The third suspension of the Bank Act took place in 1866. Many elements of disturbance to the Money Market had been in force during two or three preceding years. The Civil War in America had resulted in gold being sent to this country; but the stoppage of the supply of cotton from America, owing to the war, disorganised one of our staple national industries, and supplies of cotton had to be obtained from elsewhere at high prices, and paid for in cash. Hence a drain of gold set in on a large scale. In addition, a large speculation had been built up on credit in the stocks and shares of the many new limited liability companies which were formed at that time.

General uneasiness began to prevail towards the end of 1865; in January, 1866, the Bank raised its discount rate to 8 per cent., and a crisis began to develop rapidly.

Speculators tried to sell their securities and found no market for them, several large railway contractors failed, and many of the newly formed limited liability companies succumbed and were wound up. The failure of the Joint Stock Discount Company, followed shortly by that of Barned’s Bank of Liverpool, brought matters to a head; the distrust became universal and culminated in panic. On the 9th May the Bank Rate was raised to 9 per cent. On the 10th May the failure of Overend, Gurney, and Company—for upwards of ten millions—was announced, and the Bank Rate went to 10 per cent. This failure was not made known till after business hours, so it was not till Friday, the 11th May, 1866—known as “Black Friday”—that the crisis reached its height.

The stoppage of this large house affected the whole world, and general failure seemed imminent, when, in the afternoon of the day on which the failure became known, it was announced that the Bank Act was again suspended, and calm began to take the place of mania. But though the panic was allayed, many failures shortly took place, which delayed the quick restoration of a sense of security. Among these failures may be mentioned the Bank of London, the Consolidated Bank, and Agra and Masterman’s Bank. All these three institutions were perfectly solvent as a matter of fact, but they found themselves in the dangerous position of having no available assets. The two last-named banks subsequently resumed business.

From the above brief records of the financial tragedies of the past, we see that on each occasion reckless speculation and overtrading had been allowed to reach a dangerous height before any steps were taken to check them, and on each occasion the check came too late. But we also see the marvellously quick effect which the suspension of the Act had on the situation. Although a period of nearly half a century has elapsed since the time of the last suspension, the position remains the same, and it is only owing to greater knowledge and greater caution that such catastrophes have been averted.

In contemplating any future catastrophe of the kind which may come upon us, it is generally assumed that the Act would be again suspended; but delays are dangerous. By the time the situation had developed to such an extent that the Government might deem it expedient to give the Bank the necessary powers, a panic such as has never before been known might overtake us; whereas if the suspension of the Act were to a certain extent automatic, and responsible people knew for certain that money could always be had at a price, the probability of such a termination of any crisis would be very remote.

CHAPTER V
THE DEVELOPMENT OF LONDON AS THE
FINANCIAL CENTRE OF THE WORLD

Before proceeding to examine the Money Market and banking system of more modern days, it will be well to glance at the causes which contributed to the predominance of London among international financial centres, and made it the clearing house of the world. At the present time this predominance is being assailed from several quarters—notably Paris, Berlin, and New York—but there is no doubt that London still holds a good lead, and with knowledge, activity, and perseverance there appears to be no reason why it should not continue to be in the forefront in the future.