir Robert Peel was quite mistaken in supposing that bankers only make advances out of bona fide capital. This is so fully set forth in the chapter on the Theory of Banking, that we need only remind our readers that all banking advances are made, in the first instance, by CREATING CREDIT. Every banker knows perfectly well that an excessive restriction of credit causes and produces a run for gold. When the banks see that they can get no assistance from the Bank of England, they must cease discounting. But if they cease discounting, their customers have still engagements to meet, which, of course, they will do as long as they can; and, in order to do so, they have no other resource but to draw their balances, and this, of course, will end in making their bankers stop payment; and bankers and customers will fall together. Many persons have observed that the variations in the Rate of Discount have been much more frequent since the Act than before it; and they maintain that the Bank Act is the cause of these variations. In answer to this, it may be said that it was the very fixedness of the Rate of Discount in former times that was the main cause of many calamities; and that if the variations had been more frequent and severe, these calamities would have been saved. And as for the frequent variations since the Act, it may be confidently said that the Bank Act is in no way whatever their Their true cause is the increased knowledge of the true scientific principles of Banking, and the increased speed and cause. |