The Story of the Bank of England / (A History of English Banking, and a Sketch of the Money Market)

by Henry Warren

The Bank rate remained at six per cent. until 4th December (a period of twenty-seven days), when it was reduced to five per cent.; for the high rates ruling in the market attracted gold to this country, and increased the reserve of the Bank of England beyond the apprehension minimum, thereby enabling that institution to make the change in question. By the middle of the following year (1891) the Bank's rate of discount was down to two-and-a-half per cent.; but confidence was not restored for some considerable time; and we all remember the deadly dull years of 1894 and 1895, when it was predicted that Consols would never again fall below 100. The financial prophets and the weather prophets are generally wrong, but though we have acquired the habit of tapping the glass each morning, a prudent man carries his umbrella all the same.

The directors of the Bank of England, when they were informed of Baring Brothers' position, acted with great tact and ability. They did not hesitate to assist everybody who possessed good securities, and when it was found that loanable capital was obtainable, the alarming symptoms which were at first in evidence soon subsided. Whether or not the Bank were sufficiently prepared at the time is, however, a matter of opinion. The directors certainly began the year badly, for the ratio of the reserve in the Banking Department was under twenty-eight per cent.—a dangerously low proportion in these times, when huge sums of foreign capital may be suddenly withdrawn from the market at the least sign of discredit. Nor are high rates of discount always effective in immediately attracting gold to the Bank, as the Bank of France, should it desire to retain its bullion, can always charge a prohibitive premium on its gold. Certainly, since 1890 the Bank of England has maintained larger reserves, and the Baring panic unquestionably proved that such a step was necessary.

It would seem that the panic of 1890 was the result of a Stock Exchange gamble, which was only rendered possible by the large loans on securities made to members of the House by the banks. The Baring incident brought matters to a climax, and Lombard Street, which was more involved in the speculation than many persons imagined, had to save both that firm and the Stock Exchange in order to avoid a crop of bad debts, which, with numerous failures, and a far greater drop in the prices of securities, would have inevitably resulted.

Mr. Lidderdale, who was Governor of the Bank during this period, acted with great energy, and after the danger was passed congratulations were showered upon him from every side.

The Stock Exchange presented an address to Mr. Lidderdale, and in making the presentation its spokesman said: "If the Bank had not acted in the way it did, a great disaster would have befallen the mercantile community." Yes, and that disaster would have been largely caused by speculation on the Stock Exchange. Further, had not the directors of the Bank met this incipient panic in a scientific manner, and used their power as precedent dictated, members of the House would have failed by the dozen. One is forced to the conclusion that Lombard Street and the Stock Exchange had a lucky escape, and that the "members of the mercantile community" were the unfortunates who, after years of toil, had to wipe out the deficit.

Now we come to the bright side of the picture. Later on the business of Baring Brothers was converted into a company, and in 1895 it was definitely announced that the assets of the firm had been liquidated without any loss whatsoever to the guarantors. Baring Brothers & Co., Limited, now publish a strong balance sheet, which entitles the company to a place among our well-managed institutions, and so short is the memory of the public when things financial are in question, that the panic of 1890 is, if not quite forgotten, at least regarded as ancient history. Indeed, the public hardly seems to realise that, in November, 1890, the monetary situation was so acute that a quickening of the public pulse would probably have resulted in one of the most dangerous crises the country has ever been called upon to face.

After the Baring crisis the market was unperturbed for a little while, but in 1893 many of the Australian banks found themselves in difficulties, and as the people in this country, tempted by the high rates offered at the London offices of the Australian banks, and by their agents on this side, had deposited largely with them, a very bitter feeling soon manifested itself. Australia, like South America, was to prove an Eldorado for the small investor, but the pace was forced, and the reaction came in 1893, when many of the banks suspended payment. Even now some of the Australian banks in London are not any too strong, and discrimination is certainly desirable.

On 9th October, 1899, the Boers issued their famous Ultimatum, to which they immediately received an answer that was brief and unmistakeable; but, unfortunately, the pen of the Government at first proved mightier than the sword, and by 3rd November White was shut up in Ladysmith. Then followed the failures of Methuen and Gatacre, and on 15th December General Buller was repulsed at Colenso. Thoroughly roused, the Government sent out Lord Roberts and Lord Kitchener. On the night of 6th January, 1900, the Boers made a desperate attempt to take Ladysmith, while Buller again failed to relieve the town on the 22nd, and did not enter it until after Cronje was brought to bay at Paardeberg at the end of February.