May 26, 1866. N. 312.

The Bank of England and the London Bankers in the Panic.

Friends of the Bankact of 1844: If it has been suspended, it has not failed; if it has failed, it was good, very good, that it should have failed; and that it fails as beautifully and beneficently as it operates. Economist selbst muß aber sagen: „Indeed if it had not been broken this month it must have been repealed next month. The panic took the matter in its own hands.“

In the letter of the Governor and Deputy Governor of the Bank to the Chancellor of Exchequer, on the 11. May, they have the impudence to state „We commenced this morning with a reserve of £5,727,000, which had been drawn upon so largely that we cannot calculate upon having so much as 3 Mill. £. St. this evening, making a fair allowance for what may be remaining at the branches, and unless the money taken from the Bank is entirely withdrawn from circulation there is no 192 reason to suppose that this reserve is insufficient“. Dieß als „Troops of bankers were coming up from all parts of the country in order to provide themselves with gold and banknotes. The balances of the London Bankers, lodged in the B. o. E., usually from 3 to 5 Mill., and it was clear that, had the Bank Act not been suspended, they would have been compelled to withdraw every 6d. of those balances to meet a tremendous „run“. All those balances must have come out of the Bank reserve of 3 Mill. £.

The Deputy Governor of the Bank was exceedingly reluctant at the conference with Gladstone to admit that there was any necessity whatever for the suspension of the Act, until he was curtly reminded by one of the joint-stock bank directors present that „they could draw a couple of cheques to-morrow morning, which would compel the B. o. E. to close its doors“. Gladstone interposed, „but you will not do it“.

Lord Clarendon on the Panic.

The panic of 1866 possesses one essential characteristic which did not belong to its predecessors. Continental capitalists have in this instance become alarmed, and, contrary to all precedent, on the seeming verge of a colossal European war, withdraw their money from London as a measure of security, instead of sending it to London for safety, as in previous periods of convulsion. Clarendon, on the morning after the issue of the Gvt. letter, indited his circular to the Brit. embassies and legations throughout Europe, with the view of staying undue panic on the Continent as to British solvency.

We have been taught to think that the withdrawal of a million or two of bullion from the Bank of England is a very serious affair, and that the addition of a million or 2 is the occasion for national congratulation. … The precious metals always have and always will flow backwards and forwards from one country to another, and all law is powerless to stem this natural course … Clarendon tells Europe that long-continued prosperity in commercial affairs and the general wealth consequent on it have produced their ordinary results in encouraging speculation, especially of a monetary and financial character, and in fostering hopes of acquiring wealth by more speedy means than are presented by ordinary methods of commercial industry. …

Transfer of Business of the Bank of London to the Consolidated Bk.

The London Bank Reserve Fund in its last balance-sheet upwards of £300,000. In April 1864 it paid dividends at the rate of 15% p. annum, price of its shares £122, or £72 premium u. damals addition of £200,000 made to the capital by the creation and issue of £2000 new shares. These shares issued to the then existing shareholders at premium of £70 p. share, and the £140,000 realised by these premiums was carried to the reserve funds. At its last half yearly meeting paid dividends of 20%. Came to deadlock by dabbling in financial transactions. Dann neues arrangement mit der Consolidated Bank. Transfer ihr 22 May, evening, the current and deposit accounts of their customers mit ample assets to cover them. Consolidated Bk. undertook the charge of these accounts, but assumed no responsibility f. die acceptances der B. o. London. Diese daher unpaid return. ⦗Dieß ungesetzlich: giving one creditor privilege gegen den other.⦘ Der Fehler to invest Banking Funds, which may be any day withdrawn, upon Railway Contracts or Lloyds Bonds, or other securities based on public works in a progressive but unfinished state. These works may be long in progress, the capital to complete to them may not be readily obtainable, the works may never be finished. Until their completion all such securities not only liable to great fluctuation in value, but extremely difficult to deal with as available securities, even if they can be dealt with, as such, at all.

It is the business of a financial association to lend money, or lend its credit for the raising of money, upon securities not immediately convertible, and repayable at longer dates than those at which a banker justified in lending his money. The financial association, lending at longer dates, and on less marketable securities, incurs therefore greater risk, and obtains therefore larger profits than the banker. If the business well managed, higher profits cover the larger possible losses, and enable it to pay higher interest and dividends to the shareholders. But the financial association ought not to take deposits repayable on demand, or at short notice, because their investments not immediately convertible, in case of emergency for the repayment of these deposits. The mischiefs of intermingling the system of Banking institution mit financial operations lamentably illustrated in the cases of the Joint Stock Discount Co. and the Bk. of London, the London Financial and the Imperial Mercantile Credit Associations.

193

Loss in Investments since beginning of 1866 – May 26.

The recent failures and the general depreciation in the value of joint stock investments, since the commencement of the present year has involved loss at 130 mill. £. St.

The Stock Markets of the Week.

A steady drain of bullion to the Continent continues, partly to pay for the stock with which Continental holders have lately loaded our market, and partly because the machinery of the Foreign Exchanges is out of gear. Consols are weaker, but only to a trifling extent.

The speculators for a fall have altogether had a good harvest this week. Individuals or cliques sell in combination large quantities of shares in an undertaking whose very existence depends upon its credit, and then comment on the depreciation in price which they have caused, in a way to bring the credit of such concern into question, and cap the whole proceeding by circulating false and defamatory reports. It is said that men of high standing in the City of London are not ashamed to pocket the profits of these transactions. Such men pick out a high priced bank as their next victim, and repurchase with glee the stock out of which they have frightened timid shareholders.

With the exception of Italien, which seems to have fallen as low as it well can go, Foreign Stocks are all weaker. The fall in Railway Stocks very severe. London and Northwestern have been the greatest sufferers.

The great interest of the week has centered in the market for Bankshares, where the fluctuations have been terrible. The crisis under which India is still suffering afforded a pretext for heavy sales of Agra and Masterman’s shares, touched at one time 10l. per share, or 15 discount; but a great rebound has taken place; and they close at £20.

Persons who have locked up their property in their cash-boxes can so invest mit immense profits.

What is a Five-Twenty Bond? (Neue Art Convertibility for paper currency.)

The Gvt of the U. States have the option of redeeming this part of their debt at par, or 100, after 5 years from the date of issue, and at any period between 5 years and 20 from the date of issue; but, at the expiration of the 20 years, the holder of five-twenty bonds can claim the principal or per value. Similar condition für die ten-forty Bonds, the option of the State continuing in this case after the first 10 years up to 40 years. On both these kinds of bonds the interest is payable in gold, on the former at 6, on the latter at 5% p. annum.

Seventy-thirty Bonds: Interest on them payable in greenbacks, at the rate of 73 10 % p. an. (say 7$ 30 cents p. 100 dollars). These bonds exchangeable, at the option of the holder, after 3 years from the date of issue, into five-twenty bonds. By the last advices the relative prices of five-twenty and ten-forty bonds in New York were 102 u. 96. Before long – das scheme schon brought forward by McCulloch, the Gvt. will issue a 5% stock at par, and thus exercise the option they have of paying off the five-twenty 6% or substituting a 5% in their place. Chase gave the holders of „greenbacks“ the option of conversion into five-twenties. He could not make his „greenbacks“ equal in value to gold, but to five-twenties, and that he did; and so he paid for the greatest and the most costly war the world even knew. This is a form of convertibility for paper currency never before devised. But the money was raised at war rates. A „greenback“ issued in payment for cannon and gunpowder when gold was at 100% premium was, when converted into five-twenties, virtually raised at 12%. The purchase-power of the „greenback“ was only 50 p. 100, and upon that 100 6% interest was payable p. annum. Um später dieß to correct hielt Chase dem Staat die option der Rückzahlung etc vor. Mr. Chase’s option of redemption in 5 or 10 years, will be found supremely economical; in the course of a few years we may see a 4 1 2 or 5% stock substituted for the existing 6% five-twenties and ten-forties.

194

The Annual Circular of the American Commercial Agency. (Vehmgericht)

Issued from New York. The American Commercial Agency erstreckt sich nicht nur auf U. States, sondern auch British North American Provinces. The review takes the form of an everyday ledger account, the substance of what is known in favour of and against all large merchants and shopkeepers being regularly entered up. This Agency has long proved a terror to mercantile evil doers. In no large American town is it possible for any one to embark in business without receiving an early call from a representative of the Agency, who puts questions about the previous place of business of the members of the firm, their capital, and their expectations. Into the ledger of the Agency the answers are duly posted, and beneath them such corroboration as the Agency may think proper to obtain. All the entries, in the name of any firm, are accessible to the other firms connected with the Agency, but inaccessible to the firm concerned. (Der Economist hat aus diesem Annual Circular Zahlen über die American failures genommen.) The considerable increase of failures in 1865, compared mit ’63 u. ’64, is chiefly to be accounted for by the depreciation of the Currency. The circulation, in England, as in New York, of a kind of Lloyd’s register of the seaworthiness of firms, would provoke proceedings in the Courts of Law. But as long as we resist the supervision of the Agency, and America submits to it, wir haben keinen Grund f. our aspersions on American credit.

In diesem Augenblick great Consignments von Liverpool to New York. Diese consignments are stored in the bonded warehouses, for payment of duties; and the large amount of those duties keeps the market itself bare of stocks. Where realisations are demanded, such consignments take precedence of other sales, and a slight advantage in price – i. e., a moderate discount – universally attracts the jobbers. It is absolutely prejudicial to the standing of a firm to realise on terms of sacrifice; and no house of respectability will obey such instructions. Das Circular sagt u. a.: „From all points of view, the prospect warrants the conclusion that the entire production in the U. States in 1866 will be nearly, of not quite double that of 1865.“ Dießmal, nach Ende des Kriegs, very few „drummers“ (commercial travelers) have been sent from the North to the South, sondern der South has gone to the North. Southern buyers have revisited the North, and made their own proposals to sellers. To new and unknown men sales have chiefly taken the form of cash or produce, or collateral security of some kind – the assignment of planters’ notes, or mortgages, or of merchants’ notes, or mortgages. Old and known men well received, when they appeared with proposals for immediate or partial liquidation of old claims; but there has been no pressing of sales, as in former days.

The opening words of the Annual Circular state that last year (1865) was one of remarkable success in all commercial pursuits, or that seldom or ever has the increase in the surplus of merchants been so considerable or so universal.

Act of 1844 and Bank of England.

Our trade £500,000,000 p. a., u. amount of capital held on deposit in Bank, payable at demand, not less than 400 Mill. £. St. Surely of greater concurrent that convertibility should be preserved for such a mass of capital than £7,000,000 should be locked up in the B. o. E. as security for the note.

Nach der Theory des Acts von 1844 the value of money should fluctuate and depend on the variations in the currency. 2 August 1865 Bankreserve £6,461,318, rate of discount 4%. On 9 May 1866 Bankreserve £5,811,745, rate of discount 8%, showing a reduction of £649,573 in the amount of reserve, and an advance of 100% in the value of money. The theory, therefore, of regulating the value of money by the amount of reserve admits of the most capricious exercise.

A Pluralist Director.

Thomas Dakin, alderman of the City of London, is a director u. auditor in some 20 or 30 Cos, was a druggist, but left that to go to the directories, derives some 1000£ a year from it.

195

The Directors of failed Cos.

The bears may make a dead set at the shares of the Bank of London and the Agra and Masterman, but they know that some of the directors of both these banks are directors of the Imperial Mercantile Credit Association, who managed in January last to carry forward a supposed sum of £100,000 undivided profit; in April to make a call equal in amount to the paid-up capital; and in May to wreck the Co.

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