Pagina-afbeeldingen
PDF
ePub
[ocr errors]

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 issues of notes. The most bigotted 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, 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 section 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 cause. Their true cause is the increased knowledge of the true scientific principles of Banking, and the incrcased speed and cheapness with which bullion now flies from one commercial centre to another.

These considerations give a final and conclusive answer to those persons who conceive that the Rate of Discount can be kept fixed. These variations are in modern times absolutely indispensable, and the only method by which the Bank can preserve its security. They must necessarily have been made, had the Bank Act never

existed at all. In fact, if this principle of controlling the Paper Currency had been understood and acted upon in former times, there never would have been any necessity for the Act. It was the very ignorance or neglect of this principle which had brought the Bank into danger so many times before.

39. It is a matter of very serious doubt indeed whether the sweeping words of the Bank Act of 1844 have not rendered all English banking illegal. For the 11th section enacts, in the broadest possible terms, that no banker "shall make any engagement for the payment of money payable to bearer on demand." Now we have shewn the utter misconception of the very nature of banking business so generally prevalent, even among persons who might naturally have been expected to have been better informed. Thus, even Gilbart and Lord Overstone consider the business of banking to consist in borrowing money from one set of persons and lending it to another. So, also, paragraph 62 of the Report of the Committee of the House of Commons on the crisis of 1857; among other errors and misconceptions, which we have already refuted, says "the use of money, and that only they regard as the province of a bank, whether a private person or incorporation, or of the banking department of the Bank of England."

66

Now we have over and over again pointed out that this is the business of a Bill Discounter, and not of a Banker." A banker never lends money in the first instance; we have already explained that the very essence of banking is to create Credit, or liabilities payable to bearer on demand. But to shew the utter misconception of the very nature of the business prevalent among men who are supposed to be authorities on the subject, we have only to quote from the evidence given before the Committee just mentioned. A merchant was being examined as to the pressure in America in the autumn of 1857. He was questioned by Mr. Wilson as to the transactions of the American banks.

Q. 4941. Are you aware that during the last two or three years, while the circulation of notes had not increased at all, or had increased to the very smallest possible amount, the amount of advances, as shewn by those accounts, had, as you have referred to, increased to a very enormous amount?—Yes; I must apologise for the answer I gave; I meant the advances when I said the

notes; I meant the liability of the bank from its advances made on securities.

4942. Chairman (Mr. Cardwell).-The mere act of making an advance does not render a person liable; OF COURSE, THE LIABILITY IS THE OTHER WAY?-Yes.

4943. Will you trace the process by which the banks increased their own liabilities by making advances to others?—Looking at the securities which they held from other parties by making advances to a number of merchants to a larger amount than usual, they felt that the indebtedness of these parties to them were more than was prudent.

4944. Mr. Wilson-Do you mean that the banks had made undue and imprudent advances in the loan of their capital and deposits?—I apprehend that they thought so.

4947. But it would be either from deposits or from capital that increased advances could be made by the banks?— Certainly.

Now these extracts shew that neither Lord Cardwell nor Mr. Wilson truly apprehended the nature of banking business. No doubt, in ordinary cases of advances by private persons, the person who makes an advance does not create a liability; but it is just in this that the exceptional nature of "banking" consists. A banking advance is always in the first instance a liability. When Mr. Wilson asked whether banks do not make advances by a loan of their capital or deposits, he shewed that he was equally ill informed; for we have pointed out that the money deposited is not in banking language called a "deposit;" it is an "asset;" the "deposit" is the credit created in exchange for it; but when a banker discounts a bill by creating a Credit, or liability, that Credit is equally called a "deposit." Bankers, therefore, do not make advances out of their "deposits;" but they make advances by creating deposits, or credits. Surely we may marvel that such extraordinary ignorance of the mechanism of banking should pass unchallenged by the Committee, who counted more than one banker among its members. At all events, we may cease to wonder at the futile nature of Parliamentary inquiries into banking, when those who conduct them display such ignorance of the facts of what they are inquiring about as would make them the laughing stock of any bank clerk.

Equally ill informed also was Mill as to the very routine business

of banking; for in the early editions of his Political Economy, he has this note in his chapter on the Regulation of Currency, Book III., ch. 24, § 3.-" It would not be to the purpose to say, by way of objection, that the obstacle may be evaded by granting the increased advance in book credits, to be drawn against by cheques, without the aid of bank notes. This is, indeed, possible, as Mr. Fullarton has remarked, and as I have myself said in a former chapter. But this substitute for bank note currency certainly has not yet been organised; (!!) and the law having clearly manifested its intention that in the case supposed, increased Credits should not be granted, it is yet a problem whether the law would not reach what might be regarded as an evasion of its prohibitions, or whether deference to the law would not produce (as it has hitherto done!) on the part of banking establishments, conformity to its spirit and purpose, as well as to its mere letter."

Now what Mill in this extract said has never yet been organised happens to be the precise thing in which "banking" consists! It is right to add that in the later editions of his work this paragraph has been omitted.

But though Mill shewed his ignorance of the existing facts in this case, his admission is valuable that this practice is a direct violation of the spirit and purpose of the Bank Act; but whether it is not also a direct violation of its letter is very seriously doubtful.

All banking advances, then, are made by creating Credit or Deposits; and whether this Credit is transferred from one person to another, by means of Bank Notes, or Cheques, in no way affects its nature or it quantity. And it is this very thing which is already creating so much alarm in the minds of many persons when they see the huge mass of deposits, or Banking Credits, reared up by the London Banks, on so slender a basis of bullion for these Deposits are in reality neither more nor less than so many Bank Notes in disguise.

:

Now when a banker creates a Credit in his customer's favour, either in exchange for money, or bills, or any other security, by the fundamental contract between banker and customer he engages to pay this Credit to his customer, or to any one else to whom his customer may assign it: and in token of this he delivers to his customer a book containing blank slips payable to bearer on demand, or to order on demand, called in modern commercial

« VorigeDoorgaan »