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 ol 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 ia 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 notjs 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. Tho 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 quantitie ; 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 minimum 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.
an ultimate extinction of all note issues save that of the Bank of England ; and he probably expected that tho 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
