But the liberty was not without conditions. Having previously, in anxiety for its protégé, the Bank of England, been reckless of the banking-security of the community at large, the State, like a repentant sinner rushing into asceticism, all at once became extremely solicitous on this point; and determined to put guarantees of its own devising, in place of the natural guarantee of mercantile judgment. To intending bank-shareholders it said—“You shall not unite on such publicly-understood conditions as you think fit, and get such confidence as will naturally come to you on those conditions.” And to the public it said—“You shall not put trust in this or that association in proportion as, from the character of its members and constitution, you judge it to be worthy of trust.” But to both it said—“You shall the one give, and the other receive, my infallible safeguards.”
And now what have been the results? Every one knows {349} that these safeguards have proved anything but infallible. Every one knows that these banks with State-constitutions have been especially characterized by instability. Every one knows that credulous citizens, with a faith in legislation which endless disappointments fail to diminish, have trusted implicitly in these law-devised securities; and, not exercising their own judgments, have been led into ruinous undertakings. The evils of substituting artificial guarantees for natural ones, which the clear-sighted long ago discerned, have, by the late catastrophes, been made conspicuous to all.
When commencing this article we had intended to dwell on this point. For though the mode of business which brought about these joint-stock-bank failures was, for weeks after their occurrence, time after time clearly described; yet nowhere did we see drawn the obvious corollary. Though in three separate City-articles of The Times, it was explained that, “relying upon the ultimate liability of large bodies of infatuated shareholders, the discount houses supply these banks with unlimited means, looking not to the character of the bills sent up, but simply to the security afforded by the Bank endorsement;” yet, in none of them was it pointed out that, but for the law of unlimited liability, this reckless trading would not have gone on. More recently, however, this truth has been duly recognized, alike in Parliament and in the Press; and it is therefore needless further to elucidate it. We will simply add that as, if there had been no law of unlimited liability, the London houses would not have discounted these bad bills; and as, in that case, these provincial joint-stock-banks could not have given these enormous credits to insolvent speculators; and as, if they had not done this, they would not have been ruined; it follows, inevitably, that these joint-stock-bank failures have been law-produced disasters.
A measure for further increasing the safety of the provincial public, was that which limited the circulation of provincial bank-notes. At the same time that it established {350} a sliding-scale for the issues of the Bank of England, the Act of 1844 fixed the maximum circulation of every provincial bank-of-issue; and forbad any further banks-of-issue. We have not space to discuss at length the effects of this restriction; which must have fallen rather hardly on those especially-careful bankers who had, during the twelve weeks preceding the 27th April, 1844, narrowed their issues to meet any incidental contingencies; while it gave a perennial license to such as had been incautious during that period. All which we can notice is, that this rigorous limitation of provincial issues to a low maximum (and a low maximum was purposely fixed) effectually prevents those local expansions of bank-note circulation which, as we have shown, ought to take place in periods of commercial difficulty. And further, that by transferring all local demands to the Bank of England, as the only place from which extra accommodation can be had, the tendency is to concentrate a pressure which would else be diffused, and so to create panic.
Saying nothing more, however, respecting the impolicy of the measure, let us mark its futility. As a means of preserving the convertibility of the provincial bank-note, it is useless unless it acts as some safeguard against bank-failures; and that it does not do this is demonstrable. While it diminishes the likelihood of failures caused by over-issue of notes, it increases the likelihood of failures from other causes. For what will be done by a provincial banker whose issues are restricted by the Act of 1844, to a level lower than that to which he would otherwise have let them rise? If he would, but for the law, have issued more notes than he now does—if his reserve is greater than, in his judgment, is needful for the security of his notes; is it not clear that he will simply extend his operations in other directions? Will not the excess of his available capital be to him a warrant either for entering into larger speculations himself, or for allowing his customers to draw on {351} him beyond the limit he would else have fixed? If, in the absence of restriction, his rashness would have led him to risk bankruptcy by over-issue, will it not now equally lead him to risk bankruptcy by over-banking? And is not the one kind of bankruptcy as fatal to the convertibility of notes as the other?
Nay, the case is even worse. There is reason to believe that bankers are tempted into greater dangers under this protective system. They can and will hypothecate their capital in ways less direct than by notes; and may very likely be led, by the unobtrusiveness of the process, to commit themselves more than they would else do. A trader, applying to his banker in times of commercial difficulty, will often be met by the reply—“I cannot make you any direct advances, having already loaned as much as I can spare; but knowing you to be a safe man I will lend you my name. Here is my acceptance for the sum you require: they will discount it for you in London.” Now, as loans thus made do not entail the same immediate responsibilities as when made in notes (seeing that they are neither at once payable, nor do they add to the dangers of a possible run), a banker is under a temptation to extend his liabilities in this way further than he would have done, had not law forced him to discover a new channel through which to give credit.
And does not the evidence that has lately transpired go to show that these roundabout ways of giving credit do take the place of the interdicted ways; and that they are more dangerous than the interdicted ways? Is it not notorious that dangerous forms of paper-currency have had an unexampled development since the Act of 1844? Do not the newspapers and the debates give daily proofs of this? And is not the process of causation obvious?
Indeed it might have been known, a priori, that such a result was sure to take place. It has been shown {352} conclusively that, when uninterfered with, the amount of note-circulation at any given time, is determined by the amount of trade going on—the quantity of payments that are being made. It has been repeatedly testified before committees, that when any local banker contracts his issues, he simply causes an equivalent increase in the issues of neighbouring bankers. And in past times it has been more than once complained, that when from prudential motives the Bank of England withdrew part of its notes, the provincial bankers immediately multiplied their notes to a proportionate extent. Well, is it not manifest that this inverse variation, which holds between one class of bank-notes and another, also holds between bank-notes and other forms of paper-currency? Will it not happen that just as diminishing the note-circulation of one bank, merely adds to the note-circulation of other banks; so, an artificial restriction on the circulation of bank-notes in general, will simply cause an increased circulation of some substituted kind of promise-to-pay? And is not this substituted kind, in virtue of its novelty and irregularity, likely to be a more unsafe kind? See, then, the predicament. Over all the bills of exchange, cheques, etc., which constitute nine-tenths of the paper-currency of the kingdom, the State exercises, and can exercise, no control. And the limit it puts on the remaining tenth vitiates the other nine-tenths, by causing an abnormal growth of new forms of credit, which experience proves to be especially dangerous.
Thus, all which the State does when it exceeds its true duty is to hinder, to disturb, to corrupt. As already pointed out, the quantity of credit men will give each other, is determined by natural causes, moral and physical—their average characters, their temporary states of feeling, their circumstances. If the Government forbids one mode of giving credit, they will find another, and probably a worse. Be the degree of mutual trust prudent {353} or imprudent, it must take its course. The attempt to restrict it by law is nothing but a repetition of the old story of keeping out the sea with a fork.
And now mark that were it not for these worse than futile State-safeguards, there might grow up certain natural safeguards, which would really put a check on undue credit and abnormal speculation. Were it not for the attempts to insure security by law, it is very possible that, under our high-pressure system of business, banks would compete with each other in respect of the degree of security they offered—would endeavour to outdo each other in the obtainment of a legitimate public confidence. Consider the position of a new joint-stock-bank with limited liability, and unchecked by legal regulations. It can do nothing until it has gained the general good opinion. In the way of this there stand great difficulties. Its constitution is untried, and is sure to be looked upon by the trading world with considerable distrust. The field is already occupied by old banks with established connexions and reputations. Out of a constituency satisfied with the present accommodation, it has to obtain supporters for a system which is apparently less safe than the old. How shall it do this? Evidently it must find some unusual mode of assuring the community of its trustworthiness. And out of a number of new banks so circumstanced, it is not too much to suppose that ultimately one would hit on some mode. It might be, for instance, that such a bank would give to all who held deposits over £1000 the liberty of inspecting its books—of ascertaining from time to time its liabilities and its investments. Already this plan is frequently adopted by private traders, as a means of assuring those who lend money to them; and this extension of it might naturally take place under the pressure of competition. We have put the question to a gentleman who has had long and successful experience, as manager of a joint-stock-bank, and his reply is, that some such course would very probably be adopted: adding that, {354} under this arrangement, a depositor would practically become a partner with limited liability.