So it was in 1847. Directly a few failures were announced, the public became alarmed, and speculation received a check. The failures continued, and every holder of bills, anxious to have money at his credit at the banks, tried to discount them. But the banks were totally unprepared for this sudden demand, and in Liverpool and Newcastle some of them closed their doors. The London bankers refused their customers ordinary accommodation, and the Bank of England at first declined to advance against securities. Bills, consequently, could not be met at maturity, and the result was panic and a run on the banks.
The situation was saved by the suspension of the recently passed Bank Act, and on 25th October, 1847, the Government authorised the Bank of England to issue notes at its discretion, until the feeling of apprehension had subsided. The Bank thereupon advanced on bills and stock, and, although the rate of discount was eight per cent., the fact that money could be obtained on good bills and first-class securities speedily allayed the panic, and by 23rd November following the Act was again in force. Further, the amount issued by the Bank beyond the limit imposed thereby did not exceed £400,000, although its reserve, by 23rd October, was reduced to £1,547,000.
Perhaps we shall now be better able to understand the Act of 1844, and to see that, though it effected a most useful reform in the currency, and prevented a host of weak country bankers inundating the provinces with their doubtful paper, it does not contain a single clause which would either prevent or alleviate a panic. Indeed the paradox is that during a crisis relief can only be obtained by breaking the Act, and allowing the Bank of England to advance notes freely against the better-class securities. The power to issue notes was taken out of the hands of numerous weak banks, and confided to one strong one. Perhaps, however, it would be more correct to say that the power for evil of the small country bankers was "fixed" by the Act; and, as we have seen, the Bank of England's notes are gradually driving those of the English provincial banks out of circulation. Then, again, the extinction of the country issues gave a marked impetus to our modern system of deposit banking. The cheque soon became the principal credit document in circulation, and the country joint stock banks relied absolutely for their advancement upon their ability to attract deposits to their books.
So long as the Bank of England's notes can be exchanged for gold on demand, it is impossible for them to depreciate in value, and they cannot drive more gold out of the country than is equal to the Bank's fixed or authorised maximum, because, against every note issued in excess, specie for a like amount must be deposited in the Issue Department. Certain writers urge that this limitation is an interference with the freedom of the banker; but, seeing that our modern system of banking rests upon so small a cash basis, surely it is absolutely essential that our currency at least should be above suspicion in times of falling credit. The public does not require notes then. It wants credit; and this it obtains in the books of the banks.
The currency, certainly, should be left absolutely to the laws of supply and demand; and though it is true that the Bank of England sometimes has to protect the convertibility of its notes by raising its rate of discount, still, our present system approaches very near to perfection in so far as the exchange of the note for gold is concerned, and it certainly does not seem desirable to have the country again flooded with paper money which may, or may not, be paid on presentation.
Any person who possesses gold can have it turned into coin immediately; so, under our present system, every addition to the currency must come either direct from the mines or else be received in settlement of the balance of indebtedness owing by foreign nations to this country. We are, therefore, spared those evils which result from an over-issue of paper, and which were sometimes so greatly in evidence before the passing of the Act of 1844.
The absurdity of the attack on the Act must now be apparent, inasmuch as the only reform it could possibly effect was a currency reform, which was certainly badly needed. Viewed in that light it must surely be acknowledged that the Bank Act of 1844 is one of the soundest financial Bills that has ever become an Act of Parliament. The fact that, in spite of the great change in our banking system—which may be said to have been revolutionised since 1844—the Act has successfully stood the test of time, is also proof positive (if proof were required) that it was framed with great skill and judgment.
Had the Act further decreed that every bank should maintain a ratio of, say, at least eighteen per cent. of legal tender against its public liabilities, even panics might have been avoided. At any rate, the banks would have been better prepared to meet drains upon their resources, though even then—as has been pointed out is the case with the Act itself—the law would have to be broken directly a run was made on the banks by their customers. For all that, such a regulation would keep the banks in a fair state of preparedness during normal times, and consequently every bank in the land would be ready to face a panic.
Our system of credit is based on a small cash reserve; and it would be impossible to devise any workable scheme which would afford bankers absolute security, because it would prove too costly both to the banks themselves and to their customers, who would have to pay much higher rates in proportion as the depositors' money was secured. The most prudent banker can only insure his business up to a certain point, as, if he kept more than a certain proportion of cash in hand, he would conduct his business at a loss; so if a panic take possession of his customers and they rush for gold, he is lost if the demand should drain his reserve and encroach on his till-money. No system in the world could possibly save him then. The most our banks can do, therefore, is to be prepared to a certain extent, and, viewed in the light of past history, it is criminal of directors not to take the ordinary precautions. A clause in the Act, as already suggested, would at least ensure a fair state of preparedness in all our banking companies, and beyond that it is impossible to go.
It has been shown that the Act works most effectively in a time of panic when it is broken. It is, perhaps, interesting to recall that the Bank of Germany, in order to remedy this defect, is allowed to issue notes beyond the authorised amount at its own discretion; but the German Government, in order to check abuses, makes over-issue an unprofitable transaction for the Bank by imposing a fine of five per cent. on any amount issued in excess of the authorised limit. Were our own Government to adopt the same expedient, the Bank of England, during a time of stress and excitement, could meet all demands automatically, and the Act would be almost perfect of itself. On the other hand, the Government might not like to see so much power pass into the hands of the directors of the Bank, though there can be little doubt that they would use it with the greatest moderation and to the public advantage.