At first sight these sudden advances seem highly imprudent, because the banks are parting with their resources, but unless the workshops are assisted the banks _must_ break: whereas, by advancing liberally on the best securities at high rates of interest, the dangerous element is speedily weeded out, and, provided the reserves of the banks are fairly large in proportion to their liabilities, a healthy reaction is practically certain to assert itself long before the end of their lending power is reached. The Bank, when it advances, of course creates credit in its books, and so adds to the resources of Lombard Street. The relief thus obtained is artificial, and, were it intended as a permanent cure of a disease, it must in the end only aggravate the malady. But it is temporary assistance during a trying time that the workshops require, and it is just this which our modern credit system, when skilfully administered, can give admirably. In fact it possesses the very machinery for the purpose. This sudden demand for additional credit (not specie) during a period of pronounced distrust is fortunately of short duration, and the Bank is, therefore, only called upon to make large loans for a short time, as, though the depression following a panic may prove lasting, the acute stage which the Bank has to face is soon over.
The dangers of our credit system are apparent to everybody; but when critics point to the panics which have occurred since the Act was passed, and make deductions therefrom to the effect that the Bank may find itself in a similar plight should another such whirlwind develop, they usually forget that, though the same danger exists, our banking companies are now much more prudently managed, and that the directors of the Bank of England, having the misfortunes of the past to guide them, are thoroughly acquainted with the delicacy of the machine they manage, and are, consequently, less liable to err.
We have seen that the joint stock banking movement began in 1826 under conditions which were far from favourable, and the companies, like the Bank of England itself, having to learn their business as the movement progressed, naturally committed many blunders; but when the dangers of banking were better understood failures became much less frequent, and after 1866 they were few and far between. The credit of the joint stock banks vastly improved in consequence, and confidence in their stability soon began to take the place of distrust. But in 1878 the failure of the City of Glasgow Bank and of the West of England Bank, together with some half-dozen private bankers and banking companies, undoubtedly revived old prejudices and created a feeling of unrest among depositors and shareholders.
The City of Glasgow Bank, it will be remembered, was in trouble during 1857, but in 1878 both its customers and shareholders had reason to regret that it ever opened its doors again, for the gravest irregularities were disclosed when its affairs were examined, false balance sheets having been certified by auditors and directors during a period of over four years; and once again the public was startled out of its sense of security by the discovery that some bank directors and auditors were not less peccant than the majority of the human race when hazardous speculations landed them in financial difficulties.
The directors of the City of Glasgow Bank finding themselves out of their depth, clutched at the proverbial straw, and, like a weak individual who starts with the best of intentions, they were speedily sucked into the vortex of crime. By the Act of 1845 the directors were bound to hold gold against any excess in the amount of the bank's circulation fixed thereby, but they overcame this difficulty by the simple expedient of making false returns to the Government. Having once crossed the line which separates the sheep from the goats the rest was easy.
With an utter disregard for the interests of the shareholders, the directors advanced huge sums to firms in which they were pecuniarily interested, and, as these firms did badly, they were compelled either to bolster them up with additional loans or to allow them to fail. They chose the latter alternative, and, as might have been expected, the bank's assets rapidly dwindled, millions of pounds in the shape of bad debts being disguised on the right hand side of the balance sheet as cash in hand, Government securities, and so on. The business of the bank soon degenerated into a mere gamble, and during the latter part of its career the institution was only kept in existence by the continuous perpetration of frauds.
Of course the longer the game (it can be dignified by no other name) continued the more desperate were the efforts it called forth, and just before the end the directors hit upon the brilliant idea of conducting a big gamble in Australia, in the vain hope that a decided success would obliterate the mistakes of the past; but about this time rumour was active, and when it was noticed that the bank's acceptances were being hawked all over the City, holders of its paper became suspicious. The bill brokers naturally do not like putting all their eggs in one basket, but endeavour to get as many good names as possible, so that, should a particular firm meet with misfortune, they may be in a position to bear the loss. When, therefore, the City of Glasgow Bank's paper was offered freely, they refused to place more of its bills in their cases, and, inquiries concerning the bank being made in consequence, the end soon came.
Though the revelations which followed generated a feeling of intense nervousness among bank shareholders and depositors both in Scotland and this country, and undoubtedly caused a slight panic, the country was spared a crisis. The Scotch banks, in order to prevent the run extending to themselves, encashed the notes of the delinquent institution, and advanced liberally to those persons whose money and securities were held by the City of Glasgow Bank. In this manner a serious panic was averted.
The Bank of England raised its rate immediately danger was threatened, and on the 14th October, 1878, the rate touched six per cent., but it fell to five per cent. in November, and money was exceptionally cheap during the next two years. The West of England Bank had also advanced its resources in a reckless manner, and it failed badly in consequence; but the Scotch scandals were not repeated, and the public gradually regained confidence in the banking companies.
When it was clearly seen after the failure of the Glasgow Bank, how easily a large bank, unless it be most cautiously and prudently managed, can ruin its members and customers, the public hesitated to hold shares in an unlimited banking company. For a time the prices of bank shares fell considerably, and fiction became tediously full of heroines and heroes who lost their fortunes by holding just one share in the Glasgow Bank. It was the "just one share" that proved so thrilling, and accentuated the sadness and the danger of possessing shares in an unlimited bank. The risks of a banking business were discussed on every side; and, after this failure, the unlimited banking companies took steps which enabled them to affix the desirable word "limited" to their registered names.
From the time of the failures of the City of Glasgow Bank and the West of England Bank until 1890, when the Baring crisis suddenly opened the eyes of the public to the dangerous gamble which was taking place in South American securities, the money market enjoyed a period of comparative calm. Speculation since 1885 had increased in volume, and the prices of securities steadily rose; but early in 1890 it became apparent that continuous speculation had inflated prices and created a situation which could not last. The Bank rate during the autumn of 1889 was exceptionally high, and remained at six per cent. from 30th December, 1889, to 20th February, 1890, when it gradually descended, but this fall only proved the lull before the storm, which raged furiously in the November following.
England has always speculated largely in both North and South America, and the result has almost invariably been a panic. In 1890 it was the Argentine Republic which was to prove an Eldorado for the British investor, and Baring Brothers were so convinced that this wonderful land must prove a veritable gold mine that they practically staked the existence of their firm upon it, but Argentina sadly disappointed its backers. Having staked their all and lost, there were many who thought that Barings should have paid the penalty of their mistake, for Fate certainly was not so kind to some of the smaller losers in the gamble as was the Bank of England to Baring Brothers.
In June the Buenos Ayres Western Railway was unable to raise capital in this country; and when at a later date Baring Brothers failed to place a new Argentine loan, the worst was feared. Earlier in the year the United States had increased its circulation of silver currency, thereby creating a sudden demand for that metal and a proportionate rise in those securities upon which the interest is payable in silver. A fall soon followed; and when it was found that the Argentine Government was in straits, Stock Exchange settlements became difficult. The banks, which had advanced huge sums to the Stock Exchange on American securities, increased their margins directly the markets looked dangerous; consequently high rates of interest, together with the rapid fall in South American securities, made "carrying over" in the House an expensive operation. Speculators became alarmed, and sold out at panic prices in order to cut their losses, and on 7th November pressure upon the Bank of England became so great that the rate was raised from five to six per cent.
Lord Revelstoke, who was a partner in the firm of Baring Brothers, was also a director of the Bank of England, and, finding that his firm was in difficulties, he disclosed his position to the Bank directors, who, when they heard that Messrs. Barings' liabilities to the public amounted to over £28,000,000, felt that even the Bank of England could not afford to guarantee so large a sum; so, after much deliberation, it was decided to invite the co-operation of Lombard Street in the bolstering up of Barings, and, for the first time in its history, the directors of our large banking institutions met the directors of the Bank in their sacred parlour to discuss what steps should be taken in order to avoid a disturbance of credit which, should the suspension of Barings be announced, would probably produce a crisis even more disastrous than that caused by the Overend and Gurney crash in 1866.
The resources of Lombard Street combined are infinitely greater than those of the Bank, which, we have seen, largely draws its own power therefrom, and the directors of the Bank of England, in consulting with the directors of the joint stock banks, proved that they thoroughly understood the constitution of the money market. Moreover, this new step created a precedent which bound the whole market more closely together, for each division clearly recognised how essential it is that the great machine should work smoothly. This can only be accomplished by the best of feeling existing between its constituent parts, and the wise step taken by the directors of the Bank in November, 1890, undoubtedly generated a feeling of sympathy which had formerly been noticeably absent between the various sections of the money market, and which augurs well for the harmonious working of the system in the future. Such sympathy may be the outcome of enlightened selfishness, but it is none the less valuable.
The directors of the joint stock banks, when the position of Baring Brothers was revealed to them, instantly recognised the danger of the position, and, as their advances to the Stock Exchange were considerable, they were naturally anxious to prevent a catastrophe which would create a panic in the House, and the end of which it was impossible to foresee. Barings, who are financiers in the English sense of the word, not bankers, had at the worst only been guilty of imprudent speculation, and, as all inquiries were answered in the most straightforward manner, Lombard Street was as anxious as the Old Lady herself to assist Baring Brothers over the stile. Undoubtedly Lombard Street would have liked to make an example of the firm that was caught short of cash, but it was afraid to leave it to its fate, because it knew that discrimination is not one of the characteristics of excited depositors, and that, were Barings to close their doors, the credit of Lombard Street would next be questioned.
The outcome of the meeting at the Bank was that the Bank of England agreed to make advances to Baring Brothers in order to enable them to meet their liabilities as they matured, and the large banking companies, on their side, guaranteed the Bank against loss to the extent of £15,000,000.
Immense sums had been invested in South America, and when it was rumoured that the wealthy firm of Barings was tottering, Argentine securities were practically unsaleable on the Stock Exchange, where a state of panic prevailed. For a few days the wildest rumours were noised abroad, and the tension, just at the height of the panic, became so acute that even the Consol market was idle. The market then turned in despair to the Bank, which was compelled to borrow £3,000,000 from the Bank of France as a precautionary measure, and also to accept help from the Russian Government.
The British Government, fully alive to the gravity of the Bank's position, promised to suspend the Act in case of need; but when it became known that Barings were to be supported, and that the Bank of England was lending freely on approved securities at high rates of interest, confidence was restored, though a few days earlier it had looked as if a dangerous crisis were imminent. The Bank Act, however, was not suspended, but it is difficult to say what might have happened had not the Bank of France come to the rescue, for the gold advanced by that institution at so awkward a time doubtless tended to greatly alleviate the feeling of apprehension which existed in this country, and which, at any moment, might have overcome restraint.
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.
This period of disaster cast a gloom over the whole nation, which grew sullen and determined, and, when at last the tide began to turn, the sudden lifting of the burden immediately metamorphosed a silent depressed crowd into a cheering multitude, which on Mafeking day turned London into a veritable pandemonium; but the depression caused by unpleasant surprises was intense, and, therefore, the joy at finding the incubus gone was the more irrepressible. Hence the disorderly scenes upon the day in question. A reaction after the period of suspense was inevitable, and the greater the gloom the more violent would be the excitement that followed when the first ray of sunshine pierced the mist. Yet how little was this understood at the time.
That financial barometer--the Bank rate--began to reflect the political situation early in October. Our state of unpreparedness was a by-word on the Continent, and when in September, 1899, the Boers displayed an unyielding attitude, which was at first mistaken for bravado, our overweening confidence in the British soldier blinded our eyes to the imperfections of our fighting machine. The Continent, which was better informed than the British Government, believed that the Boers were determined. On the 3rd October, when the Free State burghers occupied Van Reenen's Pass, the Bank advanced its rate to four-and-a-half per cent.; on the 5th October the rate was five per cent., and on the 30th November six per cent., where it remained until the 11th January, 1900, when five per cent. was recorded.
But if the Government was unprepared the Bank of England was not, and from start to finish, by a judicious use of its rate of discount, an adequate supply of bullion was maintained in the Issue Department. Long experience had taught its lesson, and our financial machine, which was in a good state of preparedness, worked without a hitch. Who can doubt that if our fighting machine had been as ably handled, it would have done its work well from first to last?
There is also another point which is well worth attention. If our banks neglect to keep good reserves, a panic results immediately there is any unusual demand upon their resources, and the cost of a panic soon convinces their directors that it is cheaper to be always prepared. Will the expenditure of some £230,000,000 teach the Government the same simple truth? If we must have an army, it is madness not to keep it--as our banks are kept--ready. Mr. Kruger and his advisers did not consider the latent potentiality of the British fighting machine. They ascertained its state of preparedness to strike at a moment's notice, and, seeing that it was unprepared, the Boers wisely struck the first blow, hoping to drive the English into the sea before the machine could be adapted to a new environment. On the other hand, they failed to realise the resources of the Empire. Had the Boers believed that the British could land an army of even 150,000 men in South Africa, in all probability there would have been no war. The Government, which was caught unprepared, had to pour out money like water, because it had neglected to take one of the simplest business precautions--to keep the army ready.
On 31st May, 1902, peace was declared, and now the country has to face a domestic problem. In 1899 trade was good, and in 1900 the prices of commodities were at their zenith; but during 1901 a reaction set in, and at the present time trade is certainly not active. Reservists are arriving from South Africa in large numbers; and, as the labour market is already depressed, a number of them are sure to experience considerable difficulty in finding employment. War is certainly not a business that civilises, and if a man has once tasted blood, in however just a cause, it is difficult to believe that life will seem quite so sacred to him again. Should the times become really bad, these men who have returned from the front, and who cannot again find a place in civil life, will turn instinctively to the weapons upon which they have learned to depend. Consequently, should there be a severe depression in trade, an epidemic of crime is one of those possibilities which may send a thrill of horror through the country.
Since September, 1899, the money market has certainly had to contend with great difficulties, and a system which has proved itself more than equal to the strain surely cannot be so undesirable as certain critics would have us believe. Again, the more the public understands the system, the less is the danger of panic; for it must be apparent to every man who reads this book that, if he study his own interests, he will select a strong bank, and, having taken that precaution, he will carefully refrain from rushing for his deposit during a time of stress.
CHAPTER XVI.
The Banks and the Public.
We have seen that the history of the Bank of England may be divided into two periods. From 1708 to 1826 the Bank enjoyed the monopoly of joint stock banking in England. After 1826 it had to adapt itself to a constantly changing environment. England, in fact, outgrew the Bank, just as the financial world has outgrown London. The directors of the Bank of England were City merchants, whose ideas usually run in a particular groove. It is not, therefore, in the least remarkable that they stuck to old customs and neglected new opportunities. The directors of the London and Westminster Bank made the same mistake. So did those of the Union Bank of London, the London Joint Stock Bank, and one or two others, simply because their training was of the City: that is to say, like the streets around the Bank, narrow.
To a very great extent the Bank of England is dependent upon the bankers' balances, for, unless it held them, it would not be able to finance the Government. If its directors had, however, thoroughly understood the movement of 1826, the Bank would now be a much more independent institution, and would be a power in every county in England and Wales. In 1826 the Government expressly desired the directors of the Bank to open country branches, and by 1830 it possessed eleven offices in the large provincial towns. But the innovation was not encouraged by those in authority, and to-day the Bank of England possesses only nine country and two Metropolitan branches. Unquestionably a golden opportunity was neglected, for, had the directors decided to open in the large provincial towns, Bank stock would probably be worth over five hundred at this moment.
At first the joint stock bank movement was neither popular nor successful, but nobody questioned the credit of the Bank of England; and if that institution had quickly met the wants of the country by opening branches in the towns, it could have had the pick of the provincial business, for everybody, including both commercial firms and the leisured classes, would have been anxious to deal with a bank which was absolutely above suspicion. And who would dream of making a run upon the "Government" bank? The Bank would gradually have accumulated vast deposits, which would have made it independent of the "bankers' balances"; but the ground is now covered with banking companies, and the Bank of England's opportunity is gone, never to return. At present it is a great bank of discount. Had it farmed the provinces in earnest, it would have become a great deposit bank, deriving its power from its depositors and the Government account, instead of from the Government and the bankers, as it now does. But its directors were not trained bankers, and they failed to realise the important part that branches or feeders were to play in the new system, consequently, with the huge capital of the Bank, large dividends on its stock are now out of the question.
Our present system is, after all, the result of chance as well as of skill. It grew. Further it committed all the follies of youth and inexperience. Then, again, at the beginning, it was as a house divided against itself, and consequently upon more than one occasion it fell, for a banking system can only be worked successfully when all the strong members are pledged either to stand or to fall together. Indeed, our system would be considerably strengthened if the great banks were in closer touch with the Bank of England.
Some few years ago, when there was a somewhat bitter feeling between Lombard Street and the Bank, it was often suggested that were each bank to keep its own reserve of cash the rate of discount would be more stable; but, in the event of such a change, the banks would undoubtedly have to maintain increased reserves, and a greater proportion of their resources would consequently be non-productive. As they would then have less capital to lend, it also follows that, even if rates in the open market did fluctuate less, the average rate of discount paid by the public would be higher, because there would be less capital in the London short loan money market to meet the demands of the bill brokers and stockbrokers.
On the other hand, if the banks realised their investments in proportion as they increased their reserves, and so maintained the same amount of capital in the London short loan fund, their own profits would decrease; and the bank proprietors are not philanthropists. In the one case the public would suffer, and in the other the banks themselves would lose, whilst in neither instance is the advantage to be gained at all proportionate to the risk incurred by a sudden disturbance of credit.
Our present system, with all its imperfections, has gradually grown up around the Bank of England, and if Lombard Street were to decide to keep its own reserve, the result would be confusion, and confusion might be followed by panic--so great is the faith of the public in the Old Lady, whose history entitles her to both consideration and respect. The change might, or might not, result in a run upon Lombard Street; but the Bank of England, whether or not the money market were disorganised, would not lose the confidence of the nation, which is convinced that the Bank cannot fail.