Readers who are not acquainted with the history of Banking must not assume that the Act of 1844 affects either Scotland or Ireland. The note circulation of both those countries is regulated by the Act of 1845, but in neither country are the provisions identically the same as those affecting England.
Any person may demand of the Issue Department notes in exchange for gold bullion of standard fineness at the rate of £3 17s. 9d. per ounce.
The Bank Act of 1844, according to its framers, would make panics and crises evils of the past; but, as a matter of fact, it was a new broom, and its sweeping powers were greatly overestimated. Its provisions, we can see, related entirely to currency reform; and though the country bankers could no longer borrow on their notes to an unlimited extent, it must be remembered that Sir Robert Peel's famous Act, if it fixed the maximum amount of their issues, did not take the precaution to also fix the minimum reserve of cash in hand to be held against them. Obviously, no Act could strengthen the position of the banks against panics unless it laid down the minimum or legal reserve of cash to be maintained against deposits, and we shall see that, in this respect, the Act of 1844 did not realise expectations.
Controversy raged furiously around Peel's Act, and, needless to say, it became the bone of party contention. Whenever a subject reaches that stage in this country, its merits are forced into the background. Sides are taken, critics and politicians range themselves upon either the one or the other, and the subject, consequently, speedily gets all the truth lashed out of it. The number of people who really understand the question thoroughly is infinitesimal; and they, as a rule, by a strange irony of fate, do not dabble in politics. The important subject is therefore handed over to the tender mercies of the multitude, which, quite ignorant of its underlying principles, splits itself into two hostile camps, beats out the dust with sticks, and then returns a man to Parliament to vote on this side or on that.
When in 1847, three years after the passing of the Act, another crisis occurred, public opinion attached all the blame to Peel's Act; but public opinion was wrong. Public opinion is usually based upon instinct rather than upon reason, and, consequently, carried away by a sense of indignation or wrong, it rushes madly at what it considers the cause of the mischief. In this case its bugbear was Peel's Act. The real reason was to be found in the simple fact that neither the Bank of England nor any of the large banks held a sufficient proportion of cash in hand to meet those sudden demands for gold which may be made upon a banker at any moment, and to which his business is peculiarly exposed during periods of bad credit.
It was the old, old story, which in these days seems hardly to require an explanation. After a period of exceptional prosperity, there almost invariably follows a lean year or two, when loanable capital is cheap and the prices of commodities depressed. Then is the company promoter's opportunity, and schemes, wise and otherwise, are brought to the notice of the public. Presently there comes a gradual expansion of enterprise, and rising prices beget confidence, when a whisper goes round to the effect that good times are coming.
At first business improves slowly and surely. Then, as prices mount higher and higher, every producer increases his output, anxious to share in the general prosperity. Suddenly, just before the end, there is a boom. Prices rush madly upwards, until every prudent man sees that business has degenerated into a mere gamble, and that he must act quickly if he does not wish to be caught by the receding tide. Unless the banks are strong at that moment, disaster is inevitable; and as they had not taken the necessary precaution in 1847, the result was a crisis.
Capital was cheap during the last quarter of 1844, the Bank rate remaining stationary at two-and-a-half per cent. from September of that year to October, 1845. Cheap money gives the promoter his opportunity; and in 1845 the railway mania was at its zenith. England was in the hands of the surveyor, and the "boom" began in real earnest. As usual, everybody was to become immensely rich, and, as usual, most people were again bitterly disappointed. By a strange process of reasoning, experience does not count in finance. Hope, after a very little while, drives out of the memory of human beings the nightmare of disaster; so, in an astonishingly short space of time, they are gambling again. The crisis of 1837 had lost all its significance by 1845; and then, of course, the Bank Act was to prevent commercial panics in the future!
At the end of 1846 the Bank rate was raised to four per cent., and in October, 1847, it touched eight per cent. The speculation in railways naturally resulted in a gamble in iron; and, after the terrible famine in Ireland of 1846, when thousands died of fever and want in their wretched hovels and even on the roadsides, the suspension of the Corn Laws led to large importations of foreign grain. A sudden fall in prices immediately followed the increased supply, and the merchants in Mark Lane began to fail. Then people looked gravely at one another, and inquired what would happen next.
Credit is the disposition of one person to trust another; therefore as business gradually expands, credit or confidence increases at precisely the same ratio; and when prices are high and profits large, the impression prevails that everybody is making money—consequently, confidence begins to drive out caution; so, towards the end of a period of prosperity the acquisitive fever burns fiercely. Everybody is in mad haste to get rich; caution is flung to the winds; and we get a débâcle. Then follows a time of bad credit. That is to say, immediately after the reaction, everyone is disposed to be sceptical of his neighbour's position, to wonder whether he were hit by the recent upheaval, and to be extremely cautious in granting credit to his customers. This took place after the crisis of 1847. For a little while everybody was afraid to trust his neighbour; but by 1857 speculation was in full swing again, and the inevitable collapse followed. These periods of good and bad times, or good and bad credit, run their course with the regularity of a fever.