Encyclopaedia Britannica > Volume 3, Athens-BOI

326
BANKING
protecting instincts of men, especially of capitalists, will be
forced to confess that the recurrence of crises must be
accepted as inevitable The more highly developed is the
economy of money the greater must be the sum which
banks and bankers are liable to be called upon to repay
on demand or at short notice in proportion to the reserves
of money kept in their coffers ; and the greater also must
be the amount of bills falling due daily, and largely met
as they fall due by the proceeds of bills drawn daily and
discounted as drawn. The smoothness of action of the
commercial machine evidently depends upon the continu¬
ance of that confidence which is ordinarily felt by the
creditor-class in the solvency of debtors, and any access of
distrust may easily produce consequences culminating in a
crisis. Bankers who are at once debtors and creditors are
necessarily constrained to protect themselves in such
periods of defective confidence by declining to meet the
applications for loans and discounts which are forced upon
them ; and a sharp competition ensues for the possession of
the ready money that is available in the market. The
pressure is concentrated upon the Bank of England, and
the publicity of the condition of that institution, consequent
upon the weekly issue of its balance-sheet, lets all men
know the rate of decline of its cash reserve. At such a
time an accident may cause the spirit of caution to pass
into apprehension and panic. The fear that the cash
balances of the banking department may be exhausted
incites bankers to hasten to anticipate one another in with¬
drawing any reserve they may have kept at the bank, and
the rate of diminution of the cash of the department is
accelerated. It is obvious that the condition we have
described is in its origin independent of any particular
regulations adopted with respect to the note-circulation of a
community; and it has, in fact, been experienced in Great
Britain under all varieties of laws, and in the United States,
in Northern and Southern Germany, and in the British
colonies under an equally wide dissimilarity of currency-
regulations. Our history previous to 1844 shows that
such a condition may be aggravated, if not precipitated,
by an antecedent issue of notes increasing the proportion
between the volume of transitory credits and the cash
available to meet instantaneous demands; and as long
as the issue of notes was unrestricted, bankers could
never resist the temptation to make up, by an increase in
their issues, any diminution in their available cash, a cause
directly provocative of a further diminution by its effect on
adverse exchanges, and therefore producing a sharper
reaction when the necessity was at last recognised of recover¬
ing the balance between their cash in hand and their
liabilities. The Act of 1844 cannot prevent panic, but it
prevents bankers from resorting to causes which aggravate
panics, and it moreover supplies a means of allaying the un¬
reasoning terror in which panics culminate. Were it not for
the separation of the issue and the banking departments
we should be constrained to witness and tolerate periodical
suspension of cash payments, as this would be the only
means left of appeasing alarm; and this desperate expedient
has been, in fact, employed over and over again, under such
circumstances, both in England and elsewhere. The Act
of 1844 gives us a less dangerous, though by no means a
perfectly harmless, power When the minds of creditors
are unhinged, and all are competing for money which is not
in existence in sufficient quantities to satisfy their demands,
the announcement that the Government has authorized the
bank directors to suspend the action of the Act and to fall
back on the resources of the issue department operates as
a charm. The mere announcement is often enough to put
an end to the panic previously prevailing, the feverish fit
passes away, and the customary temper of confidence is
more or less slowly restored.
We conclude that the existence of the Act of 1844 is
justified even when it is suspended, for it provides, in the
maintenance of the cash reserves of the issue department, a
stock of money, the unlocking of which furnishes the means
of arresting panic which would otherwise have to be sought
in a periodic suspension of cash payments. It has naturally
been asked whether the law might not be saved the apparent
discredit involved in its being set aside by an act of the
Executive Government, acting on the faith of a subsequent
indemnity from Parliament, by the embodiment in it of a
power authorizing its suspension under circumstances that
provoke its suspension. Mr Lowe, as Chancellor of the
Exchequer, introduced into the House of Commons, in 1873,
a bill having this object. He proposed that the Bank
Act might be suspended by order of the Government of
the day when the minimuvi rate of discount had reached
12 per cent., when the exchanges were favourable to
England, and when the governor and deputy-governor of the
bank certified that panic had caused a large portion of the
bank notes nominally in circulation to be locked up and
withdrawn from circulation. The authority of Mr
Gladstone’s administration had declined when this bill was
introduced, and it was not well received. It was con¬
tended that the conditions proposed by Mr Lowe had not
always existed when the Act had been suspended, and they
would be so rarely satisfied that the power of suspension
promised by the bill could never be exercised. It was
further contended that Mr Lowe’s attempt was necessarily
impracticable. In seeking to define beforehand the con¬
ditions of suspension of the Bank Act, he tried to define the
conditions of a panic; and to attempt to define the con¬
ditions of that which is in its essence unreasonable was a
logical contradiction. A panic has no laws : it has no fixed
shape. It is precipitated we know not how; and we are
in the midst of it before we are aware. As it is thus
impossible to prescribe beforehand the conditions of panic,
it may reasonably be thought that it is better to leave to
the Government of the day the responsibility of acting when
a panic has demonstrated its existence. Mr Lowe’s bill,
assailed from many quarters, was withdrawn without the
opinion of Parliament being taken on its merits, and no
attempt has been since made to bring the subject before
the Legislature.
We have already said that Sir Robert Peel contemplated
an ultimate extinction of all note issues save that of the
Bank of England; and he probably expected that the
substitution of Bank of England notes for all others would
not be long delayed. The progress actually achieved
towards this end has been very slow. Out of 204 private
banks in England and Wales left by the Act of 1844, with
total privileged issues of .£5,153,407, no more than 85
have ceased to issue ; and the amount they issued which is
now withdrawn was £1,283,041. Of joint-stock banks 18
have ceased to issue £842,453, out of 72 having privi¬
leged issues of £3,495,446. Only one Scotch bank has
ceased to issue notes since the Scotch Act of 1845, and no
alteration whatever has taken place in the fixed issues of
the Irish banks. It may be added that the provisions of
the Act of 1844, relied upon by Sir Robert Peel for bringing
about by arrangement a substitution of Bank of England
notes for those of privileged bankers, have been for many
years entirely neglected. With these facts before us it is
not surprising that, in 1865, Mr Gladstone, as Chancellor
of the Exchequer under Lord Palmerston, should have
submitted to the House of Commons a bill dealing with the
subject. By it, it was proposed that private banks of issue
in England and Wales should be released from the existing
restriction that the numbers of partners must not exceed
six, and that joint-stock banks should be allowed to come
within the circle of sixty-five miles from London upon their