British Commerce and Finance

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London, Sept. 14, 1858

In reviewing the Report on the Crisis of 1857-58 of the Committee appointed by the House of Commons, we have, first, shown the ruinous tendencies of Sir Robert Peel's Bank act, and, secondly, done away with the false notion, attributing to banks of issue the power of affecting general prices by an arbitrary expansion or contraction of the paper currency. We arrive, then, at the question, What were the real causes of the crisis? The Committee state that they have established "to their satisfaction, that the recent commercial crisis in this country, as well as in America and in the North of Europe, was mainly owing to excessive speculation and abuse of credit." The value of this solution is certainly not in the least impaired by the circumstance that, to find it out, the world have not waited upon the Parliamentary Committee, and that all the profit society may possibly derive from the revelation must at this time be fully discounted. Granted the truth of the proposition—and we are far from contesting it—does it solve the social problem, or does it but change the terms of the question? For a system of fictitious credit to spring up, two parties are always requisite—borrowers and lenders. That the former party should at all times be eager at trading upon the other people's capital, and endeavor to enrich themselves at other people's risk, seems so exceedingly simple a tendency that the opposite one would bewilder our understanding. The question is rather how it happens that, among all modern industrial nations, people are caught, as it were, by a periodical fit of parting with their property upon the most transparent delusions, and in spite of tremendous warnings repeated in decennial intervals. What are the social circumstances reproducing, almost regularly, these seasons of general self-delusion, of over-speculation and fictitious credit? If they were once traced out, we should arrive at a very plain alternative. Either they may be controlled by society, or they are inherent in the present system of production. In the first case, society may avert crises; in the second, so long as the system lasts, they must be borne with, like the natural changes of the seasons.

We consider this to be the essential defect not only of the recent Parliamentary Report, but of the "Report on the Commercial Distress of 1847", and all the other similar reports which preceded them—that they treat every new crisis as an insulated phenomenon, appearing for the first time on the social horizon, and, therefore, to be accounted for by incidents, movements and agencies altogether peculiar, or presumed to be peculiar, to the one period just elapsed between the penultimate and the ultimate revulsion. If natural philosophers had proceeded by the same puerile method, the world would be taken by surprise on the reappearance even of a comet. In the attempt at laying bare the laws by which crises of the market of the world are governed, not only their periodical character, but the exact dates of that periodicity must be accounted for. The distinctive features, moreover, peculiar to every new commercial crisis, must not be allowed to overshadow the aspects common to all of them. We should overstep the limits and the purpose of our present task, were we even to give the faintest outline of such an inquiry. This much seems undisputed, that the Commons' Committee, so far from solving the question, has not even put it in its adequate terms.

The facts dwelt upon by the Committee, with a view to illustrate the system of fictitious credit, lack, of course, the interest of novelty, The system itself was in England carried on by a very simple machinery. The fictitious credit was created through the means of accommodation bills. The latter were discounted principally by joint-stock country banks, which rediscounted them with the London bill brokers. The London bill brokers, looking only to the indorsement of the Bank, not to the bills themselves, in their turn relied not upon their own reserves, but upon the facilities afforded to them by the Bank of England. The principles of the London bill brokers may be understood from the following anecdote, related to the Committee by Mr. Dixon, the late Manager Director of the Liverpool Borough Bank:

"In incidental conversation about the whole affair, one of the bill brokers made the remark that if it had not been for Sir Robert Peel's act the Borough Bank need not have suspended. In reply to that, I said that whatever might be the merits of Sir Robert Peel's act, for my own part I would not have been willing to lift a finger to assist the Borough Bank through its difficulties, if the so doing had involved the continuance of such a wretched system of business as had been practiced, and I said if I had only known half as much of the proceedings of the Borough Bank before I became a Managing Director, as you must have known, by seeing a great many of the bills of the Borough Bank discounted, you would never have caught me being a stockholder." The rejoinder to which was: "Nor would you have caught me being a stockholder; it was very well for me to discount the bills, but I would not have been a shareholder either."

The Borough Bank in Liverpool, the Western Bank of Scotland, in Glasgow, the Northumberland and Durham District Bank, into the operations of which three banks the Committee instituted the strictest inquiry, seem to have carried the palm in the race of mismanagement. The Western Bank in Glasgow, which had 101 branches throughout Scotland and connections in America, allowed to draw upon it for the mere sake of the commission, raised its dividend in 1854 from 7 to 8 per cent, in 1856 from 8 to 9 per cent, and declared a dividend of 9 per cent, still in June, 1857, when the greater part of its capital was gone. Its discounts which in 1853 were £14,987,000 had been increased in 1857 to £20,691,000. The rediscounts of the bank in London, amounting in 1852 to £407,000, had risen in 1856 to £5,407,000. The whole capital of the bank being but £1,500,000, the sum of £1,603,000 appeared on its failure, in Nov. 1857, to be owed to it by the four installment houses alone of McDonald, Monteith, Wallace and Pattison. One of the principal operations of the bank consisted in making advances upon "interests", that is to say, manufacturers were provided with capital, the security for which consisted in the eventual sale of the produce to be created through the means of the loan advanced. The levity with which the discount business was managed, appears from the circumstance that McDonald's bills were accepted by 127 different parties; only 37 being inquired about, the report on 21 of which turned out unsatisfactory or positively bad. Still McDonald's credit continued undiminished. Since 1848, a substitution was made in the books of the bank, by which debts were turned into credits, and losses into assets.

"The modes", says the Report, "in which this kind of disguise can be accomplished, will perhaps be best understood by stating the manner in which a debt called Scarth's debt, comprised in a different branch of the assets, was disposed of. That debt amounted to £120,000, and it ought to have appeared among the protested bills. It was, however, divided into four or five open credit accounts, bearing the names of the acceptors of Scarth's bill. These accounts were debited with the amount of their respective acceptances, and insurances were effected on the lives of the debtors to the extent of £75,000. On these insurances, £33,000 have been paid as premiums by the bank itself. These all now stand as assets in the books."

Lastly, on examination it was found that £988,000 were due to the bank from its own shareholders.

The whole capital of the Northumberland and Durham District Bank amounting to £600,000 only, nearly £1,000,000 were loaned by it to the insolvent Derwent Iron Company. Mr. Jonathan Richardson, who was the moving spring of the Bank, in fact the person who managed everything, was, although no direct partner in the Derwent Iron Company, very largely interested in that .unpromising concern, as holding the royalties upon the minerals which they worked. This case presents, therefore, the peculiar feature of the whole capital of a joint-stock bank being eaten up with the single view to improving the private speculations of one of its managing directors.

These two samples of the revelations contained in the Committee's report reflect a rather dismal light on the morality and general conduct of joint-stock trading concerns. It is evident that those establishments, the rapidly growing influence of which on the economy of nations can hardly be overvalued, are still far from having worked out their proper constitution. Powerful engines in developing the productive powers of modern society, they have not, like the medieval corporations, as yet created a corporate conscience in lieu of the individual responsibility which, by dint of their very organization, they have contrived to get rid of.