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and unless there is a regular conspiracy, we shall not mind any body. But we have to supply the public. You have stopped the issue of notes to us; and if you, who have been in the habit of supplying us with money when we required it, will not do so now, we, on the other hand, will not supply the public.' I satisfied them that if they wished to curtail transactions, which was really their object, the way to do it was to make us act harmoniously with the Bank. Sir John Rae Reid said at once, I perfectly understand you;' and after a little consultation he said, 'If they are all proper bills, go and discount away; and if you want money, come to us.' I went home, and told them what had taken place. It not only affected us, but it affected the whole of Lombard Street; this dark cloud disappeared, and a perfect sunshine took place in an instant. We discounted every thing; and, as far as my memory serves me, I do not think we went to the Bank for a shilling; there was no interruption to the ebb and flow of the banking money. But when the Bank of England said, 'You shall not have it,' the effect was to lock up millions immediately; for a large portion of the banking money deposited with us is in great masses, because the parties know that they can have it in a moment. If, in our own arrangements between ourselves and the Bank, the Bank say, 'We will not do this,' all that is stopped in a moment; and those millions, which would otherwise be of benefit to the public, under existing circumstances become immediately locked up; because people say, We would rather have no interest at all, than have a doubt about our getting the money in case we require it.""
Probably this is a satisfactory resource if the Bank of England is ready at all times, and willing at all times, to give the re-discount required. A man may advance every shilling of borrowed money on securities which he is sure that he can pledge in any quantity and at any time. But can these traders be sure that the Bank will be at all times so able and so willing?
Of the willingness of the Bank there need be no question. Its leading director has explained the system on which it acts. Mr. Norman is asked:
"3527. The advances of the Bank of England are made through what is called the Discount Office ?-The greatest part of them.
3528. What is the nature of the Discount Office?-It is a very anomalous institution, because the Bank is supposed to hold out an offer to every body to lend money to any amount on bills of exchange at a rate of interest fixed by itself, and subject, first of all, to variations in the rate of interest, and then to certain other contingencies, such as a diminution in the échéance, and an occasional rejection of securities ordinarily admitted.
3529. Is it not principally by raising the rate of interest that you check the amount of discounts which may be so demanded of you ?Yes; we have found, contrary to what would have been anticipated, that the power we possess, and which we exercise, of raising the rate
of discount, keeps the demand upon us within manageable dimensions. There are other restrictions which are less important. The rate we charge for our discounts we find, in general, is a sufficient check."
The power of the Bank is far less evident. If Sir R. Peel's act is to be retained, and really acted on during a crisis of difficulty, that power would, if we may trust our experience, not exist. When there was less than a million in the reserve of notes, it was quite certain that the Bank could not make unlimited advances. Unquestionably, by keeping a much larger reserve in times of security, the Bank may retain the power of making these sudden and large advances in times of insecurity. And if the Bank directors in the forthcoming inquiry mean to support the act of 1844, they most certainly should assure the public that they will in future adopt that expedient. It is idle for them to undertake to make very great loans, and also to defend an act which limits their means, unless they can show us that by judicious management these means can be made practically adequate to such advances. They must either abandon the argumentative defence of the statute of restriction, or they must show us how the business which they profess to carry on can be managed within the provisions of that statute. And even irrespectively of the conditions of this act, a cautious banker hardly likes to be under an engagement to make advances however great, in times of difficulty however severe. It may be safe, but it does not sound safe. A much larger reserve of bullion than six or seven millions seems quite necessary to render the profession to afford such advances even plausible.
We are therefore of opinion, that though the state of other trades in England was as satisfactory during the present autumn as we can in general hope to have it, the condition of the money-lending trade was critical, and perhaps perilous. We think that the reserve held by the Bank for its banking liabilities was dangerously low; especially when we remember that this is the only actual cash reserve for all the banking liabilities of the country. We believe that the bill-brokers of Lombard Street incur serious risk in depending on the ability of the Bank to make unlimited advances at moments when money is remarkably scarce. On both these points we have the same fault to find with the money-lenders: that they have developed too highly the system of credit-in more graphic, though less elegant words, that they have "used up their money too close;" and do not keep enough of it unemployed to meet the contingency of an occasional pressure.
As we are using phraseology so similar, we would desire, however, to distinguish ourselves particularly from those per
sons who impute the principal error in the over-development of the system of credit in London to the joint-stock banks, which are now so remarkable a feature in its pecuniary system. We have no desire to enter the lists for every thing which these banks have done; we should be inclined, on a proper occasion, to maintain that they have committed errors; and that, in consequence of the law which requires that every shareholder shall be liable for the debts of the bank to his last shilling and his last acre, there are defects in their management which it will be difficult to amend. Still, on the whole, the joint-stock banks of London have stood remarkably well; not only have none of them failed, but none of them have been in danger of failing. They have now gone quite safely through a general pressure, and some time since they passed through a special pressure consequent on the failure of the Royal British Bank; and in both cases the result has been beneficial. It is quite true that they have adopted the bill-broker's business; but they have divested it of the dangers of which we have spoken. Being possibly conscious that, as apparent, and perhaps in some degree real, competitors of the Bank of England, they might not find extreme favour with the authorities of the "Discount Office" the joint-stock banks do not rely on the support of that establishment in times of difficulty. Mr. Chapman the bill-broker, whom we have more than once cited, has given evidence on this point which we must believe to be conclusive, as it is in favour of those whom he admits to be his competitors. "Is it," he is asked, "within your experience that the London joint-stock banks, such as the London and Westminster and other banks, re-discount their bills?" "I never heard of such a thing." "Then in that respect the London joint-stock banks differ materially in their mode of carrying on business from that which is adopted by the discount houses in Lombard Street, do they not?" Certainly they do; because it is our business to sell our bills again, and they do not sell their bills again that I know of." These banks are enabled to carry on this course of business without recourse to the expedient which those who first practised it have been compelled to rely upon, because their situation is in one most important respect far more advantageous. The bill-brokers pay an interest for all the money which they borrow; the banks which compete with them have a great deal of money on the balances of drawing accounts for which they pay no interest—they can afford to keep idle some of their cheap money in order to provide for the occasional withdrawal of the money for which they pay highly. Of course they do this at the expense of a diminution in the profits which they might derive from the other
parts of their banking business. If they did not keep their money idle for this peculiar purpose, they might employ it in the common way, and obtain a profit upon it. But this is a matter which may be safely left to the practised pecuniary judgment of the managers. If they carry on such a business, we may without rashness infer that it is a profitable one. Possibly they may, from an implied engagement to give for money one per cent less than the minimum rate of discount, have been recently induced to give higher rates for deposits than we shall be likely to see again; perhaps the time of notice in which they hold their interest-bearing deposits may be too short; but these are points of detail-on a general view of the subject they must be considered to have diminished one of the most serious risks of the bill-broking business, at the same time that they have continued to afford to the public all characteristic advantages.
We do not consider as important arguments in favour of the conclusion that the system of credit has been perhaps too largely developed in England, the reckless advances which appear to have been made by the three large banks which have failed in Scotland and the north. In a great country like this there will always be some unsound banks, as well as some insolvent merchants. Two of these banks nearly suspended payment, and perhaps should have suspended payment, in 1847; and the other has been well known in the banking world for a speculative and exceptional business. We would not ground our conclusion on any singular and casual facts. We wish to base it solely on the small amount of cash, especially of cash available for banking liabilities, held by the Bank of England; and on the exclusive reliance of Lombard Street, and indirectly of the rural bankers, on the Bank of England.
This extreme development of credit must of course be attended with peril during a crisis, in whatever manner that crisis may be occasioned. Every crisis must disturb confidence; and credit is the effect of trust and confidence. We cannot but believe, however, that during the last two months the peril of this inevitable disturbance of credit has been much enhanced by our peculiar legislation. The proof of this seems to us to lie on the surface of the subject. The cause of panic is the expectation of insolvency. People who have during many years given long and large credit, become apprehensive, and wish to be paid in cash immediately. The peril of this state of feeling is measured by the amount of cash which is available to meet the demands for such repayment. As we have explained, the sole reserve applicable to such repayments dur
ing a pressure on Lombard Street is the banking reserve of the Bank of England. Previously to the Act of 1844, the Bank of England resembled the Bank of France, and held a single reserve of coin and bullion against all its liabilities, whether to note-holders or depositors. If this state of things had continued, the reserve of cash applicable to a domestic panic, and its proportion to the claims upon it, would have been shown by the following figures:
"The result of which is, that the Bank reserve, beginning at about one-fourth of its general liabilities, was reduced to between one-sixth and one-seventh of them in five weeks. In that space of time, while the liabilities have been increasing, one-third of the bullion reserve has been abstracted." This is evidently an account likely to create a serious feeling in the minds of attentive and cautious men. It would have convinced many of them, at least in our judgment, that our credit system rested on a basis dangerously small: but it is evidently an account requiring to be looked at with attention, and reasoned upon after consideration; it would not produce a frantic alarm in the minds of any of those who are incapable of steady reasoning, and are solely acted on by the tendencies of the moment, and the opinions of those around them. The extreme danger of a period of discredit consists in the frantic alarm which it occasions among such unreflective and undiscriminating persons. Sir Robert Peel's act enjoins a form of account which is felicitously apt to catch and rivet the minds of such persons. The amount applicable to the banking liabilities of the Bank of England, so long as the ordinary business of the Bank is going on, is the reserve in the banking department; this, it is true, consists of notes, but these are exchangeable on the other side of the Bank for bullion, and may therefore be regarded as tickets for so much bullion. The history of this reserve, and of the liabilities to which it is applicable, is as follows: