The object of this chapter is to show that panics were not lessened in any degree by the Act, and perhaps it may be said that the fact has been dinned into one's ears to the verge of irritation. But an ardent reformer's feelings are strong, and it is difficult to make this subject clear to those who are not conversant with the history of Banking, and who, perhaps, are disposed to think the subject both dry and uninteresting.
The panic of 1847 was followed by another in 1857, and in 1866 the Overend and Gurney crisis occurred. From 1866 down to the present day, unless we include the Baring scare in 1890, the country has been free from these scourges, and the reason is not very far to seek.
The Act of 1844 placed the currency of the country on a sound basis, and experience, by teaching the banks caution, did the rest. The large banking companies, after the terrible panic of 1866, plainly recognised that advances must be made with great discretion, and that, if they valued their own safety, speculation must be either kept well within bounds or discouraged entirely. Merchants and traders who require capital for speculative purposes can only obtain it by making application to the banks, which, in the very great majority of instances, now refuse to make advances unless tangible securities be deposited to cover their loans.
Merchants, therefore, unless their credit be exceptionally good, or unless they possess first-rate stocks and shares, cannot speculate to the same extent as was possible forty years ago and, of course, those persons who possess marketable securities, which bring them in incomes, are the last people in the world to risk an assured position for possible great future gain. They are accustomed to the good things of this earth, and though they may earnestly desire a large accretion to their wealth, the thought that, in the event of failure, they may lose what they already possess, checks the impulse to finance a scheme, which, while holding out promises of great success, is also not without possibilities of grave disaster. As a rule, only small men will take such risks, and the banks will not finance them at any price.
By refusing to accommodate weak speculators, the banks have kept business in a healthy channel, and have largely confined speculation to those people who can afford to pay their losses—always a cautious class. The rank speculator, therefore, has been driven to outside houses, and such houses, we know, are constantly failing; but Lombard Street, having weeded this dangerous element out of its system, is now more stable.
Recognising that their system of credit is always exposed to possible disaster, and having had the fact brought forcibly home to them upon so many occasions, the banks, since 1866, have gradually accumulated larger and larger cash reserves in order to be better prepared to deal immediately and effectively with those cataclysms which from time to time are certain to assail them; and though it is an open question whether their reserves are even now sufficient, the most casual observer must acknowledge that, with a few exceptions, our banking companies are in a better state of preparedness at the moment than perhaps during any other period of their history.
By compelling the schemers to deposit securities against their loans and advances the banks secure themselves against large bad debts; and by accumulating fair cash reserves they insure their business against suspension during panics. Having taken these precautions, it is not surprising that their path has been rendered comparatively smooth during recent years; and, further, the more prudent manner in which the business of a banker is now conducted makes the shares of the large banking companies less speculative holdings, and greatly reduces the risks of shareholders in connection with their liabilities on the uncalled portion of their shares, though that liability should by no means be forgotten or accepted in any other light than that of serious responsibility.
This brings us to another point in their history. It was not until 1858 that banks could be registered as limited liability companies, and, needless to say, no unlimited bank has been formed since that date; whilst every joint stock bank now in existence (although, in the great majority of instances, the members are liable for certain known sums on each share held by them) has limited the liability of its shareholders, those companies formed prior to 1858 having since taken the necessary steps.