Page images
PDF
EPUB

client who cheerfully pays the rate of interest demanded, there can be no doubt whatever that neither side is benefited so well permanently, as when a client pays a rate of interest which the business in which he employs it will safely bear, and the banker can part with his money with a conviction that he will receive it when due, and in the meantime will have no occasion to supply its place at a loss.

Mr. John Stuart Mill, Principles of Political Economy,' vol. ii. p. 194, says: Fluctuations in the rate of interest arise from variations either in the demand for loans, or in the supply. The supply is liable to variation, though less so than the demand. The willingness to lend is greater than usual at the commencement of a period of speculation, and much less than usual during the revulsion which follows. In speculative times, money-lenders, as well as other people, are inclined to extend their business by stretching their credit; they lend more than usual (just as other classes of dealers and producers employ more than usual) of capital which does not belong to them. Accordingly, these are the times when the rate of interest is low, though for this, too (as we shall immediately see), there are other causes. During the revulsion, on the

contrary, interest always rises inordinately, because, while there is a most pressing need on the part of many persons to borrow, there is a general disinclination to lend. This disinclination, when at its extreme point, is called a panic. It occurs when a succession of unexpected failures has created in the mercantile, and sometimes also in the non-mercantile, public a general distrust in each other's solvency; disposing every one, not only to refuse fresh credit, except on very onerous terms, but to call in, if possible, all credit which he has already given. Deposits are withdrawn from banks; notes are returned on the issuers in exchange for specie; bankers raise their rate of discount, and withhold their customary advances; merchants refuse to renew mercantile bills. At such times the most calamitous consequences were formerly experienced from the attempt of the law to prevent more than a certain limited rate of interest from being given or taken. Persons who could not borrow at five per cent. had to pay, not six or seven, but ten or fifteen per cent. to compensate the lender for risking the penalties of the law; or had to sell securities or goods for ready money at a still greater sacrifice.

'Except at such periods, the amount of capital

disposable on loan is subject to little other variation than that which arises from the gradual process of accumulation; which process, however, in the great commercial countries is sufficiently rapid to account for the almost periodical recurrence of these fits of speculation; since, when a few years have elapsed without a crisis, and no new and tempting channel for investment has been opened in the meantime, there is always found to have occurred, in those few years, so large an increase of capital seeking investment, as to have lowered considerably the rate of interest, whether indicated by the prices of securities or by the rate of discount on bills; and this diminution of interest tempts the possessors to incur hazards, in hopes of a more considerable return.'

It will thus be seen that the rate of interest which may be ruling at one period or another is not influenced by the amount or value of money which may be in circulation.

As the rate of interest rises, all descriptions of securities become depressed; and there is always the danger that bankers will be tempted to lend too large a proportion of their deposits, so that when demanded by the depositors they may be unable to return them.

APPENDIX:

[ocr errors]

The following is copied from the Times' of
May 18, 1866.

The return from the Bank of England for the week ending May 16, 1866, gives the following results, when compared with the previous week :—

[merged small][ocr errors][merged small][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small][merged small]

The amount of notes in circulation is 26,120,9957., being an increase of 3,776,6007.; and the stock of bullion in both departments is 12,323,8051., showing a decrease of 832,3351. when compared with the preceding statement. This is the most extraordinary return ever presented. On neither of the two preceding occasions of the suspension of the Bank Act did the figures exhibit any very violent change, but in this instance the peculiar severity of the panic caused an extra 10 millions to be applied for by the public in the shape of discounts and temporary advances, of which 5,105,135l. found its way back in the shape of bankers' balances, and between four

and five millions went into circulation in the form of remittances of notes and coin to country bankers and others. Under these circumstances, although the receipts of foreign bullion during the week exceeded the withdrawals for exportation by 93,000l., the stock held shows a decrease of 832,3351. As the reserve of notes and bullion in the banking department still amounts to 1,202,8107., it will be seen that no actual infringement of the Act has taken place, and consequently, that no Parliamentary action will be requisite.

In reply to the questions of two honourable members of the House of Commons, put to the Chancellor of the Exchequer on May 17, 1866, Mr. Gladstone, in informing them that they were under a misapprehension as to the Bank of England not having made advances 'upon the lodgment of Government securities,' stated that:"The advances made by the Bank of England on Government securities on Friday, the day of the panic, amounted to 919,000l.; on Saturday, to 747,0007., and on three subsequent days various amounts, making up the total amount advanced on these securities in five days to 2,874,000l. Then, with regard to the accommodation of commerce in general, the best measure that can be given of the manner in which the Bank has exercised its functions is shown in this-that it has made advances upon bills, and has discounted bills to the extent of 9,350,000l., making a total of advances and discounts in five days of 12,225,0007.'

PRINTED BY SPOTTISWOOde and co., NEW-STREET SQUARE, LONDON.

« PreviousContinue »