[The Bank Act of 1844 and the Monetary Crisis in England]^[418]

On the 5th inst. the Bank of England raised its minimum rate of discount from 8 per cent, at which it was fixed on October 19, to 9 per cent. This enhancement, unprecedented as it is in the history of the Bank since the resumption of its cash payments, has, we presume, not vet reached its highest point. It is brought about by a drain of bullion, and by a decrease in what is called the reserve of notes. The drain of bullion acts in opposite directions—gold being shipped to this country[a] in consequence of our bankruptcy, and silver to the East, in consequence of the decline of the export trade to China and India, and the direct Government remittances made for account of the East India Company. In exchange for the silver thus wanted, gold must be sent to the continent of Europe.

As to the reserve of notes and the influential part it plays in the London money market, it is necessary to refer briefly to Sir- Robert Peel's Bank act of 1844[419], which affects not only England, but also the United States, and the whole market of the world. Sir Robert Peel, backed by the banker Lloyd, now Lord Overstone, and a number of influential men beside, proposed by his act to put into practice a self-acting principle for the circulation of paper money, according to which the latter would exactly conform in its movements of expansion and contraction to the laws of a purely metallic circulation; and all monetary crises, as he and his partisans affirmed, would thus be warded off for all time to come. The Bank of England is divided into two departments—the issuing department and the banking department; the former being a simple manufactory of notes and the latter the real bank.. The issuing department is by law empowered to issue notes to the amount of fourteen millions sterling, a sum supposed to indicate the lowest point, beneath which the actual circulation will never fall, the security for which is found in the debt due by the British Government to the Bank. Beyond these fourteen millions, no note can be issued which is not represented in the vaults of the issuing department by bullion to the same amount. The aggregate mass of notes thus limited is made over to the banking department, which throws them into circulation. Consequently, if the bullion reserve in the vaults of the issuing department amounts to ten millions, it can issue notes to the amount of twenty-four millions, which are made over to the banking department. If the actual circulation amounts to twenty millions only, the four millions remaining in the till of the banking department forms its reserve of notes, which, in fact, constitutes the only security for the deposits confided by private individuals, and by the State to the banking department.

Suppose now that a drain of bullion sets in, and successively abstracts various quantities of bullion from the issuing department, withdrawing, for instance, the amount of four millions of gold. In this case four millions of notes will be cancelled; the amount of notes issued by the issuing department will then exactly equal the amount of notes in circulation, and the reserve of disposable notes in the till of the banking department will have altogether disappeared. The banking department, therefore, will not have a single farthing left to meet the claims of its depositors, and consequently will be compelled to declare itself insolvent; an act affecting its public as well as its private deposits, and therefore involving the suspension of the payment of the quarterly dividends due to the holders of public funds. The banking department might thus become bankrupt, while six millions of bullion were still heaped up in the vaults of the issuing department. This is not a mere supposition. On October 30, 1847, the reserve of the banking department had sunk to £1,600,000 while the deposits amounted to £13,000,000. With a few more days of the prevailing alarm, which was only allayed by a financial coup d'état on the part of the Government, the Bank reserve would have been exhausted and the banking department would have been compelled to stop payments, while more than six millions of bullion lay still in the vaults of the issuing department.

It is self-evident then that the drain of bullion and the decrease of the reserve of notes act mutually on each other. While the withdrawal of bullion from the vaults of the issuing department directly produces a decrease in the reserve of the banking department, the directors of the Bank, apprehensive lest the banking department should be driven to insolvency, put on the screw and raise the rate of discount. But the rise in the rate of discount induces part of the depositors to withdraw their deposits from the banking department, and lend them out at the current high rate of interest, while the steady decrease of the reserve intimidates other depositors, and induces them to withdraw their notes from the same department. Thus the very measures taken to keep up the reserve, tend to exhaust it. From this explanation the reader will understand the anxiety with which the decrease of the Bank reserve is watched in England, and the gross fallacy propounded in the money article of a recent number of The London Times. It says:

"The old opponents of the Bank Charter Act are beginning to hustle in the storm, and it is impossible to feel certain on any point. One of their great modes of creating fright is by pointing to the low state of the reserve of unemployed notes, as if when that is exhausted the Bank would be obliged to cease discounting altogether."

As a bankrupt, under the existing law it would be in fact, obliged to do so.

"But the fact is that the Bank could, under such circumstances, still continue the discounts on as great a scale as ever, since their bills receivable each day of course, on the average, bring in as large a total as they are ordinarily asked to let out. They could not increase the scale, but no one will suppose that, with a contraction of business in all quarters, any increase can be required. There is, consequently, not the shadow of a pretext for government palliatives."[b]

The sleight-of-hand on which this argument rests is this: that the depositors are deliberately kept out of view. It needs no peculiar exertion of thought to understand that if the banking department had once declared itself bankrupt in regard to its lenders, it could not go on making advances by way of discounts or loans to its borrowers. Taken all-in-all, Sir Robert Peel's much vaunted Bank law does not act at all in common times; adds in difficult times a monetary panic created by law to the monetary panic resulting from the commercial crisis; and at the very moment when, according to its principles, its beneficial effects should set in, it must be suspended by Government interference. In ordinary times, the maximum of notes which the Bank may legally issue is never absorbed by the actual circulation—a fact sufficiently proved by the continued existence in such periods of a reserve of notes in the till of the banking department. You may prove this truth by comparing the reports of the Bank of England from 1847 to 1857, or even by comparing the amount of notes which actually circulated from 1819 till 1847, with that which might have circulated according to the maximum legally fixed. In difficult times, as in 1847, and at present by the arbitrary and absolute division between the two departments of the same concern, the effects of a drain of bullion are artificially aggravated, the rise of interest is artificially accelerated, the prospect of insolvency is held out not in consequence of the real insolvency of the Bank, but of the fictitious insolvency of one of its departments.

When the real monetary distress has thus been aggravated by an artificial panic, and in its wake the sufficient number of victims has been immolated, public pressure grows too strong for the Government, and the law is suspended exactly at the period for the weathering of which it was created, and during the course of which it is alone able to produce any effect at all. Thus, on Oct. 23, 1847, the principal bankers of London resorted to Downing street, there to ask relief by a suspension of Peel's Act. Lord John Russell and Sir Charles Wood consequently directed a letter to the Governor and Deputy Governor of the Bank of England[c], recommending them to enlarge their issue of notes, and thus to exceed the legal maximum of circulation, while they took upon themselves the responsibility for. the violation of the law of 1844, and declared themselves prepared to propose to Parliament, on its meeting, a bill of indemnity[420]. The same farce will be again enacted this time, after the state of things has come up to the standard of the week ending on Oct. 23, 1847, when a total suspension of all business and of all payments seemed imminent. The only advantage, then, derived from the Peel Act is this: that the whole community is placed in a thorough dependence on an aristocratic Government—on the pleasure of a reckless individual like Palmerston, for instance. Hence the Ministerial predilections for the act of 1844; investing them with an influence on private fortunes they were never before possessed of.

We have thus dwelt on the Peel Act, because of its present influence on this country[d], as well as its probable suspension in England; but if the British Government has the power of taking off the shoulders of the British public the difficulties fastened upon them by that Government itself, nothing could be falser than to suppose that the phenomena we shall witness on the London money market—the rise and the subsiding of the monetary panic—will constitute a true thermometer for the intensity of the crisis the British commercial community have to pass through. That crisis is beyond Government control.

When the first news of the American crisis reached the shores of England, there was set up by her economists a theory which may lay claim, if not to ingenuity, to originality at least. It was said that English trade was sound, but that, alas! its customers, and, above all, the Yankees, were unsound. The sound state of a trade, the healthiness of which exists on one side only, is an idea quite worthy of a British economist[e]. Cast a glance at the last half-yearly return issued by the English Board of Trade for 1857, and you will find that of the aggregate export of British produce and manufactures, 30 per cent went to the United States, 11 per cent to East India, and 10 per cent to Australia[f]. Now, while the American market is closed for a long time to come, the Indian one, glutted for two years past, is to a great extent cut off by the insurrectionary convulsions, and the Australian one is so over-stocked that British merchandise of all sorts is now sold cheaper at Adelaide, Sydney and Melbourne, than at London, Manchester or Glasgow. The general soundness of the British industrialists, declared bankrupt in consequence of the sudden failure of their customers, may be inferred from two instances. At a meeting of the creditors of a Glasgow calico printer, the list of debts exhibited a total of £116,000, while the assets did not reach the modest amount of £7,000. So, too, a Glasgow shipper, with liabilities of £11,800, could only show assets to meet them of £789. But these are merely individual cases; the important point .is that British manufactures have been stretched to a point which must result in a general crash under contracted foreign markets, with a consequent revulsion in the social and political state of Great Britain. The American crisis of 1837 and 1839 produced a decline in British exports from £12,425,601, at which they stood in 1836, down to £4,695,225 in 1837, to £7,585,760 in 1838, and £3,562,000 in 1842. A similar paralysis is already setting in in England. It cannot fail to produce the most important effects before it is over.

Notes