a history of money from ad 800 phần 7 docx

20 PRIVATE BANKING IN THE EARLYUNITED STATES PRIVATE BANKING BEFORE 1837 Chapter 18 concluded with the demise of the Second Bank.. The southern States were actively to oppose the renewal

reduce its note issue The private banks ‘instead of following the…lead, issuedfifty per cent more notes than before’ There was ‘a great failure in Ireland’,presumably the Agricultural Bank (Barrow 1975:136).

The Independent Treasury

The United States government was still without proper banking arrangements.President Van Buren summoned Congress on 4 September 1837 and stated:

it is apparent that the events of the last few months have greatlyAugmented the desire, long existing among the people of the UnitedStates, to separate the fiscal operations of the Government from those ofindividuals and corporations

Congress considered three schemes, a new National Bank, continuing thedeposit system established on 23 June 1836, and the Independent Treasury Thishad originally been proposed by Senator Gordon in 1834 and was revived bySenator Silas Wright of New York It was supported by Gouge (1837) whoreckoned that thirty-six depositories would be needed, and that the cost would

be $101,600, less than the banks were charging He put forward in support ofhis case two decidedly odd and unconvincing arguments: there was less riskfrom robbery, as thieves would be able to carry little of the heavy metal, andthat the system would decrease executive patronage! (Kinley 1910:38–9).Daniel Webster and Albert Gallatin opposed the plan It was impossible,they said, to separate public and private finance To insist on specie paymentwhile the government hoarded gold and silver would be a deflationary attack

on the credit system As Webster said on 12 March 1838 ‘The use of money is

in the exchange It is designed to circulate, not to be hoarded… To keep itthat is to detain it…is a conception belonging to barbarous times andbarbarous governments’ (Webster Senate speech 1838)

After a long political battle the Bill to introduce the Independent Treasury waspassed on 30 June 1840 (Doc Hist vol ii: 177) From that date, one quarter ofgovernment dues had to be paid in specie, increasing by a quarter each year untilfull specie payment was due from 1843 Public money was already largelyheld by collecting officers The sub-Treasury Act was repealed on 13 August

1841 (Doc Hist vol ii: 189) and state banks were once more to be used asdepositaries The banks were now (it was said) safer It seems that governmentagents continued to act as depositaries

There were later developments The Democrats regained office in 1845,with the extreme anti-bank ‘Loco Foco’ faction dominant A new sub-TreasuryBill was pased in 1846 Secretary of the Treasury Walker instructed allgovernment offices to accept only gold and silver coin and treasury notes, butCongress had made no provision for the extra costs (Myers 1970:132) In 1847the government issued 20 million of treasury notes to finance the Mexican war,

and in May 1854 the ubiquitous William Gouge was appointed special agent toexamine the condition of the sub-treasurers

20 PRIVATE BANKING IN THE EARLY

UNITED STATES

PRIVATE BANKING BEFORE 1837

Chapter 18 concluded with the demise of the Second Bank This was the end of

a series of attempts to set up a public banking system in the United States.Meanwhile, what of the private banks? Most of this chapter is concerned withthe period after 1837, but the earlier history is also relevant The Panic of 1819placed great strains on the US banking and financial system The crisisexposed a basic inconsistency between two goals…specie convertibility…and liberal extension of farm credit…Economists since the time of AdamSmith had understood that banks which issued convertible notes…couldnot safely lend to farmers…loans were typically long term, illiquid andrelatively risky

(Russell 1991:49)This led, in the agrarian South and West, to experiments with the issue ofinconvertible notes The banks could only stop runs by suspending payments.Notes continued to circulate, but at varying discounts leaving the holders withfinancial losses

The Western States (for this purpose, essentially Kentucky, Tennessee,Indiana, Illinois and Missouri: Pennsylvania and Ohio were also sometimescounted as ‘Western’) had large numbers of small banks, most of which were,following the Panic, insolvent The States reacted by revoking their charters,and their role was taken over by State controlled ‘relief banks’ Theirinconvertible notes were given a constitutionally dubious quasi-legal tenderstatus Their history was ‘brief, controversial and generally undistinguished’(Russell 1991:50) and most collapsed after court challenges, some orchestrated

by the Second Bank

In the South (mainly North Carolina, South Carolina and Georgia, but alsoperhaps Virginia and Alabama) banks were typically larger and bettercapitalized, with branch networks Although they suspended payment, theycontinued to operate and the discounts were much smaller Russell argues that

this was a successful experiment, with noteholders carrying part of theportfolio risk The Second Bank eventually forced resumption: Virginia andSouth Carolina in 1823, and the others during the following five years In 1828Georgia established a Central Bank to deal with the problem of short termbank credit The southern States were actively to oppose the renewal of thecharter of the Second Bank.

The demise of the Second Bank also had substantial consequences for thefuture of private banking Standard works on American financial history tend

to concentrate on the big public banks and have relatively little to say on theprivate banks which were proliferating during the period Contemporarysources give much more information, and it has proved well worth the effort

of tracking them down There is in fact a long and complicated history of Statechartered banking, and the issues were now brought into sharp focus After

1834 there was no longer anything of the nature of a Central Bank—andindeed it was not until 1913 that the Federal Reserve took up this role Bankregulation was a State matter, but the mood of the country favoured hardmoney and treated all banks, and all paper money, with suspicion Threemethods of bank control were adopted at different times and in differentplaces All have their parallels in Europe, and all have lessons for the modernworld: The Safety Fund system; The Suffolk Bank system; and ‘FreeBanking’

William Gouge and other writers

One of the classic works on the private note issuing banks at this period is The Curse of Paper Money and Banking, or a Short History of Banking in the United States of America published by William Gouge of Philadelphia in 1833.

(The full text was also reprinted in the successive issues of The Journal ofBanking edited, and probably mainly written, by Gouge These appeared inPhiladelphia from July 1841 to July 1842, and is the version referred to insubsequent notes.) It was republished a few months later in England byWilliam Cobbett, M.P., a determined opponent of paper money In hisintroduction he says:

The following history is the work of an apparently exceedingly dull andawkward man: the arrangement of the matter is as confused as it canwell be made, the statement of facts is feeble and there is as little ofclearness as can well be imagined in anything coming from the pen of abeing in its senses There was a TIRST PART consisting of the moraland philosophical and economical…lucubrations of the author; but I amvery sure that if my reader could see these he would thank me forleaving them out, especially as the omission is attended with a deductionfrom the price of the book

(Cobbett 1833:ix)

Cobbett was wrong The first part is, at least to a modern reader, morereadable than the second, which, as an accumulation of facts, is rather heavygoing Van Deusen (1959) quotes from it with approval, claiming that his ownparagraphs are based on a careful study of the book, and regarding Gouge asthe principal economic theorist of Jacksonian democracy.

Gouge thought that gold and silver were natural money, but that bank notesconstituted an artificial and dangerous inflation of the currency He arguedthat this caused booms and panics (an argument reflected in the Englishdiscussions of the time) and that it gave bankers an unfair opportunity formaking profits Gouge disliked banks both because they made inflationaryissues of paper money and because they were corporations Corporations, hesaid,

…are unfavorable to the progress of national wealth As the Argus eyes

of private interest do not watch over their concerns their affairs are muchmore carelessly and much more expensively conducted than those ofindividuals Corporations are obliged to trust everything to stipendiaries,who are often less than the clerks of the merchant…

(Gouge 1841–2:80)

He quotes ‘A celebrated English writer’ (in fact Lord Thurlow) as saying

‘corporations have neither bodies to be kicked, nor souls to be damned’.Various sources give figures for the number of banks at various dates.Goddard lists, with details of paid up capital and dividend record, 137 banksoperating in twenty-four cities in 1831, but does not give incorporation datesfrom which a pattern could have been derived Gouge gives a table (Cobbett1833:184–5) showing the number of banks in the various states at differentdates He comments ‘While so much uncertainty hangs over Bank accounts, thereader will be content with an abstract of the tables and statements of MrGallatin’

Some figures from various sources are given in Table 20.1

These figures do not include banks which had failed by the date given.Gouge mentions 165 ‘broken banks’ by 1830 There was, by any test, a huge expansion after 1812 Many of these new banks were in the South and West,and these were formed mainly to give credit to farmers (Russell 1991:49) Thiswas important for later developments

Gouge also summarises information on banks in existence and bank notes incirculation, but cautions his readers about the sources of his information Hislist of banks by states, shows fifteen were in Massachusetts and thirteen inRhode Island in 1811 His rather tedious and repetitive discussions of thehistories of different banks, indicates a lot of activity Many banks failed andthe notes of others which were probably solvent circulated at a discount.New charters in this period had to be granted individually by the Statelegislatures and, said Myers, ‘obtaining a charter from an unfriendly

legislature was sometimes difficult if not impossible’ Banks typicallyextended loans as notes and these were used even for small payments ‘Notuntil 1813 did the law of New York forbid the issues of notes of less than $1 invalue’ (Myers 1970:69–70).

Robert Tucker’s (1839) The Theory of Money and Banks Investigated is

much more readable, but is more in the tradition of the learned tracts thenbeing published in England Tucker was born in Bermuda (The family is one ofthe ‘Forty Thieves’ said to run the island) He became successively anAmerican lawyer, Professor of Moral Philosophy and Political Economy in theUniversity of Virginia, and chairman of the East India Company

Thomas Goddard (1831), in spite of his title, deals only briefly withEuropean banks, and reproduces at length key documents from the history ofthe Second Bank He wrote just before the Bank War He appendsconsiderable information on the capital and dividend of a long list of banks as

at 1831, and on insurance companies and other institutions

McCullough’s contribution on ‘Money’ to the eighth edition (1858) of theEncylopaedia Britannica contains a few pages on banking in the United States

It has been the uniform practice of the different States of the union toallow banks to be established for the issue of notes payable in specie ondemand In cases where the liability of shareholders in banks was to belimited to the amount of their shares, they had, previously to 1838, to beestablished by acts of local legislatures But in general, these were easilyobtained, and down to a comparatively late period, it may be said thatbanking was quite free and that practically all individuals or associationsmight issue notes provided they abided by the rules laid down for theirguidance and engaged to pay them when presented Under this systemthe changes in the amount and value of the paper currency of the UnitedStates have been greater than in any other country and it has produced anunprecedented amount of bankruptcy and ruin

(McCullough 1858:491)

Table 20.1 Growth of US Banks and circulation of US$: 1792 to 1813

Hildreth (1837), begins with a brief and readable account of John Law,English and Scottish banking, and of the ‘suspension’ during ‘Pitt’s antiJacobin war’ It is interesting as an expert American view in 1837 He arguesthat the Bank of Amsterdam was needed because of a depreciated circulatingmedium Hildreth’s History ends on an optimistic note:

since which time [1831, the beginning of his fourth period] we mayreckon a new era in the commercial history of America It is not to besupposed that business will continue to go on with the same rapidprogression for which the last six years have been distinguished Butthough its progress will not be so rapid still business will go on; andunless war returns again to curse the earth and barbarize its inhabitants,the science and industry of the present age will accumulate stores ofwealth, and the means of comfort and pleasure, hitherto unknown

(Hildreth 1837:91)

As so, eventually, it was Weeks after the words were written, the 1837 crash,already described in Chapter 19, hit the country

Jackson’s second term

Jackson’s veto message had been deliberately ambiguous, as he feared that toomuch emphasis on the hard money aspect of opposition to the Bank mightalienate some of his supporters In 1833, re-elected with strong Westernbacking, he had the confidence to embark on his real programme, or ratherthat of Taney and Benson The motives were partly political ‘Democracyimplies a government by the people…aristocracy implies a government of therich’ In his view this meant destroying the Bank:

…the centre and the citadel of the moneyed power…A national bank isthe bulwark of the aristocracy, its outpost and its rallying point It is thebond of union for those who hold that Government should rest onproperty

(Schlesinger 1945:125)There was also a coherent economic policy, largely set out by Gouge, whosebook circulated widely He was to work for a time for the Treasury from 1835and felt the need to explain, in his 1841–2 ‘Journal’ version, that it had beenwritten before he was a public servant The economic arguments divided intotwo Honest money benefited the working man, who had often been cheated

by being paid in depreciating bank notes Excessive paper issues may havestimulated trade, but by profiting the moneyed classes at the expense of theothers The other argument appears to have been based on a primitive, butbroadly sound, theory of the trade cycle

New York safety fund system

All banks chartered by New York had, since 1829 subject to certainregulations, to subscribe to a ‘safety fund’ out of which the notes of failedbanks could be redeemed: ‘it does not level the root of the evil; and has theobvious defect of taxing the honest for the sins of the fraudulent’ (Hildreth1837:75)

The early history of private banks, as described above, parallels the attempts

to develop an official ‘Bank of the United States’; attempts defeated byAndrew Jackson during the dramas of the Bank Wars The system is alsodiscussed at length in a paper by Robert Chaddock, prepared for and published

by the National Monetary Commission New York, not surprisingly, had along tradition of private banking, which goes back certainly to 1800 ‘Soundbanking develops slowly out of experience The charters from 1800 to 1825show certain common provisions to which others were added as experiencedictated’ (National Monetary Commission, Chaddock 1910: 243) There was,for instance, an innovation in 1811 by which the State legislature in charteringthe Union Bank and two others retained the right to appoint the first directors

In the same year another bank, the Middle District, had Commissionersappointed mainly by the legislature to distribute the stock and arrange the firstelection of directors ‘This latter method by commissioners, continued to befollowed under the safety fund system for several years and was the source ofmuch complaint and abuse.’

Other specific provisions are discussed on the following pages There was adebate on the renewal of bank charters in 1827 in which the Speaker of theHouse said that the profits of City banks ‘do not depend upon the circulation

of their bills but arise from the discount of notes’, distinguishing theiractivities from those of the country banks Chaddock’s chapter 2 discusses theidea of the Safety Fund which had been first mooted in 1829 Martin vanBuren (at that time Governor of New York) pointed out that, of the forty banksoperating in the state, the charters of thirty-one expired within four years andthat it was necessary either to arrange promptly for the renewal of the charters

of the sound banks or ‘to anticipate the winding up of their concerns by theincorporation of new institutions’ He rejects in a sentence the prospect ofliving without banks or relying only on Federal ones and in a few more words,the idea of a state bank

If by a state bank it is intended an institution to be owned by the stateand conducted by its officers it would not seem to require muchknowledge of the subject to satisfy us that the experiment wouldprobably fail here as it has elsewhere

(Doc Hist vol i: 319)

Successful and beneficial banking ‘must be conducted by private men upontheir own account’

Van Buren goes on to expand on the right basis for renewing charters andgranting new ones ‘The policy…of requiring the payment of a large bonus tothe state for performance of some special service as the price of bank charters

is condemned by experience’ The conditions for the grant should therefore

‘refer exclusively to the safety and stability of the institution’ The legislaturemust ensure that the citizen when he exchanges his ‘property or services forbank paper may rest contented as to its value’ The plan he himself putsforward with real or pretended dividends to the independent legislators isintended ‘to make all the banks responsible for any loss the public may sustain

by a failure of any one or more of them’ (collective responsibility)

A few days later he goes into more detail and the Act itself, the New YorkSafety Fund Act, was passed on 2 April 1829 (Doc Hist vol i: 325 ff).According to Chaddock (1910:259) Joshua Foreman had devised the safetyfund proposals The banks, he argued ‘had the exclusive privilege offurnishing a paper currency by which they made a profit Therefore the statewould lack a guarantee for the soundness of that paper The banks should incommon be answerable for it’ Foreman had also argued that public injurycaused by the management of solvent banks in lending excessively and thensuddenly calling in their loans to the inconvenience and sometimes ruin oftheir customers were greater than the losses from bank failures (Chaddockcomments that the discussion assumed that banking was identified with noteissue, rather than deposit banking.)

Under the proposals subsequently enacted each bank was required to pay in

a sum equal to one half per cent of its capital each year into a safety fund, suchpayments to continue for as long as the assets of the fund did not exceed 3 percent of such capital The interest on the fund after expenses was to be paid tothe banks and the fund itself was to be used to meet debts (but not the capitalstock) of failed banks The administration was in the hands of three bankCommissioners, one appointed by the governor of the state and two by thebanks They required to visit each bank quarterly and more often if requested

by any three other banks

A ‘monied corporation’ as the Act referred to banks, could by Section 28,

be wound up if it was three months in arrears with its sinking fundcontribution if it should have lost half its capital stock, suspended payment ofits bills in specie for ninety days or refused access to the commissioners Arejected proposal was that all bank notes should be countersigned by a centralagent to prevent fraudulent over issues This caused problems, of which morelater There continued to be provisions by which capital had to be paid up before

a bank could open: the officers of the bank had to declare on oath that noarrangements had been made to finance the purchase of stock with moneyborrowed from the bank In 1829 sixteen charters were renewed and elevennew ones granted There was some resistance from the New York City banks

who argued that they were less profitable because of competition with theBank of the United States

There was little provision for debts other than bank notes The City banksactually had a substantial deposit business and there were some arguments in

1841 as to whether the deposits were effectively covered by the guarantee Afree banking system was inaugurated in 1838 but the safety fund systemappears to have continued The later appears to have worked well until 1838

It had to deal with five cases of insolvency but most of the losses wereeventually recovered There was a procedural meeting in 1837 involving threeBuffalo banks It was found that the fund intervened after the liquidation wascompleted and the final deficit known This could result in loss to note holdersand an Act of May 1837 enabled the authorities to take measures to pay thenotes of failed banks at once out of the fund and thus prevent depreciation andloss to note holders’ (Chaddock 1910: 302)

After the crash of 1837

The 1837 law, while bringing forward the date at which the safety fund couldintervene did not permit it to top up its funds until liquidation of the insolventbank was complete An 1841 law repealed this and permitted calls at a rate ofone half per cent per annum to top up the fund This was construed to meanthat banks which had not yet paid up their full 3 per cent would have tocontribute at the rate of 1 per cent per annum There were also provisions forpermitting banks to make their contributions in the notes of failed banks.During 1840–2 there were eleven bank failures in New York State, listed inChaddock (1910:309) and described individually on his following pages In

1842, when it was discovered that failed banks had debts other than notes ofover $1 million the law was changed to relieve the safety fund of responsibilityfor deposits or any debts other than notes The table in Chaddock (1910:383)shows how between 1836 and 1860 the character of banking had changedbecause of the growth and eventual dominance of deposits and the decrease inthe use of bank notes He comments ‘evidently banks did not realise until thepanic of 1857 that deposits now constituted the danger point in banking andmust be covered by a reserve as well as notes’ See also Rockoff (1991:91)

Free banking

In New England, where the monopoly of banking privileges had always beenleast complete, and where the banks had been well managed the number ofbanks had gone on increasing In 1830 Hildreth says there were 230 banks inthe United States, of which 170 were in New England The safety Fund provedinadequate to cope with the 1837 crisis, and Free Banking legislation wasintroduced in 1838

[In principle, anyone could obtain a charter for a bank, which granted]the necessary powers to carry on the business of banking by discountingbills, notes and other evidences of debt; by receiving deposits; by buyingand selling gold and silver bullion, and foreign coins; by buying andselling bills of exchange and by issuing bills, notes and other evidences

of debt; and no other powers whatsoever except as are expressly granted

by this act

(Free Banking Act 1838)This was by no means laissez faire There were many restrictions First, therewere strict reserve requirements The bank was required to hold a 100 per centreserve against its notes in the form of mortgages or state bonds and anadditional 12.5 per cent in specie (The specie requirement was repealed in1840.) These were really quite strict: a bank could not raise funds forcommercial lending by issuing notes, although there was undoubtedly a profitfrom the operation Indeed the issue of $100,000 of notes required thecommitment of $12,500 of own funds as capital One problem was that thevalue of the state bonds held as security could fluctuate with interest rates andthe perceived quality of the issuer The ‘reserve requirement’ was thereforetechnically imperfect

Another weakness is that, at least in New York, there was no reserverequirement for deposit liabilities Of eighteen states which adopted freebanking by the 1850s, some took deposits into account, while others permittedpart of the reserves to be held as deposits in other banks Second, convertibilitywas into the US specie dollar, which at this time was essentially gold.Technically, there was a bimetallic standard but the ratio favoured gold Third,many states had usury laws, restricting the rate of interest that banks couldcharge

White and Seglin (1989) discuss how a Free Banking system can evolve,mentioning the case of the Boston banks in establishing the concept of ‘paracceptance’; the strategy of one bank accepting the notes of another at par.Why should private banks, assumed to be acting in their self-interest, do this?The profit of a note-issuing bank is a function of ‘the face value of its outstandingnote issue the proportion of that issue which it may safely lend at any time [i.e.after maintaining a prudent reserve for withdrawals] and the rate of interestearned on its loans’ Clearly it wants the highest proportion of its loansoutstanding, and benefits from making its own notes more attractive.Superficially, this argues against making those of its rivals more acceptablebut, it is suggested, there is an even greater benefit from making notes ingeneral more widely held Mutual acceptance widens the circulation, and may

be a more attractive strategy than ‘note duelling’ This involves a bankbuilding up a stock of the notes of a rival bank, and then presenting them forredemption The dangers, to both parties, are obvious The practice reduces

collective profits by forcing banks to maintain higher specie reserves (Whiteand Seglin 1989:228)

New York Free Banking is discussed by McCullough (1856:49), who says:

It is objectionable because, 1st, A longer or shorter, but always aconsiderable period necessary elapses after a bank stops before its notescan be retired and 2nd, Because the securities lodged for the notes arenecessarily…of uncertain and fluctuating value; while, in periods ofpanic or general distrust, they become all but inconvertible

He quotes a letter from the sub-secretary of the (Federal) Treasury, supportinghis view, and lists six banks operating under the system which had failed.Time would elapse before the notes would be redeemed Only one bank would(eventually) redeem at par In other cases the pay-off was between 77 and 94cents

Jevons (1875) says of the Free Banking system under which a banker hasdiscretion over the reserves kept against the notes issued:

As a general rule, no doubt, notes thus issued will be paid; but, havingregard to the great fluctuations of commerce…[there will be periods ofpressure and experience shows] that a certain number of individuals willcalculate too confidently on their good fortune

(Jevons 1875:230–1)

He later implies that the pre–1845 Scottish system would work admirably, ‘if

we were all Scotchmen, and had only 11 great banks’ The system had nolender of last resort: Did this matter? Rockoff (1991) discusses the effect ofthe 1857 crisis, which resulted in a suspension of specie payments He alsodiscusses wild cat banking One method of generating a multiplier effect was

to deposit State bonds purchased at a discount: the State insisted that its bonds

be valued at par

By the Civil War, some semblance of order had taken the place of the chaos

of early unregulated wild cat banking There was still no national bankingsystem, no central bank and no Federal banking law, but some States at leastseem to have filled the gap remarkably well Soon, though, there was to be amajor upheaval, described in Chapter 27

21 THE BANK CHARTER ACT OF 1844

AND THE CRISIS OF 1847

THE BANK CHARTER

In 1837 Colonel Robert Torrens had put forward a proposal to separate theBank of England into two departments He followed Ricardo on wanting,eventually to go one step further and ‘to withdraw the right of issue from theBank altogether’ He was supported by two fellow members of the CurrencySchool, Loyd and Norman A new Parliamentary Committee was set up in

1839 but when Parliament was dissolved in 1841 it simply published theevidence without a report Peel, in opposition, had been a member of thecommittee but did not attend for any of the evidence given by Tooke, the onlyrepresentative of the Banking School

In 1841 Peel became Prime Minister but took no immediate action Therewas a provision by which the government could terminate the charter of theBank of England in 1844, which provided a convenient opportunity forintroducing the Bank Charter Act This, perhaps the most important singlepiece of legislation in nineteenth century financial history, receivedsurprisingly little debate The Chancellor, Henry Goulburn, wrote formally tothe Bank on 26 April He hinted that if separation of functions was not agreed,the right of issue could be taken over by the Treasury The Bank replied on 30April, accepting separation without comment but raising a number ofquestions affecting its income (Clapham 1970 vol ii: 180)

The Bank Charter Act of 1844 (‘Peel’s Act’) was not pure ‘CurrencyPrinciple’ but was a compromise A newly created issue department took over

£14 million of securities from the banking department in return for the issue ofnotes This ‘fiduciary issue’ was not backed by gold but was intended to be afixed amount—only to be increased by an amount equal to two-thirds of theamount of lapsed country bank note issues It was actually increased to £19,700,000 by 1923 when the last of the country banks of issue (Fox Fowler andCompany) was absorbed by Lloyds Bank

Apart from the fiduciary issue, all notes issued by the Bank had to bebacked 100 per cent by gold or silver, not more than one-fifth of the totalbeing silver The Bank was required (Sections III and IV) to issue notes

and exchange all gold bullion offered to it at the rate of £3.17s.9d per ounce

of standard gold (Equivalent to £4.4s.10d per ounce of fine gold) (This had infact been the practice of the bank since 1829.) Section VI of the act requiredthe Bank to publish a weekly return of its position The form of this returnremained unchanged until 1959 even though the historic fiduciary issue,shown as a separate item, was swamped by other issues

Other provisions of the Act were designed gradually to extinguish thecountry note issues Only banks issuing notes on 6 May 1844 were in future tohave the right to issue notes, the right being limited to the bank’s averagecirculation for the preceding twelve weeks The rights would lapse if a bank(other than an existing joint stock bank) acquired more than six partners byamalgamation or otherwise Where the right of issue lapsed the Bank ofEngland might apply for an Order in Council adding two-thirds of the relevantamount to the Fiduciary issue Separate acts in 1845 extended these measures

to Scotland and Ireland Joint Stock Banks within the sixty-five mile radius ofLondon may ‘draw, accept, or endorse Bills of Exchange, not being payable to

a Bearer on Demand’ The Bank was released from the payment of stamp duty

on its notes but was required to pay £180,000 (£120,000 as in the 1833 Actplus £60,000 in lieu of stamp duty)

There were criticisms John Stuart Mill suggested that, as gold exports werelikely to come from deposits, ‘the deposit department might have noalternative but to stop payment’ even though ‘the circulating department wasstill abundantly supplied with gold’ James Wilson, founder of the Economistsaid that if Peel’s object had been to increase the intensity of a crisis, he couldnot have adopted a more certain plan (Clapham 1970 vol ii: 195; and see alsoThomas Tooke, ‘Inquiry into Currency Principles’) These were soon to beproved right but on 2 September 1844, for better or for worse, there came intoforce what Clapham called ‘a law which was to stand for eighty years, but notalways upright’ (see Wilson 1847)

THE CRISIS OF 1847

The Bank Charter Act came into force in 1844 It principles were soon to betested and its key defect became apparent The Crisis of 1847 was the firstbased on excessive credit (i.e ‘deposits’ as part of the ‘money supply’) ratherthan on the over-issue of bank notes The best contemporary account is in D.Morier Evans (1848), himself extensively quoted in Clapham Evans divideshis book into three parts—the Railway Mania (1845), the Food and MoneyPanic (1847 the ‘crisis’ proper) and the French Revolution (that of 1848).These events were, however simply the climax The commercial and financialstructure of England (and Scotland, whose story is significantly different) waschanging, and changing fast The successive crises were, arguably, a necessary

if uncomfortable part of the process of change

Background to the Crisis

Trading companies had to finance goods which were four months or more intransit Initially traders operated with their own capital, but becameincreasingly keen to obtain credit from the banks This was normally done bydiscounting bills and the competitive efforts of the joint stock banks made iteasier to raise finance on bills of six months or even longer The entry of theBank of England into this market is very significant for what was to follow.From 1832 until the middle of 1836, the total of bills held by the bank wasgenerally below £3 million (though rising exceptionally to over £11 millionduring the pressure of 1837–9) In 1844 the bank had held about £15 million

of gold against a note issue of £21 million After the transfer of gold to theissuing department as required by the Bank Charter Act, it was found that thebanking department held bullion equal to 60 per cent of deposit liabilities Its

‘earning assets’ were only 40 per cent A Committee on ‘the present state of theDiscount Department’, reporting in advance of the operative date of Peel’sAct, recommended that discount rates should be fixed in line with market rates.This was intended to ensure that sufficient good borrowers were at all timesattracted to the Bank In line with this policy in September 1844 the bank ratewas reduced from 4 per cent to 2.5 per cent The Bank then began to lendaggressively Total discounts reached £9.5 million by end 1845 and £12million by March 1846 Although the Bank did not discount bills with a longerdate than ninety-five days it started advancing money (in form for threemonths at a time) on much longer eastern trade bills Arguably the intention ofthe authors of the 1844 Act were defeated The directors of the Bank appeared

to think that provided they kept to the rules governing the issue department,the banking department could lend indiscriminately

The Crisis at its height

The railway mania was a prelude to the full crisis of 1847, which reallydeveloped from the price of corn (i.e wheat) In 1845–6 the failure of the Irishpotato crop led to a rise in the price of corn Given the mood of the time therewas the inevitable speculation and the Bank of England was called upon todiscount ‘an inordinate number of corn bills’ The cost of importing corn

…coming at a time when so much of the country’s savings were sunk inunfinished and as yet unwanted railways, caused serious drain on gold.The Bank of England who supplied the market with £7–10 million offloating funds by discounts and by market loans was in a bad position bothfor curbing speculation and for checking the drain As soon as itattempted to do so there was bound to be shrinkage of credit [and a risk

of panic] As a matter of fact however the leading directors for sometime came to the believe that they need do nothing They waited for the