Sect. IV.—: Private and Joint-Stock Banks.

After the statements already made in regard to the constitution and purposes of these banks, it is unnecessary to enter into further details with respect to them, unless as respects their history and proceedings as issuers of money.

Except during the suspension of cash payments, the issues of the Bank of England have generally been, as they always ought to be, determined by the state of the exchange. But though the greatest, the Bank of England has not been the only issuer of paper in this country. Large amounts have been issued by the provincial banks, and their issues have been but little influenced by the influx or efflux of bullion, but have almost wholly depended on the state of credit and prices in the districts in which they happened to be situated. If their managers supposed that these were good or improving, they rarely hesitated, previously to the new system introduced in 1844, about making additional issues. Hence, when the state of the exchange, and the demand on the Bank of England for bullion, showed that the currency was redundant and ought to be contracted, the efforts of the bank to effect its diminution have been often impeded, and met by a contrary action on the part of the country banks. This was not owing to the ignorance of the latter. Under the supposed circumstances, the country bankers saw, speaking generally, that they ought also to contract; but being a very numerous body, comprising several hundred establishments scattered over all parts of the country, each was impressed with the well-founded conviction, that all that he could do in the way of contraction, would be next to imperceptible; and few thought of attempting anything of the sort, so long as they felt satisfied of the stability of those with whom they dealt. On the contrary, most bankers knew, that had they withdrawn a portion of their notes, some of their competitors would have been eager to embrace the opportunity of filling up the vacuum; and that they would only have lost a portion of their business, without in any degree lessening the amount of paper afloat. Hence, in nineteen out of twenty instances, the country banks went on increasing their issues long after the exchange had been notoriously against the country, and the Bank of England had been striving to pull up.

And not only did they almost universally increase their issues when they ought to have been diminished, but the moment they were compelled to set about their reduction, they ran headlong into the opposite extreme, and unreasonable suspicion took the place of blind unthinking confidence. It is seldom, indeed, that a recoil takes place without its destroying more or fewer of the provincial banks; and provided the others succeed in securing themselves, little attention is usually paid to the interests of those they may have taught to look to them for help. In exemplification of these statements, we shall shortly notice some of the circumstances connected with the destruction of country bank paper in 1792-93, 1813-15, 1825-26, and in 1836-39.

1. Previously to 1759, the Bank of England did not issue any notes for less than £20; but having then commenced the issue of £10 notes, her paper was gradually introduced into a wider circle, and the public became more habituated to its employment in their ordinary transactions. The country banks had not, however, been so very scrupulous in regard to the magnitude of their notes, which they endeavoured to get into circulation by making them for very small sums. But this being a practice productive of much abuse, was checked in 1775, by Parliament enacting that notes should not be issued for less than £1. In 1777, this minimum limit was further raised to £5, at which point it continued till 1797, when an issue of £1 notes was again authorised.

The distress and embarrassment that grew out of the American war proved exceedingly unfavourable to the formation of country banks, or of any establishments requiring unusual credit or confidence. No sooner, however, had peace been concluded, than everything assumed a new face. Agriculture, commerce, and still more, manufactures, into which Watt and Arkwright’s inventions had been lately introduced, immediately began to advance with a rapidity unknown at any former period. In consequence, that confidence which had either been destroyed, or very much weakened by the disastrous events of the war, was fully re-established. The extended transactions of the country required fresh facilities for carrying them on, and these were supplied in the utmost profusion. The number of banks, which in 1784 was certainly under 150, increased so rapidly, that in 1792 they amounted to about 350! In consequence, a banking office was opened in every market-town and in most considerable villages. And such being the case, it is needless, perhaps, to add, that the prudence, capital, and connections of those who set up these establishments were but little attended to. The great object of a large class of traders was to obtain discounts; and the bankers of an inferior description were equally anxious to accommodate them. All sorts of paper were thus forced into circulation, and enjoyed nearly the same degree of esteem. The bankers, and those with whom they dealt, had the fullest confidence in each other. No one seemed to suspect that there was anything hollow or unsound in the system. Credit of every kind was strained to the utmost; and the available funds at the disposal of the bankers were reduced far below the level which the magnitude of their transactions required to render them secure.

The catastrophe which followed, was such as might easily have been foreseen. The currency having become redundant, the exchanges took an unfavourable turn in the early part of 1792. A difficulty of obtaining pecuniary accommodation in London was not long after experienced; and notwithstanding the efforts of the Bank of England to mitigate the pressure, a violent revulsion took place in the latter part of 1792 and the beginning of 1793. The failure of one or two great houses excited a panic which proved fatal to many more. Out of the three hundred and fifty country banks in England and Wales, when this revulsion began, about a hundred were compelled to stop payments, and upwards of fifty were totally destroyed, producing by their fall an extent of misery and bankruptcy till then unknown in the country.

“In the general distress and dismay, every one looked upon his neighbour with caution, if not with suspicion. It was impossible to raise money upon the security of machinery, or shares of canals; for the value of such property seemed to be annihilated in the gloomy apprehension of the sinking state of the country, its commerce and manufactures; and those who had any money, not knowing where they could place it with safety, kept it unemployed and locked up in their coffers. Amid the general calamity, the country banks, which had multiplied greatly beyond the demand of the country for circulating paper currency, and whose eagerness to push their notes into circulation had laid the foundation of their own misfortunes, were among the greatest sufferers, and, consequently, among the greatest spreaders of ruin and distress among those connected with them; and they were also the chief cause of the drain of cash from the Bank of England, exceeding any demand of the kind for about ten years back. Of these banks above a hundred failed, whereof there were twelve in Yorkshire, seven in Northumberland, seven in Lincolnshire, six in Sussex, five in Lancashire, four in Northamptonshire, four in Somersetshire, &c.”

Attempts have sometimes been made to show that this crisis was not occasioned by an excess of paper-money having been forced into circulation, but by the agitation caused by the war then on the eve of breaking out. But there do not seem to be any good grounds for this opinion. The unerring symptoms of an overflow of paper—a fall of the exchange, and an efflux of bullion—took place early in 1792, or about twelve months before the breaking out of hostilities. Mr Chalmers states that none of the great houses that failed during this crisis had sustained any damage from the war. The efforts of the country bankers to force their paper into circulation occasioned the redundancy of the currency, and it was on them, and on the country dealers and farmers dependent on them, that the storm principally fell. It has been already seen, and it is of importance to remark, that the Bank of England had no notes for less than £10, and the country banks for less than £5 in circulation when the crisis of 1792-93 took place.

2. During the period from 1800 to 1813, the number of country banks increased from about 400 to 922; and in consequence partly of this rapid increase, and partly of the suspension of cash payments at the Bank of England in 1797, and the issue of one-pound notes by that establishment and the country banks, the amount of paper afloat was vastly increased, particularly after 1808, when it sunk to a heavy discount as compared with bullion. Mr Wakefield, whose extensive employment in the management of estates in all parts of the country gave him the most favourable opportunities for acquiring correct information, stated to the agricultural committee of 1821, that “down to the year 1813, there were banks in almost all parts of England, forcing their paper into circulation at an enormous expense to themselves, and in most instances to their own ruin. There were bankers who gave commission, and who sent persons to the markets to take up the notes of other banks; these people were called money-changers, and commission was paid them.” (Report, p. 213). And among the various answers to the queries sent by the Board of Agriculture in 1816, to the most intelligent persons in different parts of the country, there is hardly one in which the excessive issue of country-bank paper is not particularly specified as one of the main causes of the unprecedented rise of rents and prices previously to 1814.

We have already seen what was the result of this conduct, and that the extensive destruction of country bank paper at the end of the war, by raising the value of the currency nearly to par, paved the way for the resumption of cash payments at the old standard in 1821.

But notwithstanding the ample experience that had been supplied by the occurrences of 1792-93 and 1814-16, of the mischievous consequences of the issue of paper by the country banks, and of their want of solidity, nothing whatever was done, when provision was made for returning to specie payments, to restrain their issues, or to place them on a better footing. The consequences of such improvidence were not long in manifesting themselves. The prices of corn and other agricultural products, which had been greatly depressed in consequence of abundant harvests, in 1820, 1821, and 1822, rallied in 1823; and the country bankers, true to their invariable practice on similar occasions, immediately began to enlarge their issues. It is unnecessary to inquire into the circumstances which conspired, along with the rise of prices, to promote the extraordinary rage for speculation exhibited in 1824 and 1825. It is sufficient to observe, that in consequence of their operation, confidence was very soon carried to the greatest height. It did not seem to be supposed that any scheme could be hazardous, much less wild or extravagant. The infatuation was such, that even the most considerate persons did not scruple to embark in visionary and absurd projects; while the extreme facility with which discounts were procured upon bills at very long dates, afforded the means of carrying on every sort of undertaking. The most worthless paper was readily negociated. Many of the country bankers seemed, indeed, to have no object other than to get themselves indebted to the public. And such was the vigour and success of their efforts to force their paper into circulation, that the amount of it afloat in 1825 is estimated to have been nearly fifty per cent. greater than in 1823.

The consequences of this extravagant and unprincipled conduct are well known. The currency having become redundant, the exchanges began to decline in the summer of 1824. The directors of the Bank of England having unwarily entered, in the early part of that year, into an engagement with the government to pay off such holders of four per cent. stock as might dissent from its conversion into a three and a half per cent. stock, were obliged to advance a considerable sum on this account after the depression of the exchange. But despite this circumstance, they might and ought to have taken measures in the latter part of 1824 and the earlier part of 1825, by lessening their issues, to stop the efflux of bullion. But not being sufficiently alive to the urgency of the crisis, the London currency was not materially diminished till September 1825. The recoil, which would have been less severe had the efforts of the bank to prevent the exhaustion of her coffers taken place at an earlier period, was most apalling. The country banks began to give way the moment they experienced a considerably increased difficulty of obtaining accommodation in London, and confidence and credit were immediately at an end. Suspicion having awakened from her trance, distrust had no limits. All classes of depositors made haste to call up the sums they had entrusted to the care of the banks. There was, also, a run upon them for payment of their notes, not in the view of sending the gold as a mercantile adventure to the Continent, but to escape the loss which it became obvious the holders of country paper would have to sustain. Sauve qui peut was the universal cry; and the destruction was so sudden and extensive, that in less than six weeks, above seventy banking establishments were swept off, and a vacuum was created in the currency which absorbed from eight to ten millions of additional issues by the Bank of England; at the same time that myriads of those private bills that had previously swelled the amount of the currency, and added to the machinery of speculation, were wholly destroyed.

3. It may be worth while, perhaps, to observe that it has been alleged, in opposition to what is now stated, that the difficulties of the bank in 1825 were not caused by any excess either of her issues or of those of the country banks, but by the too great amount of the capital she had lent; and in proof of this allegation, we are referred to the increase of nearly eight millions in the amount of securities which the bank held in August 1825 over their amount in August 1822, and to the simultaneous decrease of nearly six and a half millions in the amount of bullion in her coffers. But a little consideration will suffice to show the futility of this statement. It is impossible, indeed, that any mere advance of capital, however great, whether by the bank or any other great association, should affect the state of the currency or the exchanges. It was not the magnitude of the advances, but the mode in which they were made, that brought on the crisis. The bank took no steps, or none of sufficient energy, to reduce the amount of her notes in circulation till long after the exchange had become unfavourable, and bullion was demanded of her for exportation. The accumulation of securities was the necessary result of this radical error. Had the bank made her advances in the shape of produce—in corn, cotton, cloth, or iron—they might have been ten times as great without having the smallest influence over the exchange. But the currency having become redundant in 1824, the notes of the bank were returned upon her for gold, so that her securities were augmented at the same time that her means of dealing with the unfavourable exchange were impaired. It is to be remembered, that the efflux of bullion showed conclusively that, however issued, and whether greater or less than at former periods, the paper afloat was in excess, and that its contraction had become indispensable. And such being the case, it was the bounden duty of the bank, as soon as she felt the drain for gold setting steadily against her, to adopt every means in her power, by raising the rate of interest, selling securities, and otherwise, to reduce her issues, and restore the exchange to par. And had she done this at a sufficiently early period, it is all but certain she would not have lost more than two or three millions of bullion; whereas, by following a different line of conduct, and deferring the adoption of vigorous repressive measures till too late a period, she was drained of about seven millions of bullion, and her safety seriously compromised before she could stop the drain.

It is, therefore, the merest delusion to ascribe the crisis of 1825, or any similar crisis, to the bank advancing too much capital. She did no such thing. What she did was to issue and keep out an excess of notes in the teeth of an unfavourable exchange. It was this that drained her of her bullion; and it would have had precisely the same result had the bank capital been ten times greater than it actually was.

4. Notwithstanding nations are proverbially slow and reluctant learners, the events of 1825-26, taken in connection with those of the same sort that had previously occurred, produced a conviction of the necessity of taking some steps to improve the system of country banking in England. But we regret to have to add, that the measures adopted in this view were very far indeed from being effectual to their object. The law of 1708, limiting the number of partners in banking establishments to six, was repealed; and it was enacted, that banks with any number of partners, might be established for the issue of notes anywhere beyond sixty-five miles from London; and that banks not issuing notes might be established in London itself with any number of partners. The circulation of notes for less than five pounds in England and Wales was at the same time forbidden.

Much benefit was expected, but without much reason, to result from these measures. The suppression of £1 notes was in so far advantageous, that it shut up one of the principal channels by which the inferior class of country bankers got their paper into circulation, and tended, consequently, to secure the labouring classes against loss in the event of their bankruptcy. But the other measure, or that for the establishment of joint-stock banks, proved to be a complete failure. And we have seen in the previous inquiry into the constitution of such banks, that nothing but mischief could be expected to arise from giving them power to issue notes.

Those who supposed that joint-stock banks would be immediately set on foot in all parts of England, were a good deal disappointed with the slowness with which they spread for some years after the Act permitting their establishment was passed. The heavy losses occasioned by the downfall of most of the joint-stock projects set on foot in 1824 and 1825, made all projects of the same kind be looked upon for a considerable period with suspicion, and deterred most persons from embarking in them. But this caution gradually wore off; and the increasing prosperity of the country, and the difficulty of vesting money so as to obtain from it a reasonable return, generated of new a disposition to adventure in hazardous projects. A mania for embarking in speculative schemes acquired considerable strength in 1834, and during 1835 and part of 1836, it raged with a violence but little inferior to that of 1825. It was at first principally directed to railroad projects; but it soon began to embrace all sorts of schemes, and, among others, joint-stock banks, of which an unprecedented number were projected in the course of 1835. The progress of the system was as follows:—

In point of fact, however, the number of banks created in 1835 and 1836 was vastly greater than appears from this statement. We believe that, at an average, each of the fifty-six banks established in those years, like those previously established, had from four to five branches; and as these branches transacted all sorts of banking business, and enjoyed the same credit as the parent establishment, from which they were frequently at a great distance, they were, to all intents and purposes, so many new banks; so that, instead of fifty-six, it may safely be affirmed that from about 220 to 280 new joint-stock banks were opened in England and Wales in 1835 and 1836, but mostly in the former!

In January, February, and March 1836, when the rage for establishing joint-stock banks was at its height, the exchange was either at par, or slightly in our favour, showing that the currency was already up to its level, and that if any considerable additions were made to it, the exchange would be depressed, and a drain for bullion be experienced. But these circumstances, if ever they occurred to the managers of the joint-stock banks, do not seem to have had, and could not in truth be expected to have, any material influence over their proceedings. Their issues, which amounted on the 26th of December 1835 to £2,799,551, amounted on the 25th of June next to £3,588,064, exclusive of the vast mass of additional bills, cheques, and other substitutes for money they had put into circulation. The consequences were such as every man of sense might have foreseen. In April 1836 the exchange became unfavourable, and bullion began to be demanded from the Bank of England. The latter, that she might the better meet the drain, raised the rate of interest in June from four to four and a-half per cent., and this not being enough sufficiently to lessen the pressure on her for discounts, she raised it in August from four and a-half to five per cent. But during the whole of this period the country banks went on increasing their issues. We have seen that, on the 25th of June 1836, their issues were £788,513 greater than they had been on the preceding 26th of December; and notwithstanding the continued drain for bullion, and the increased rate of interest charged by the Bank of England, and the reduction of her issues, the issues of the joint-stock banks increased from £3,588,064 in June, to no less than £4,258,197 on the 31st of December, being an increase of nearly twenty per cent. after the exchange was notoriously against the country; and the most serious consequences were apprehended from the continued drain for bullion.

It may perhaps be supposed that the increased issue of the joint-stock banks would be balanced by a corresponding diminution of the issues of the private banks, and that on the whole the amount of their joint issues might not be increased. This, however, was not the case. Some private banks were abandoned in 1836, and others incorporated with joint-stock banks; and it is farther true, that those which went on managed their affairs with more discretion than their associated competitors. But, from the 26th of September 1835 to the 31st of December 1836, the issues of the private banks were diminished only £159,087, whilst those of the joint stocks were increased during the same period £1,750,160, or more than ten times the falling off in the others!

These statements show the inexpediency of having more than one issuer of paper. Its issue ought in all cases to be governed by the state of the exchange, or rather, as already stated, by the influx and efflux of bullion. But previously to 1844, the provincial banks might go on over-issuing for a lengthened period without being affected by a demand for bullion, or even for Bank of England paper.

In the end, no doubt, an efflux of the former was sure, by rendering money and all sorts of pecuniary accommodation scarce in the metropolis, to affect the country banks as well as the Bank of England; and then the injury to industry, occasioned by the withdrawal of their accustomed accommodations from a great number of individuals, was severe in proportion to the too great liberality with which they had previously been supplied. This was especially the case in 1836, when the Bank of England, by bolstering up the Northern and Central Bank, averted, though but for a while, the bankruptcy of that establishment, which had no fewer than forty branches, and, by doing so, is said to have prevented the occurrence of a panic that might have proved fatal to many other joint-stock and private banks. Still, however, the shock given to industrial undertakings, by the revulsion in the latter part of that year, and in 1837, although unaccompanied by any panic, was very severe. All sorts of commercial speculations were for a while completely paralysed, and there were but few districts in which great numbers of individuals were not thrown out of employment. In Paisley, Birmingham, and most other towns, the distress occasioned by the revulsion was very general and long-continued. And owing to the Bank of England having delayed, in 1838 and the earlier part of 1839, to take efficient measures for the reduction of her issues, despite the unmistakeable evidence of their being redundant, the bullion in her coffers was reduced in September 1839 to £2,406,000; and, but for the efficient assistance obtained from the Bank of France, her stoppage could hardly have been averted.