Panic Years.

When in 1667 a Dutch fleet sailed up the Medway, demolished a fort at Sheerness, and, forcing a way into Chatham Docks, burnt all the ships assembled therein, to the consternation of the inhabitants of London, there was a run upon the banks; but a Stuart regarded both events with equanimity, for "Old Rowley" had a mind above trifles of this description, possibly because he had learnt many bitter truths in a world seldom understood by Kings. Cynics are not born—they are made; and Charles II. had drunk from that cup which sharpens the understanding.

France, during 1719 and 1720, was in the throes of the Mississippi scheme, which was engineered by that notorious Scotsman, John Law; and England, in 1720, witnessed the collapse of the South Sea Company, which Sir Robert Walpole, with rare insight and unerring financial instinct, had demonstrated was a mere gamble, that, at the best, could only enjoy a temporary success, which was absolutely dependent upon a rise in the company's stock; but the Government turned a deaf ear to his warning.

Scotland, we have seen, had its Darien venture in 1699; and in 1720 all England went mad over the South Sea Company, which offered to relieve the Government of part of the National Debt, and entered into an insane competition with the Bank of England for that purpose. Then occurred some spirited bidding between the two companies for this privilege; but the directors of the Bank proved themselves the less mad, and left their rival in possession of the incubus and the road to ruin.

The result of the bidding gave the necessary stimulus to the South Sea Company's stock, and, seeing it going up, the public at once rushed in, when the stock rose faster than ever. In a very short space of time the fever for speculation infused itself into the blood of the whole nation. The pace became so furious that the more thoughtful among the gamblers began to see the end and to sell, with the result that, upon a memorable morning, everybody wanted to dispose of his stock—and then the bubble burst.

In June, 1720, the £100 stock of the South Sea Company was rushed up to £890, and a little later it touched £1000. Then the tide turned, and, as is invariably the case, all were as anxious to sell as a few days before they had been eager to buy. Every hour intensified the panic, until at length the stock fell to £175, and the difference between the highest and lowest quotations is eloquent of the loss inflicted upon the community, for everybody who had money to invest was interested in this gigantic gamble.

Widespread misery and ruin followed. Suicide was of daily occurrence, and, after a momentary lull in the storm, popular indignation lashed itself into fury against the directors, for whom, it was openly declared, hanging was too good a fate. The Government, thoroughly alarmed, turned to the one strong man who had consistently opposed the scheme, and who, in consequence, was at that moment the most popular man in England; so Sir Robert Walpole stepped into the breach, and stemmed the tide of popular indignation and national disaster.

At first Walpole was disposed to resort to half-measures, but when it became apparent that the South Sea Company was rotten to the core and that it must go at any price, he devised a scheme by which the East India Company and the Bank of England took over £18,000,000 of South Sea stock. The Bank directors, throughout this trying period, acted with a strange lack of caution, and the situation was only saved by Walpole's better judgment.

The period was one of mad speculation, and no venture was too absurd to foist upon a public, which, until the crash came, did not display a gleam of intelligence or discernment, so blinded was it by greed. Naturally, those bankers who had advanced against South Sea stock did not escape loss, and many of the goldsmiths and private bankers were ruined by the reaction, while the Bank of England itself barely escaped. It is interesting to notice that, even in 1720, the public could only be tempted by a rising market; and it has remained true to this instinct, as, for some unaccountable reason, the "bear" is always looked upon as an undesirable kind of person.

The next disturbance of credit occurred in 1745, when the Young Pretender, "Bonnie Prince Charlie," after defeating Sir John Cope at Prestonpans, resolved to march on London, and penetrated as far as Derby. The news of his arrival there reached London on the 4th December (Black Friday), and the City was seized with so severe a panic that business was suspended. Some of the citizens actually left the country, and even the King made preparations for flight. Everybody then wished to possess himself of gold, and a run at once began upon the Bank of England, which was taken completely by surprise, and only saved the situation by resorting to the expedient of paying its notes in sixpences—a somewhat lengthy proceeding, but one which enabled it to gain time. Nobody, however, would trust a Stuart, and the panic very quickly subsided.

Learning that the Duke of Cumberland was advancing to meet him, Charles was compelled by his followers to beat a hasty retreat towards Scotland, and by the 23rd December the Highlanders had crossed the border again. In January, 1746, they defeated General Hawley at Falkirk, but in the following April the Prince lost the battle of Culloden, which dealt the final blow to the hopes of the House of Stuart.

The panics and crises between 1745 and 1857 have been discussed in Chapters I. and II. of this book—principally in Chapter II.

The Crimean War, through which this country muddled, was brought to a close in 1856, at a cost to the nation of £33,000,000; and it may perhaps be interesting to compare this sum with the £230,000,000 which has been expended in the South African struggle. Even for a Balaclava £33,000,000 seems a dear price to pay. But £230,000,000 for a Colenso! Glory makes a poor national asset.

In 1848 Lord Dalhousie carried out a policy of annexation in India in a ruthless manner, and the native princes, thirsting for revenge, insidiously propagated a rumour among the native soldiery of the East India Company to the effect that the British Government was anxious to Christianise them, knowing that the unsophisticated Hindu preferred his sacred cow to the God of his conquerors, though he had probably little faith in either.

At any rate, the princes appealed to the patriotism of the native soldiers, who, in May, 1857, replied by refusing to accept the famous "greased" cartridges, and in a few days the insurrectionary movement was ablaze in India. The massacre at Cawnpore sent a thrill of horror and indignation through the country, and Sir Colin Campbell (afterwards Lord Clyde) was ordered post haste from England to take command of the British troops. Naturally, our trade with India was disorganised; and, speculation having exceeded all bounds in America, the grave news from that country, combined with the outbreak in India, hastened on the crisis of 1857.

Quite an epidemic of crime swept through England about the middle of the nineteenth century, and many names well known in the City were smirched, whilst even the firm of Overend and Gurney, whose credit was then at its zenith, were said to have compounded a felony in order to avoid a bad debt. Financial morality, which is at all times peculiar, was at this period at its lowest ebb. So small wonder that when the American banks failed by the dozen in 1857, a feeling of distrust should make itself felt in this country, which was then engaged in a fierce struggle in India.

Merchants and houses engaged in trade with India and America began to fail, and in a very little while there was a run upon some of the banks. Then followed the collapse of the Borough Bank, and Dennistoun's of Liverpool. In Scotland the Western Bank and the City of Glasgow Bank put up their shutters; and the failure in London of Sanderson & Co., the well-known bill brokers, accentuated the grave condition of credit, forcibly reminded the public that the rotten state of the American railroads had ruined thousands of speculators in this country, and generated in the public mind a feeling of positive alarm. The result was a panic, which by 12th November culminated in a crisis. The country then looked to the Government and to the Bank of England.

Both 1855 and 1856 were years of unusually high Bank rates, and during 1857 the demand for loanable capital became so pronounced that the Bank of England, in order to protect its dwindling store of bullion, had to raise its rate still further. The year opened with six per cent. In July it fell to five-and-a-half per cent., but by 19th October it had reached eight per cent. On 5th November nine per cent. was recorded; and upon the 9th of the same month it was hurriedly raised to ten per cent. Lombard Street had then practically arrived at the end of its available resources; and demand, of course, centred itself upon the bank which held the bankers' cash balances.

The Bank of England, as usual in those days, was quite unprepared to meet a crisis, and made application for assistance to the Government. Had help then been refused, it must inevitably have closed its doors, for the reserve in its Banking Department on 13th November, 1857, had fallen to £957,000, while it was rumoured that, at the close of a particular day, the reduction was appreciably greater. In plain English, the Bank of England was practically broken.

On 12th November the Government consented, for the second time since 1844, to the suspension of the Bank Charter Act; and when it became known that the Bank of England was in a position to increase its circulation to an unlimited extent, and to advance notes against the better-class securities, the nervous tension created by the numerous failures throughout the country instantly relaxed, and in a few days a comparative calm followed the storm. Indeed, before the close of 1858 the Bank rate was down to two-and-a-half per cent.

The suspension of the Act during a crisis creates a market for securities at the Bank of England. Furthermore, at so critical a moment the Bank is the only market in existence; consequently those securities in which it decides to deal are alone saleable, and we know that it confines its advances solely to the so-called gilt-edged securities and to good bills. Of course, if the public only thought, it would instantly perceive that the more notes the Bank issues in excess of its authorised amount the less secure is its position, because the smaller is the proportion of gold in the Issue Department to its liabilities. But the British public is led; it does not think. If it did we should speedily be in the throes of a revolution.

The public thinks the Government lends its credit to the Bank, but in reality it does nothing of the kind. It simply authorises the Bank of England to break the law, and to advance notes at its discretion. However, the credit of the Bank is so good that the public, seeing that it has the "moral" support of the Government, possesses absolute confidence in its stability; and though it trusts the Bank blindly and unreasonably, that institution has earned its gratitude upon more than one occasion, and its history, if full of mistakes, certainly entitles it to this confidence.

Mention has been made of the failure of the Western Bank of Scotland in 1857. This institution, besides advancing indiscreetly at home, helped to finance the gamble in American securities; consequently, when the crisis occurred in the United States, the bank found itself saddled with huge blocks of unsaleable stocks and shares. Subsequent investigation disclosed a most discreditable state of affairs.

In 1856 the Royal British Bank, after a short life of continual fraud, came to the ground; and in 1857 the public learned that the notorious Colonel Waugh had fled to Spain with considerable sums belonging to the Eastern Banking Company. A little later, when it was discovered that bank directors and auditors who, for a consideration, would attest such statements as those issued by the Western Bank, could be found in Scotland, the public came to the conclusion that a balance sheet is worth little more than the paper upon which it is printed; and a run at once began upon the rest of the Scotch banks, which promptly arrested the panic by guaranteeing the notes of the insolvent Western Bank of Scotland. The City of Glasgow Bank, though it closed its doors temporarily during this period of fraud and distrust, succeeded in weathering the storm, only to fail badly in 1878.

The relations between England and France were severely strained in 1859. A plot was hatched in London by an Italian secret society against the life of Napoleon III., whose publication of a denunciation of British hospitality sent a thrill of passionate resentment through this country, which replied to his threat of invasion by the inception of the volunteer movement. The call met with immediate response, for nothing kindles enthusiasm so quickly as hate, and England, for the first time in her history, created an army of citizen soldiers. At the height of the frenzy there were ominous rumours, and for a little while a state of panic prevailed; but the alarm soon subsided, and the next year a commercial treaty was enacted with France.

During 1862 loanable capital was cheap, and in July that year the Bank rate sank to two per cent., whilst at no time did it exceed three per cent. With money abundant, the promoter was soon in evidence, and the speculation fever once more took possession of the public, hundreds of companies being registered under the Companies Act of 1862 within the space of a few months, until dear money began to lessen the output of limited liability concerns and the energies of that arch-enemy, the promoter. In 1861 the United States was convulsed by civil war, which caused a cessation of production there on a large scale, and produced a cotton famine in this country. Lancashire, the centre of the industry, could not obtain fresh supplies of the raw material when the ports of the Southern States were blockaded, and early in January, 1863, hundreds of thousands of operatives were out of employment. Speculation instantly received a check, and the energies of the country were concentrated upon raising huge sums for the alleviation of the distress in Lancashire—for 500,000 unemployed workers might at any moment, should their attitude become menacing, prove a danger to the State.

From 1863 to 1865 the Bank of England was undoubtedly face to face with a serious situation, and, for the first time in its history, its directors grasped the simple fact that only by maintaining a good reserve can the country be saved from panics and crises. The year 1863 was one of high Bank rates, and during the autumn of 1864 pressure upon the Bank's resources became so severe that a crisis was narrowly averted. Supplies of cotton from America having practically ceased, demand centred upon India, and the Bank of England, early in August, had to support a drain of silver thither to help pay for the cotton crop. On 4th August the Bank rate was raised to eight per cent., and again on 8th September to nine per cent., at which figure it remained until the 10th November, when it fell to eight again. The strain upon the Bank was severe, but the crises of 1847 and 1857 had taught their lesson, and by using the "Bank rate" with effect, the directors succeeded in keeping a sufficient reserve in the Banking Department.

By about the middle of 1865 capital was cheap, but, towards the end of that year, a decided stringency manifested itself, and at the beginning of 1866 many companies which had been registered under the Act of 1862 failed. The banks, whose reserves were then much smaller than now, came in for their share of distrust, and the failure of a Liverpool firm for a large amount made the public uneasy; but when it was known on the 11th May that Overend, Gurney & Co. had closed their doors, the City was seized with panic, and streams of depositors rushed to Lombard Street to withdraw their money from the banks, which, in a very short time, were paying out at a rate it was impossible to maintain; and it soon became evident that unless confidence were speedily restored the banks must break.

The Bank of England had to meet large demands from the provincial banks, for distrust was general throughout the country; consequently at such a moment the country bankers required their reserves of cash in their safes, so that they could immediately meet the demands of the more nervous of their customers should necessity arise. The Bank advanced its rate to seven per cent. on the 3rd May; to eight per cent. on the 8th of the same month; and to nine per cent. on the 11th; and, the pressure becoming more intense, application was made to the Chancellor of the Exchequer, with the result that the Bank of England was authorised to break the Act if necessary, the Government's condition being that the rate of discount should be ten per cent. while the Act was in abeyance; so, on the 12th May, the Bank rate was raised to ten per cent., where it remained until the 16th August following.

By the 16th May the reserve was reduced to £731,000, but directly it became known that the Bank was in a position to advance notes against approved securities the tension relaxed, thereby proving that the public understood the cure as little as it did the disease—for it was an act of madness to make the run, and equally as stupid not to perceive that the issuing of unconvertible notes is at the best only a quack remedy. However, the remedy proved effective, and the result enables one to realise that a nation, like an individual, is the slave of habit.

The history of the firm of Overend, Gurney & Co. makes sorry reading. Between this old-established discount house and the Bank of England there had always existed a spirit of rivalry; and when, after the crisis of 1857, the Bank stated its intention not to again assist the bill brokers during a time of panic, and only to make advances to them at those periods when the Government takes large sums off the market, a very bitter feeling sprang up between the discount houses and the Bank.

Overends, determined to show the Bank that it was not omnipotent, allowed their account at the Bank of England to run largely into credit, and one day suddenly demanded three millions in cash. Their ruse failed. Indeed it was as stupid as the resolution which goaded them into making the effort; for, of course, were the Bank to refuse to assist the bill brokers during a panic, it would only be adding fuel to the flames and increasing its own difficulties. Small wonder then that so absurd a decree created intense irritation, for, upon examination, it is evident that the Bank of England is as dependent upon the bankers' balances in a time of panic as are the bill brokers upon the institution which holds them. Then what folly to advertise such a decision!

Naturally, the Bank is not pleased at the thought that it must help its rivals over the stile, but the peculiarities of our banking system compel it to, whether it like the task or not. Therefore, it was an error of judgment on the part of the directors of the Bank to pose as the champions of the banking community, and to declare that the bill brokers must, in future, accumulate reserves of their own, when they knew quite well that the nature of their business utterly precluded such an attempt.

During a panic the Bank of England can only save itself by advancing freely against certain securities and good bills. The credit so created, however, swells the bankers' balances in its own books, and consequently the amount standing to the credit of the bankers increases appreciably. But, at such a moment, the bankers call in large sums from the bill brokers, and, unless the brokers can obtain advances from the Bank of England against good bills and gilt-edged securities, they will be unable to satisfy the demands of Lombard Street. By declining to advance to the bill brokers, the Bank, in reality, would be refusing credit to Lombard Street (bankers' balances); and, as the Bank itself could not live were Lombard Street to withdraw its balances at so critical a time, it follows that it must lend to the bill brokers in order to enable them to repay the bankers. It simply dare not refuse to assist them, for, if it did, the banks might decline to support the Bank which left them in the lurch just at the height of the storm. The bill brokers (the outside market) come within our present credit system, and if, when a state of panic prevails, they were left to their fate, in every probability the system of which they form a part would collapse with them. The brokers may not be essential to the system, but it is always dangerous to "swop horses whilst crossing a stream."

In 1865 Overend, Gurney & Co. converted their business into a joint stock company for the same reason that some private firms adopt the procedure—because their profits were decreasing—though this was not known until after the crash of 1866. During the panic of 1857 the Bank of England made large advances to Overends; but when, early in May, 1866, the firm again applied to the Bank for assistance, the request was refused. It has been suggested that the Bank's decision was prompted by malevolence, but at so crucial a moment the directors of the Bank would have hesitated to make a rod for their own backs, and, had they believed in the genuineness of Overends' application, they would have gladly granted the accommodation in order to spare themselves the panic which they knew must follow their refusal to assist a firm with liabilities of over £19,000,000. Moreover, subsequent events confirmed the judgment of the directors of the Bank of England.

When the partners of Overend, Gurney & Co. discovered that their books were full of possible bad debts, they promptly converted the firm into a company, guaranteed the book debts, and appointed directors. Shortly afterwards it was noticed that the Gurneys were realising their property, and suspicion was at once aroused, for it was naturally assumed that they had incurred heavy losses. When, therefore, the company appealed to the Bank the next year, the directors were sceptical, for though Overends still retained the entire confidence of their country customers, there undoubtedly existed a feeling of distrust in the City, and the directors of the Bank of England shared in the opinion there prevailing.

When the rash speculations of the partners were disclosed the public was loud in its abuse, and nothing short of a prosecution would satisfy it; and when, early in January, 1869, the directors of Overends were committed for trial on the gravest of charges, the crowd manifested its delight. But the comedy followed. The trial took place at the end of the year, by which time public opinion had completely veered round, and when it became known that the accused were acquitted, this same crowd cheered lustily. Small wonder that a Government, which must be well aware of the vagaries of crowds, should hesitate to conduct a public prosecution.

The panic of 1866, though the suspension of the Bank Act immediately brought relief, dealt a fearful blow to credit, and the country recovered from the shock with painful slowness. Foreigners, alarmed by the disorganisation of the London money market, began to withdraw their capital, and the Bank, in order to check this drain of gold outwards, was compelled to keep its discount rate at ten per cent. for three weary months.

By the middle of 1867 the Bank rate was at two per cent.; but even the company promoter had not the audacity to show himself, so depressed was the public spirit by the disasters of the previous year. The great railway companies, too, began to find themselves in financial straits, and their credit was so bad that they could only raise money on debenture stocks at high rates of interest, for the public then looked upon their ordinary shares as distinctly speculative holdings. As the railway directors neglected to borrow with the option of redemption at certain figures at a future date, it followed that, when their credit greatly improved at a later period, the companies were saddled with a huge drain in the shape of high interest on their debenture issues, whereas, had their directors exercised ordinary prudence, they would now be paying very much less upon their prior stocks, and consequently the dividends on their ordinary shares would be proportionately greater. Evidently, then, the interests of the shareholders were sacrificed to the holders of the debenture and preferred stocks.

As the prior stocks absorb so large a share of the profits, and, moreover, as the amount so absorbed is practically always the same, whereas the revenue is variable, it follows that the distributions on the ordinary shares fluctuate considerably. This fact, of course, has not escaped speculators, who work out the ratio of ordinary share capital to total capital; and the smaller the ratio the more inconstant will be the dividends, and the greater the movement in prices. Investors know that, should the trade of the country be improving rapidly, a certain railway will earn more; and if its share capital ratio be small, then the increase in revenue will largely swell the ordinary dividends thereupon—so they speculate for a rise.

The Franco-German war, which broke out in 1870 did not at first exercise any very great effect on the English money market, for though the Bank raised its rate to six per cent. on the 4th August that year, it was at two and a half before the end of September. Indeed, after the panic of 1866 down to the middle of 1870, scarcely a ripple disturbed the unusual calm of the money market, but the three crises since 1844 were largely accountable for that. They taught both Lombard Street and the Bank of England that caution is essential to the successful working of our banking system, and that fair reserves, however great the loss of interest incurred thereupon, are indispensable to a banker. The result of these bitter lessons may be read in the comparatively peaceful history of English banking since 1866.

In 1870 specie payments were temporarily suspended by the Bank of France, and the European demand for the precious metals had to be met by the Bank of England. A much larger amount of foreign capital, consequently, was deposited in London, which then became the Clearing House of Europe, and the accumulation of so much foreign money unquestionably made the money market more sensitive, and increased the responsibilities of the Bank, whose store in the Issue Department was then peculiarly exposed to the danger of a drain outwards.

The Franco-German war ended disastrously for France in 1871, and the vanquished had to pay a huge indemnity to the victor. France paid considerable sums to Germany by bills on England, and although Germany employed a certain proportion of the capital so obtained in the London money market, it withdrew large sums in gold, which were required for purposes of currency reform. During the latter part of 1872 the Bank rates were decidedly high, and in November, 1873, nine per cent. was recorded for about two weeks, but by December it was down to four and a half again. The Bank, no doubt, had its anxious moments during this period, for the larger the drain outwards the more dependent would be the bill brokers upon it, and the directors could not refuse to increase their advances to the brokers, because, had they done so, there would have been a panic at once.

We can now see distinctly how our system works. First, we get the bill brokers or middlemen, who, from the nature of their business, cannot afford to keep reserves, because their margin of profit is so small; and secondly there are the bankers, who keep their reserves with the Bank of England, which is thereby placed, so to speak, in the centre of the money market.

The Bank, after it was stripped of its monopoly of joint stock banking, failed for a time to understand its new environment, and it would have closed its doors three times since 1844 but for Government intervention, viz., in 1847, 1857, and 1866. However, when we remember that its directors were merchants, not trained bankers, and that the Bank had to adapt itself to entirely changed surroundings, this result is not remarkable. So little acquainted were the directors with the laws of banking that they actually believed the Act of 1844 would prove a panacea for all kinds of financial troubles; but their eyes were opened very widely indeed in 1847, and they gradually came to the common-sense conclusion that "the higher the ratio of reserve in the Banking Department the smaller is the danger of disaster to the Bank and to the country."

During 1866 the Bank was fairly well prepared, and, for the first time in its history, it met a panic in a scientific or common-sense manner, and advanced without hesitation to all would-be borrowers whose securities were good. The greatest danger the Bank has to face is the suspension or stoppage of the credit machine of which it is the heart, for if the progress of that machine be arrested, then the trade of the country must also stop, and England will be bankrupt.

So long as the machine can be kept in motion a catastrophe is impossible, and experience has taught the Bank that, during a period of pronounced distrust, this can only be done by advancing liberally against certain securities, and by a skilful use of the "Bank rate." The whole credit machine must work smoothly, and it would be madness, at such a moment, for the Bank to attempt to leave any part of the machine (the bill brokers for instance) to its fate. This is now fully recognised, and consequently a better feeling exists between the various divisions of the money market.

The credit machine is kept in motion by the workshops; therefore, during a panic money has to be advanced to discount good trade bills in order to support the workshops, for if a rumour got about that the banks were refusing the acceptances of strong firms, the pressure to borrow would immediately increase, thereby adding a fresh danger to the situation, and causing nervous depositors to rush in a body to the banks for their money.

It follows, therefore, that in order to arrest a panic, and to prevent a dangerous run upon their resources, the banks must lend freely to strong clients. In a time of financial stress the weak go to the wall, for finance is no exception to the rule that only the strong can live when a storm bursts and causes a struggle for existence. There is no room for sentiment at such a moment. The fight is bitter and to the finish. Sentiment comes in afterwards. This state of affairs is one of the curious products of modern civilisation, and, if you want to alter it, you must first alter human nature, which changes strangely little as the centuries roll on.

At first sight these sudden advances seem highly imprudent, because the banks are parting with their resources, but unless the workshops are assisted the banks must break: whereas, by advancing liberally on the best securities at high rates of interest, the dangerous element is speedily weeded out, and, provided the reserves of the banks are fairly large in proportion to their liabilities, a healthy reaction is practically certain to assert itself long before the end of their lending power is reached. The Bank, when it advances, of course creates credit in its books, and so adds to the resources of Lombard Street. The relief thus obtained is artificial, and, were it intended as a permanent cure of a disease, it must in the end only aggravate the malady. But it is temporary assistance during a trying time that the workshops require, and it is just this which our modern credit system, when skilfully administered, can give admirably. In fact it possesses the very machinery for the purpose. This sudden demand for additional credit (not specie) during a period of pronounced distrust is fortunately of short duration, and the Bank is, therefore, only called upon to make large loans for a short time, as, though the depression following a panic may prove lasting, the acute stage which the Bank has to face is soon over.

The dangers of our credit system are apparent to everybody; but when critics point to the panics which have occurred since the Act was passed, and make deductions therefrom to the effect that the Bank may find itself in a similar plight should another such whirlwind develop, they usually forget that, though the same danger exists, our banking companies are now much more prudently managed, and that the directors of the Bank of England, having the misfortunes of the past to guide them, are thoroughly acquainted with the delicacy of the machine they manage, and are, consequently, less liable to err.

We have seen that the joint stock banking movement began in 1826 under conditions which were far from favourable, and the companies, like the Bank of England itself, having to learn their business as the movement progressed, naturally committed many blunders; but when the dangers of banking were better understood failures became much less frequent, and after 1866 they were few and far between. The credit of the joint stock banks vastly improved in consequence, and confidence in their stability soon began to take the place of distrust. But in 1878 the failure of the City of Glasgow Bank and of the West of England Bank, together with some half-dozen private bankers and banking companies, undoubtedly revived old prejudices and created a feeling of unrest among depositors and shareholders.

The City of Glasgow Bank, it will be remembered, was in trouble during 1857, but in 1878 both its customers and shareholders had reason to regret that it ever opened its doors again, for the gravest irregularities were disclosed when its affairs were examined, false balance sheets having been certified by auditors and directors during a period of over four years; and once again the public was startled out of its sense of security by the discovery that some bank directors and auditors were not less peccant than the majority of the human race when hazardous speculations landed them in financial difficulties.

The directors of the City of Glasgow Bank finding themselves out of their depth, clutched at the proverbial straw, and, like a weak individual who starts with the best of intentions, they were speedily sucked into the vortex of crime. By the Act of 1845 the directors were bound to hold gold against any excess in the amount of the bank's circulation fixed thereby, but they overcame this difficulty by the simple expedient of making false returns to the Government. Having once crossed the line which separates the sheep from the goats the rest was easy.

With an utter disregard for the interests of the shareholders, the directors advanced huge sums to firms in which they were pecuniarily interested, and, as these firms did badly, they were compelled either to bolster them up with additional loans or to allow them to fail. They chose the latter alternative, and, as might have been expected, the bank's assets rapidly dwindled, millions of pounds in the shape of bad debts being disguised on the right hand side of the balance sheet as cash in hand, Government securities, and so on. The business of the bank soon degenerated into a mere gamble, and during the latter part of its career the institution was only kept in existence by the continuous perpetration of frauds.

Of course the longer the game (it can be dignified by no other name) continued the more desperate were the efforts it called forth, and just before the end the directors hit upon the brilliant idea of conducting a big gamble in Australia, in the vain hope that a decided success would obliterate the mistakes of the past; but about this time rumour was active, and when it was noticed that the bank's acceptances were being hawked all over the City, holders of its paper became suspicious. The bill brokers naturally do not like putting all their eggs in one basket, but endeavour to get as many good names as possible, so that, should a particular firm meet with misfortune, they may be in a position to bear the loss. When, therefore, the City of Glasgow Bank's paper was offered freely, they refused to place more of its bills in their cases, and, inquiries concerning the bank being made in consequence, the end soon came.

Though the revelations which followed generated a feeling of intense nervousness among bank shareholders and depositors both in Scotland and this country, and undoubtedly caused a slight panic, the country was spared a crisis. The Scotch banks, in order to prevent the run extending to themselves, encashed the notes of the delinquent institution, and advanced liberally to those persons whose money and securities were held by the City of Glasgow Bank. In this manner a serious panic was averted.

The Bank of England raised its rate immediately danger was threatened, and on the 14th October, 1878, the rate touched six per cent., but it fell to five per cent. in November, and money was exceptionally cheap during the next two years. The West of England Bank had also advanced its resources in a reckless manner, and it failed badly in consequence; but the Scotch scandals were not repeated, and the public gradually regained confidence in the banking companies.

When it was clearly seen after the failure of the Glasgow Bank, how easily a large bank, unless it be most cautiously and prudently managed, can ruin its members and customers, the public hesitated to hold shares in an unlimited banking company. For a time the prices of bank shares fell considerably, and fiction became tediously full of heroines and heroes who lost their fortunes by holding just one share in the Glasgow Bank. It was the "just one share" that proved so thrilling, and accentuated the sadness and the danger of possessing shares in an unlimited bank. The risks of a banking business were discussed on every side; and, after this failure, the unlimited banking companies took steps which enabled them to affix the desirable word "limited" to their registered names.

From the time of the failures of the City of Glasgow Bank and the West of England Bank until 1890, when the Baring crisis suddenly opened the eyes of the public to the dangerous gamble which was taking place in South American securities, the money market enjoyed a period of comparative calm. Speculation since 1885 had increased in volume, and the prices of securities steadily rose; but early in 1890 it became apparent that continuous speculation had inflated prices and created a situation which could not last. The Bank rate during the autumn of 1889 was exceptionally high, and remained at six per cent. from 30th December, 1889, to 20th February, 1890, when it gradually descended, but this fall only proved the lull before the storm, which raged furiously in the November following.

England has always speculated largely in both North and South America, and the result has almost invariably been a panic. In 1890 it was the Argentine Republic which was to prove an Eldorado for the British investor, and Baring Brothers were so convinced that this wonderful land must prove a veritable gold mine that they practically staked the existence of their firm upon it, but Argentina sadly disappointed its backers. Having staked their all and lost, there were many who thought that Barings should have paid the penalty of their mistake, for Fate certainly was not so kind to some of the smaller losers in the gamble as was the Bank of England to Baring Brothers.

In June the Buenos Ayres Western Railway was unable to raise capital in this country; and when at a later date Baring Brothers failed to place a new Argentine loan, the worst was feared. Earlier in the year the United States had increased its circulation of silver currency, thereby creating a sudden demand for that metal and a proportionate rise in those securities upon which the interest is payable in silver. A fall soon followed; and when it was found that the Argentine Government was in straits, Stock Exchange settlements became difficult. The banks, which had advanced huge sums to the Stock Exchange on American securities, increased their margins directly the markets looked dangerous; consequently high rates of interest, together with the rapid fall in South American securities, made "carrying over" in the House an expensive operation. Speculators became alarmed, and sold out at panic prices in order to cut their losses, and on 7th November pressure upon the Bank of England became so great that the rate was raised from five to six per cent.

Lord Revelstoke, who was a partner in the firm of Baring Brothers, was also a director of the Bank of England, and, finding that his firm was in difficulties, he disclosed his position to the Bank directors, who, when they heard that Messrs. Barings' liabilities to the public amounted to over £28,000,000, felt that even the Bank of England could not afford to guarantee so large a sum; so, after much deliberation, it was decided to invite the co-operation of Lombard Street in the bolstering up of Barings, and, for the first time in its history, the directors of our large banking institutions met the directors of the Bank in their sacred parlour to discuss what steps should be taken in order to avoid a disturbance of credit which, should the suspension of Barings be announced, would probably produce a crisis even more disastrous than that caused by the Overend and Gurney crash in 1866.

The resources of Lombard Street combined are infinitely greater than those of the Bank, which, we have seen, largely draws its own power therefrom, and the directors of the Bank of England, in consulting with the directors of the joint stock banks, proved that they thoroughly understood the constitution of the money market. Moreover, this new step created a precedent which bound the whole market more closely together, for each division clearly recognised how essential it is that the great machine should work smoothly. This can only be accomplished by the best of feeling existing between its constituent parts, and the wise step taken by the directors of the Bank in November, 1890, undoubtedly generated a feeling of sympathy which had formerly been noticeably absent between the various sections of the money market, and which augurs well for the harmonious working of the system in the future. Such sympathy may be the outcome of enlightened selfishness, but it is none the less valuable.

The directors of the joint stock banks, when the position of Baring Brothers was revealed to them, instantly recognised the danger of the position, and, as their advances to the Stock Exchange were considerable, they were naturally anxious to prevent a catastrophe which would create a panic in the House, and the end of which it was impossible to foresee. Barings, who are financiers in the English sense of the word, not bankers, had at the worst only been guilty of imprudent speculation, and, as all inquiries were answered in the most straightforward manner, Lombard Street was as anxious as the Old Lady herself to assist Baring Brothers over the stile. Undoubtedly Lombard Street would have liked to make an example of the firm that was caught short of cash, but it was afraid to leave it to its fate, because it knew that discrimination is not one of the characteristics of excited depositors, and that, were Barings to close their doors, the credit of Lombard Street would next be questioned.

The outcome of the meeting at the Bank was that the Bank of England agreed to make advances to Baring Brothers in order to enable them to meet their liabilities as they matured, and the large banking companies, on their side, guaranteed the Bank against loss to the extent of £15,000,000.

Immense sums had been invested in South America, and when it was rumoured that the wealthy firm of Barings was tottering, Argentine securities were practically unsaleable on the Stock Exchange, where a state of panic prevailed. For a few days the wildest rumours were noised abroad, and the tension, just at the height of the panic, became so acute that even the Consol market was idle. The market then turned in despair to the Bank, which was compelled to borrow £3,000,000 from the Bank of France as a precautionary measure, and also to accept help from the Russian Government.

The British Government, fully alive to the gravity of the Bank's position, promised to suspend the Act in case of need; but when it became known that Barings were to be supported, and that the Bank of England was lending freely on approved securities at high rates of interest, confidence was restored, though a few days earlier it had looked as if a dangerous crisis were imminent. The Bank Act, however, was not suspended, but it is difficult to say what might have happened had not the Bank of France come to the rescue, for the gold advanced by that institution at so awkward a time doubtless tended to greatly alleviate the feeling of apprehension which existed in this country, and which, at any moment, might have overcome restraint.

The Bank rate remained at six per cent. until 4th December (a period of twenty-seven days), when it was reduced to five per cent.; for the high rates ruling in the market attracted gold to this country, and increased the reserve of the Bank of England beyond the apprehension minimum, thereby enabling that institution to make the change in question. By the middle of the following year (1891) the Bank's rate of discount was down to two-and-a-half per cent.; but confidence was not restored for some considerable time; and we all remember the deadly dull years of 1894 and 1895, when it was predicted that Consols would never again fall below 100. The financial prophets and the weather prophets are generally wrong, but though we have acquired the habit of tapping the glass each morning, a prudent man carries his umbrella all the same.

The directors of the Bank of England, when they were informed of Baring Brothers' position, acted with great tact and ability. They did not hesitate to assist everybody who possessed good securities, and when it was found that loanable capital was obtainable, the alarming symptoms which were at first in evidence soon subsided. Whether or not the Bank were sufficiently prepared at the time is, however, a matter of opinion. The directors certainly began the year badly, for the ratio of the reserve in the Banking Department was under twenty-eight per cent.—a dangerously low proportion in these times, when huge sums of foreign capital may be suddenly withdrawn from the market at the least sign of discredit. Nor are high rates of discount always effective in immediately attracting gold to the Bank, as the Bank of France, should it desire to retain its bullion, can always charge a prohibitive premium on its gold. Certainly, since 1890 the Bank of England has maintained larger reserves, and the Baring panic unquestionably proved that such a step was necessary.

It would seem that the panic of 1890 was the result of a Stock Exchange gamble, which was only rendered possible by the large loans on securities made to members of the House by the banks. The Baring incident brought matters to a climax, and Lombard Street, which was more involved in the speculation than many persons imagined, had to save both that firm and the Stock Exchange in order to avoid a crop of bad debts, which, with numerous failures, and a far greater drop in the prices of securities, would have inevitably resulted.

Mr. Lidderdale, who was Governor of the Bank during this period, acted with great energy, and after the danger was passed congratulations were showered upon him from every side.

The Stock Exchange presented an address to Mr. Lidderdale, and in making the presentation its spokesman said: "If the Bank had not acted in the way it did, a great disaster would have befallen the mercantile community." Yes, and that disaster would have been largely caused by speculation on the Stock Exchange. Further, had not the directors of the Bank met this incipient panic in a scientific manner, and used their power as precedent dictated, members of the House would have failed by the dozen. One is forced to the conclusion that Lombard Street and the Stock Exchange had a lucky escape, and that the "members of the mercantile community" were the unfortunates who, after years of toil, had to wipe out the deficit.

Now we come to the bright side of the picture. Later on the business of Baring Brothers was converted into a company, and in 1895 it was definitely announced that the assets of the firm had been liquidated without any loss whatsoever to the guarantors. Baring Brothers & Co., Limited, now publish a strong balance sheet, which entitles the company to a place among our well-managed institutions, and so short is the memory of the public when things financial are in question, that the panic of 1890 is, if not quite forgotten, at least regarded as ancient history. Indeed, the public hardly seems to realise that, in November, 1890, the monetary situation was so acute that a quickening of the public pulse would probably have resulted in one of the most dangerous crises the country has ever been called upon to face.

After the Baring crisis the market was unperturbed for a little while, but in 1893 many of the Australian banks found themselves in difficulties, and as the people in this country, tempted by the high rates offered at the London offices of the Australian banks, and by their agents on this side, had deposited largely with them, a very bitter feeling soon manifested itself. Australia, like South America, was to prove an Eldorado for the small investor, but the pace was forced, and the reaction came in 1893, when many of the banks suspended payment. Even now some of the Australian banks in London are not any too strong, and discrimination is certainly desirable.

On 9th October, 1899, the Boers issued their famous Ultimatum, to which they immediately received an answer that was brief and unmistakeable; but, unfortunately, the pen of the Government at first proved mightier than the sword, and by 3rd November White was shut up in Ladysmith. Then followed the failures of Methuen and Gatacre, and on 15th December General Buller was repulsed at Colenso. Thoroughly roused, the Government sent out Lord Roberts and Lord Kitchener. On the night of 6th January, 1900, the Boers made a desperate attempt to take Ladysmith, while Buller again failed to relieve the town on the 22nd, and did not enter it until after Cronje was brought to bay at Paardeberg at the end of February.

This period of disaster cast a gloom over the whole nation, which grew sullen and determined, and, when at last the tide began to turn, the sudden lifting of the burden immediately metamorphosed a silent depressed crowd into a cheering multitude, which on Mafeking day turned London into a veritable pandemonium; but the depression caused by unpleasant surprises was intense, and, therefore, the joy at finding the incubus gone was the more irrepressible. Hence the disorderly scenes upon the day in question. A reaction after the period of suspense was inevitable, and the greater the gloom the more violent would be the excitement that followed when the first ray of sunshine pierced the mist. Yet how little was this understood at the time.

That financial barometer—the Bank rate—began to reflect the political situation early in October. Our state of unpreparedness was a by-word on the Continent, and when in September, 1899, the Boers displayed an unyielding attitude, which was at first mistaken for bravado, our overweening confidence in the British soldier blinded our eyes to the imperfections of our fighting machine. The Continent, which was better informed than the British Government, believed that the Boers were determined. On the 3rd October, when the Free State burghers occupied Van Reenen's Pass, the Bank advanced its rate to four-and-a-half per cent.; on the 5th October the rate was five per cent., and on the 30th November six per cent., where it remained until the 11th January, 1900, when five per cent. was recorded.

But if the Government was unprepared the Bank of England was not, and from start to finish, by a judicious use of its rate of discount, an adequate supply of bullion was maintained in the Issue Department. Long experience had taught its lesson, and our financial machine, which was in a good state of preparedness, worked without a hitch. Who can doubt that if our fighting machine had been as ably handled, it would have done its work well from first to last?

There is also another point which is well worth attention. If our banks neglect to keep good reserves, a panic results immediately there is any unusual demand upon their resources, and the cost of a panic soon convinces their directors that it is cheaper to be always prepared. Will the expenditure of some £230,000,000 teach the Government the same simple truth? If we must have an army, it is madness not to keep it—as our banks are kept—ready. Mr. Kruger and his advisers did not consider the latent potentiality of the British fighting machine. They ascertained its state of preparedness to strike at a moment's notice, and, seeing that it was unprepared, the Boers wisely struck the first blow, hoping to drive the English into the sea before the machine could be adapted to a new environment. On the other hand, they failed to realise the resources of the Empire. Had the Boers believed that the British could land an army of even 150,000 men in South Africa, in all probability there would have been no war. The Government, which was caught unprepared, had to pour out money like water, because it had neglected to take one of the simplest business precautions—to keep the army ready.

On 31st May, 1902, peace was declared, and now the country has to face a domestic problem. In 1899 trade was good, and in 1900 the prices of commodities were at their zenith; but during 1901 a reaction set in, and at the present time trade is certainly not active. Reservists are arriving from South Africa in large numbers; and, as the labour market is already depressed, a number of them are sure to experience considerable difficulty in finding employment. War is certainly not a business that civilises, and if a man has once tasted blood, in however just a cause, it is difficult to believe that life will seem quite so sacred to him again. Should the times become really bad, these men who have returned from the front, and who cannot again find a place in civil life, will turn instinctively to the weapons upon which they have learned to depend. Consequently, should there be a severe depression in trade, an epidemic of crime is one of those possibilities which may send a thrill of horror through the country.

Since September, 1899, the money market has certainly had to contend with great difficulties, and a system which has proved itself more than equal to the strain surely cannot be so undesirable as certain critics would have us believe. Again, the more the public understands the system, the less is the danger of panic; for it must be apparent to every man who reads this book that, if he study his own interests, he will select a strong bank, and, having taken that precaution, he will carefully refrain from rushing for his deposit during a time of stress.