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.