Saturday. May 19. 1866. N. 311. Panic. Bk o. E.

Money Market. (Reserve of B. o. E.)

On Friday evening (11. May) Gladstone state in the H. o. C. that the reserve of the B. o. E. fell that day from close upon 6 millions to 3, and the Bank Return shows that in the course of the entire week it has fallen from nearly 6 millions to one. The demand for loans, after removal of Bank Act ⦗a few hours more of intense panic would have absorbed this reserve altogether⦘ during the week more than 10 millions, greater than ever known in any previous week of the Bank’s history.

The Recent Panic and Bank Act Suspension.

Kein solcher Panic seit 1825. For a long time previously, day after day, and week after week, persistent endeavours in the Times, to bring all the financial associations into disrepute. Continual repetition of damaging insinuations could not fail to prove injurious to the credit of these Cos. and depreciate to some extent the value of their shares, as well as the value of the securities on which their advances had been made. When the favourable moment arrived, therefore, when the disreputable doings of the Joint Stock Discount Co. and the Contract Corporation had excited a large amount of public suspicion and distrust, and the imminence of a great Continental War was added, the speculations for a fall in the Stock Exchange had every inducement to extend immensely their operations, and every reason to calculate upon their success. These operations, it is said, have resulted in the realisation of large fortunes by many of the adverse speculators. For the Cos which were at all „financially weak“ – the effect was crushing. The depreciation in the market price of their shares was certain to be accompanied by a corresponding depreciation in the market value of the securities on which their investments had been made, and the depreciation of both led their customers to a withdrawal of deposits. This the result calculated upon by the speculators, and enforced. But as the conduct of these unscrupulous gamblers, that of some directors of these Cos has been infinitely more reprehensible. It is freely said that some of these directors, like certain animals which are known to follow in the trail of other beasts of prey, more savage and courageous than themselves, for the chance of partaking of the offal that may be left behind, have been following the lead of the Bears, and selling on Speculation the shares of their own Cos. These have been attempted to justify or palliate on the shallow pretext. Feeling certain that the operations of the “bears“ must frighten the public and induce them to sell, and a fall of prices must therefore ensure, they have followed the movement and have sold also, thereby accelerating and increasing the fall. Suchten dieß to justify or palliate on the shallow pretence that, by subsequently buying back their shares at the reduced prices and whilst pocketing the profits – or, in other words, sharing with the bears in the plunder of their own shareholders they have been sustaining the market.

On Thursday, the 10, the panic, which till then might be said to be still „looming in the distance“ fairly set in: at 1 3 4 o’clock had culminated in the stoppage of Overend, Gurney, etc. News flew like wildfire in all directions, in an instant telegraphed to all parts of the country. Dense masses congregated in the streets around the doors. It was clearly perceived that this Overend stoppage would be the signal for the commencement on the following morning of a „run“ upon every other banking and financial establishment, whose credit had been called into question. „Not even in the panics of 1847 and 1857“, said the Daily News, „was the apprehension shown this day equalled. The circulation of mercantile bills, however good, is completely paralysed. Merchants who have the most 188 undoubted paper find themselves under the risk of inability to meet their engagements by reason of the partial or complete collapse of the money market“. Even the Times City Editor declared that „unless prompt steps were taken, the close of that week would be marked by disasters such as had never been equalled in our commercial history.“ Means must be devised, he urged, for stemming the insane torrent of the panic, or it „would not only affect the metropolis and all the great provincial centres of our commerce, as well as our Indian colonial and the foreign markets, but would at once lead to a suspension of public works throughout the kingdom, and in every district throw thousands of people out of employment.“

The time for action had arrived. The only action possible was, in the first instance, a deputation to Gladstone (Chancellor of the Exchequer) composed of representatives of the leading institutions and firms of the City, to urge him, not in terms to suspend the Bank Act again, but in fact and in effect to supersede it. Friday Morning (11 May) came the anticipated run upon the other banks and financial institutions, and such a pressure upon the discount Department of the B. o. E. as had never been experienced before. Under this pressure the Bk. raised the rate of discount from 8 to 9%, and as regards advances on stock to 10%, and even upon those exorbitant terms it was only on the most unexceptionable bills that money could be obtained. Partially known on Thursday evening the closure of the Joint Stock Bank, its liabilities only about 8 Mill. £. This announcement was followed on Friday Morning (11 May) by the suspension of Peto, Betts, and Co (m. liabilities to £4,000,000) and of W. Shrimpton, railway contractor, for £200,000. In the course of the day it became known that Imperial Mercantile Credit Association had succumbed, the Consolidated Discount Co. has suspended. Several banks severely pressed, but the „run“ was well met. Lombard Street was thronged in a most extraordinary manner by crowds and gazers, watching the movements at several banks. So great these crowds that the streets almost impassable … constant streams of depositors and customers with anxious faces as they passed and repassed through the doorways of the banks …

Several informal communications from the bankers of the City made to Gladstone during the day, urging the immediate suspension of the Bank Act, but the Bank (o. E.) Directors had made no application, nor expressed any desire on that subject, and Gladstone unwilling to determine anything without some formal application. In the meantime the pressure upon the Discount Department of the Bank such as without parallel in all its previous history. In that single day the Bank extended its loans and discounts to a sum of more than £4,000,000, so as to reduce the reserve from 5 millions and 3 4 mill. to about 3 millions. These facts communicated to Gladstone on Friday evening, and on that evening Gladstone was waited upon by a deputation representing the Joint Stock Banks in the City, who were more urgent for a suspension of the Act. Gladstone then decided to send suspensory letter to Governor and Deputy Governor of the B. o. E. He announced this to the H. o. Commons on Friday (same day of 11 May) night.“ Thus the Bankact for 3d time suspended.

The Panic and its Remedy.

If the Bankact had not been suspended then, the B. o. E. itself would have forthwith suspended payment. Three millions out of a reserve of less than 6 mill. went on Friday, and, with a panic becoming more intense every hour as the reserve attenuated, there is no doubt that before the close of banking business on Saturday the B. o. Egd. must have closed its doors. If the leading members of Gvt had been out of the way, as is sometimes the case when Parliament is not sitting, … the B. o. E. would have stopped payment. It certainly seems strange that the commerce of a great commercial nation should be paralysed because a Minister or two might not be at their posts; but the law, as it stands, may entail a catastrophe thus momentous for a cause so insignificant.

Jezt sagen die defenders des Act of 1844: its peculiar advantage is that it will stop any Panic as soon as the Act is defunct. … The speculation in cotton, in produce, in iron; the institution of Finance Cos., „Lloyds Bonds“, and contractors’ loans, are certainly not the inventions of the Act of 1844. 189 The „phantom“ Reserve of B. o. E. Notes had suddenly fallen to such a panic point as induced a scramble for the Remnant. … Attempt to limit the supply of money, when it was most needed.

What to do with the Act of 1844?

It does no harm so long as it is doing nothing; it never does any good; it never comes into actual operation without producing evil. It is raising the Bank rate of discount that checks a foreign drain upon our gold reserves, and checks and moderates undue speculation, when it is to be checked … . It is most humiliating to reflect – that the whole of the banking, and financial, and trading interests of this country should hang suspended in the feeble grasp of a body of bank directors, supposed ⦗by the defenders of the Act⦘ to be perpetually oscillating between abject fear and reckless indiscretion. … Banks and bankers imagine that the Bank Act works well for them, and for all the money-lending community, however hardly it may operate upon the money-borrowing public, by keeping up and raising to a permanently higher level the value of loanable money. … The tendency of these frequently recurring periods of pressure and panic is to convert the industrious and enterprising classes into speculative and reckless gamblers …

The landed interest owns less than 1 6 of the national wealth, and pays less than 1 6 of the national taxation.

The Times and the Panic.

Influence that Journal can exercise in bringing about a panic.

On Thursday evening (10 May) frightened by the Panic wants something official being done … urges deputations from leading banks and firms to press at once upon the Chancellor of Exchequer, warns the Gvt etc

Friday night (11 May) Bank Act suspended. Saturday Morning (12 May) Times declares that the suspension was not necessary, „and if, as we expect, confidence be speedily restored, we shall attribute it to natural causes rather than to the interference of the Executive Gvt … The Panic would have subsided of itself.“ „The suspension of the Act coincided with the Restoration of Confidence. Confidence would have been surely and speedily restored had the law been preserved in all its integrity.“

Monday Morning (13 May) ⦗in point of fact, already in its evening edition of Saturday⦘: „To suppose that the panic could have subsided of itself, especially when the news of the condition of London, and of the State of the Bank Reserve had reached the provinces, would have been tantamount to watching for a miracle.“ And in its leader columns on the same day: „The panic far exceeded the proportions to which delicacy and discretion reduced it in the newspapers, though even they told a sad tale.“ „The concession of the Chancellor of the Exchequer come not an hour too early.

It was the Times, which had falsely announced that the Ambassadors of Prussia and Austria had mutually withdrawn. Hence perturbation on the Stock Exchange. Then announcement that „there was not one word of truth in the announcement“.

Times City Article of 25 May. Again an article, full of „deliberately false and grossly exaggerating representations of the affairs in the City“, with the transparent purpose to “write up“ the Panic, and set it again a going. In that article it is said: „The authority to suspend the Bk. Act has not allayed the panic … the state of embarrassment at the present moment seems to have reached a much worse point than before.“

In another article the Timeshas the impudence to represent the „distressed“ London bankers as begging assistance from the B. o. E., while they were calling for „their“ money at the Bank. Speaks of „bankers in distress“, while the B. o. E. was the Bank „in distress“.

On the 1st August (City article) (on occasion of Mr. Watkin’s motion for a Royal Commission of Inquiry into the Bank Act) the Times declares all Inquiry useless, and the Act perfect. (+ means universal difficulty and general disaster (article), there is something invidious in being the chief example of a trade the profit of which is founded upon misfortune.“)

On the 2nd August it says: (Leading Article) „The fortunate possessors of capital and credit, whether in Threadneedlestreet or Lombardstreet, sit aloof and administer their power upon purely selfish principles. When money is abundant, they underbid one another, and the B. o. E. lends at 2%, thus only encouraging speculation. When the evil trade is beginning to bear its evil fruit; when enterprise has gone to its utmost limits; when money is gone and ordinary credit falls into suspicion, then the Bank of England trafficks upon the fatal excesses it has provoked, and exacts 10% from its own victims. The other moneylenders do the same, but it is the Bank that sets the example. As a public institution it realises the questionable maxim that private vices are public benefits, for it thrives upon the folly of private speculators, and the 10% which accumulates the Bank „Rest“ and raises the price of Bankstock to £250.

190

Investors Losses from „Bear“ Frights.

Recently the current of speculation in the Stock Exchange has set all one way. Prices have fallen – in some instances on merits; z. B. für die Joint Stock Discount shares u. Contract Corporation Shares. But upon this comparatively small basis the Stock Exchange „bears „have erected a huge structure intended to crush all finances and discount Cos. … The bears of the hour not only sell as the old „bears“ were wont to sell, but they combine, and sell in masses, and they back up their sales by endless rumours. If one Co. makes a call, all are reported to be likely to make calls. If „Lloyd’s Bonds“ are held largely by One Co., all are said to hold „Lloyd’s Bonds“. If one Co. has railway contractors for creditors, all are reported to „be in“ deeply with railway contractors. In the peculiarly sensitive condition of the market at present a few rumours of this description, coupled with a smart decline in the price of the shares, bring real and frightened sellers into the market; whereupon depositors get frightened also, and a complete panic sets in. … There has, during the last week, been a dead set against the Alliance Bank, the Agra and Masterman’s Bank, the Credit Foncier and Mobilier of England.

The Stock Markets of the Week.

Gvt. Stocks have had a great rally, despite the immense sales forced by banks in hourly fear of a „run“. That investment has been rapidly absorbed by the public, and Consols are restored to a very fair price for a 3% security. … The public have eagerly taken all the Railway Stock with a pressure from the North had thrown upon the market. London, Chatham and Dover stock has risen. The German sales of American Stocks seem for the moment suspended, while the American demand continues, so that 5.20 Bonds have shared, although very meagrely, in the general rise.

The variations in Agra and Masterman’s Bank shares tremendous, but after touching 20, the price seems now recovering. In London and County Bank Shares recovery of £10. Speculators for a fall in Consolidated Bank shares were forced last „account“ to pay 10s. „backwardation“.

The Limited Liability Act of 1862.

So far, indeed, it seems passed for the especial benefit of clever promoters, financiers, and liquidators to the injury of the real investors. The liability, in many instances, has operated as a share. The bona fide shareholder has practically no protection against either unscrupulous directors or against a wholesale system of nominees or „men of straw“, put up as his co-partners in Cos. which have only a trifling amount of capital paid up. Thus the so called Reserve of unpaid capital may be no reserve at all. No real audit. There are some figures which must be published at last once a year; but, in some instances, if not absolutely false they have been grossly deceptive, and in nearly all cases, they are grouped under a few heads in such a way as to convey little or no information – not even to the most acute accountant in the world – as to the real character, or the extent of the commitments of the Co. The securities held against advances sometimes actually involve a liability, and may, in fact, became heavy liabilities instead of securities, without the shareholders having slightest idea of such a risk. … On the creditor side of the account should be given the amount of advances on securities not fully paid up, on securities of works in progress, and on securities representing fully paid up shares in Cos. or Loans brought out by the Co. distinct from those of other cos., also, the amount of cash at call, at interest, also that at the B. o. E., and in hand.

The shareholders selbst grossen Theils am Dreck Schuld. They blindly support directors who admit having transacted such a description of business that secrecy is actually necessary to preserve the Co. as well as the client. Shareholders are led away by plausible observations from the directors as to the evils of exposing details to the public or their rivals; recent disclosures have proved that secrecy allows unprincipled directors and managers to carry on abominably reckless transactions, of which the shareholders are in ignorance until the Co. is ruined. Even when it is ruined, a balance-sheet in accordance with the requirements of the present Act can at the very last moment be issued, showing a profitable position, as was the case with the Joint Stock Discount Co. With regard 191 to the appointment and re-election of directors (the latter being a ceremony which has almost degenerated into a mere form) they are selected because of their names being prominent as guinea-pigs, and weil sie political, municipal, official, u. mercantile duties have in combination with the responsibilities of a directorship over 5, 10, 15 other cos of varying nature with the most diversified objects. There should also be an end to reserve funds being used as capital. If it be clear profit, and is yet wanted for use in the business, let it be added to the paid-up capital or invested so as to prove a real reserve fund in case of need.

Railways. (don’t pay)

In these 25 years we have more than doubled our wealth. Sicher the securities which represent about 450 millions of Railway properties would not realise at the existing market rate their original cost. The investors in British railway property are losers. For many years past subscribers for new railways could not be found. There were, however, lawyers, contractors, and promoters. Devices invented whereby, by „Lloyd’s Bonds“ and Finance Cos., and the issue of railway securities at enormous discounts, and the payment to contractors of prices for their work and materials far in excess of the value, some railways have been made, or partly made. But, as Lord Redesdale said in the H. o. Lords last Monday, the system has fairly broken down.

The Reports of the Asiatic Banking Co., and the Bank of Hindostan, China and Japan (Limited.)

The disastrous crisis of Bombay last year (1865) has told upon the balance sheets and dividends of the various Indian Banks. All have suffered, some severely. Mit Numerous failures amongst firms of the highest standing and greatest repute, and prolonged depreciation of all description of Indian produce the Banks could not escape heavy losses. So sehr bedeutende losses der „Commercial Bank Corporation of India and the East“, ebenso, obgleich nicht so groß, in den beiden oben genannten Banks. Losses of Asiatic Banking Co: £142,000 against profit realised of £61,494. Hatte aber, fortunately, reserve fund of £175,000.

Net profits of the Bank of Hindostan etc. for the year £23,485, where swallowed up by the losses, which have also absorbed £87,794 transferred from the reserve fund. In addition, £70,000 loss anticipated. Jetzt sound.

The Economy of B. o. E. Notes. 1000£ Notes.

The B. o. E. directors suchen constantly economy of banknotes, so as to keep as small an amount as possible in the hands of the public, and as many in the reserve as they can contrive. A large amount of the whole circulation, perhaps 1 10 (say 2 mill. £. St.) consists of notes of £1000 each, and nearly all these are in the tills of bankers within half a mile of Lothbury. They are of little or no use, except to settle balances among the banking houses themselves, or occasionally for lawyers to pass when they sell real estate.

  • 1866 „The Economist“ (Jahrgang 1866) vol. XXIV.
  • The „Money Market Review“. Jahrgang 1866.