Thus the great superstructure of trade and business is built on foundations which are sustained by credit, and anything which casts a doubt on the solvency of commercial men shakes the basis on which the commercial system is founded. By the natural law which governs human transactions, confidence tends to be shaken at regular intervals. The histories of all crises are in many respects identical. When a panic has occurred on the Stock Exchange, and has involved many speculators in ruin, the financial atmosphere is temporarily cleared by the fall of the houses whose position was insecure. But the people, cautious from experience, abstain from investing their money at all, or place it in the safest securities. The natural result follows. The funds and other similar securities are forced up to an artificial value, and prudent persons find it more and more difficult to find any remunerative investment. Their inability to find good securities in which they can lodge their savings tempts them to seek other investments; and vibrating-as crowds will vibrate-from panic to confidence, they again swallow the gilded baits which financial schemers are always ready to dangle before them. Confidence, when it once takes. root, is a plant of rapid growth. The shares of a new company, whose aggregate value is comparatively smail, are easily forced to a premium. Sanguine investors imagine that they may add 10, 20, or 50 per cent. to their capital by dealing in shares. They place their own capital in shares ; they borrow other people's capital to place it in shares; and, congratulating themselves on the success which their confidence has stimulated, they close their eyes to the catastrophe which their recklessness is preparing.

It will, perhaps, be recollected that the speculation which prepared the financial crisis of 1825 mainly occupied itself with investments abroad. South America was the favourite El Dorado in which every capitalist imagined that he could quadruple his capital. The ruin of that year taught investors a salutary lesson; and at the next crisis it was found that the capitalists had shunned the temptation which foreign enter

prise had previously held out to them. But the investor had learned no other lesson. He had escaped from Scylla to be engulfed in Charybdis; he had learned to avoid distant undertakings, but he had unlimited confidence in commercial. speculations at home. This characteristic of the crisis of 1837 was also visible in the disaster of 1847. On both occasions speculation was busy with home enterprise. In 1837 companies formed for miscellaneous objects attracted investors, while in 1847 capitalists were chiefly tempted by the prospects which railways were supposed to afford.

There can be little doubt that the steps which were taken by Parliament in 1826 and 1837 partly stimulated the excitement of 1837 and 1847. In 1826, the Legislature, alarmed at the fall of private banking-houses, sanctioned the formation of joint-stock banks; and the new banks, competing one with another for business, promoted the formation of the com. panies whose ruin was the leading feature of the crisis of 1837. In 1837, the Legislature, moved by the development of commercial enterprise, approved the introduction of limited liability. Investors are among the least discreet of the human family. When they saw that, in the generality of companies, their liability was limited to a definite sum, they imagined that they had taken the only precaution that was required of them; though in many, perhaps most, cases the liability was fourfold, or even tenfold, the amount paid on their shares.

It would be a grave mistake to imagine that either the formation of joint-stock banks or the introduction of limited liability into commercial enterprise was necessarily injurious because each measure was responsible for the development of a fresh crisis. On the contrary, a crisis would in all probability have occurred in any event, and all that the Legislature did was to regulate to some extent the form which it assumed. In the same way it has been sometimes complained that Peel's Act of 1844 was partly responsible for the crisis of 1847. It would be as reasonable to urge that improved agriculture was the direct cause of famine. Yet there can be no doubt that the man who increases the production of the

VOL. V.

M

soil stimulates population, and therefore makes famine when it recurs more fatal and, in the same way, there can be also no doubt that the Act of 1844 had the temporary effect of making money cheaper, and consequently of stimulating speculation.

Up to a short time before the passage of the Act of 1844, the Bank had acted on the principle of keeping its securities at a nearly even amount.1 After 1844, its directors, fancying that their circulation was secured by the separation of the issue from the banking department, entered into much more active competition with other institutions. In September 1844 the rate of discount on the highest class of bills was reduced to 2 per cent.; and in March 1845 this reduced rate-a lower rate than had ever before been adopted-was applied to both bills and notes.2 Cheaper money naturally stimulated speculation. Perhaps few persons who have not had the actual figures before them can have any conception of the extent to which speculation grew. Any one who will turn to the files of the Times of November 1845 will, however, be in a position to appreciate the nature of the mania. In its issue of the 17th of November the Times published an elaborate analysis of the schemes before the public. Fortyseven completed railways were asking for powers to raise £70,000,000; 118 railways in course of construction were requiring £67,000,000; 1263 projected railways were seeking to raise £563,000,000. These companies alone, therefore, were simultaneously contemplating the raising of £700,000,000 of money, a sum which may seem more intelligible to many people if it is added that it exceeds the national debt of the United Kingdom at the present time.3

A speculation of this character must sooner or later have been followed by a crisis. But the crisis might possibly have 1 Tooke's History of Prices, vol. iv. p. 374.

2 Ibid., vol. iv. p. 63.

3 Times, 17th November 1845. Mr. Dawson, in a paper read before the Statistical Society in 1847, and quoted by Tooke in History of Prices, vol. iv. p. 299, seems to have overlooked the analysis of the Times. He places the railway capital for which parliamentary sanction was required at £340,000,000.

been delayed for some months if the blight had not fallen on the potato in the autumn of 1846. It became gradually clear to every one that the deficiency in the home supplies of food would necessitate large purchases of food abroad, and that gold would be taken out of the country to pay for corn. The bullion of the Bank, which had amounted to £16,000,000 in August 1846, was in this way reduced to a little more than £13,000,000 on the 23rd January 1847, and the Bank direc tors, observing or apprehending the commencement of a drain of gold, raised the rate of discount to 4 per cent.

The change in the rate of discount had not the effect of checking the drain. The reserve continued to decrease throughout January, February, and March. In the beginning of April the Bank had less than £10,000,000 of bullion, and less than £3,500,000 of reserve. Alarmed at the continued drain, its directors raised the rate of discount to 5 per cent. This addition to the rate, however, was only one feature in its policy. The minimum Bank rate applied only to bills with ninety-five days to run. The Bank, on the 15th of April, decided that it should apply to all bills, and that, when the applications for discount exceeded the whole sum which the Bank was prepared to lend on any day, a pro rata proportion of the bills presented should be returned. Such a stipulation had not been made for more than fifty years. It created panic, it almost paralysed trade. But the severe remedy fulfilled its purpose. The drain of bullion decreased; the position of the Bank improved; and, what was perhaps more exceptional, no commercial disaster of unusual importance occurred.

For three months affairs in the commercial world continued to improve. But, as the summer advanced, a new cause produced a new crisis. In the autumn of 1845 the failure of the potato crop had led to a drain of gold. In the summer of 1847 the unexpected productiveness of the wheat harvest led to a remarkable fall in the price of corn. The price of wheat fell from 1025. a quarter at the end of May to 50s. a quarter at the end of August.1 Such a fall must, in any circum1 Tooke's History of Prices, vol. iv. pp. 411, 413.

stances, have been ruinous to persons engaged in the corn trade. The ruin was more widespread in 1847 because the failure of the potato had naturally increased the speculation in corn. Houses which had been shaken by the events of the spring were ruined by the course of trade in the summer. The Governor of the Bank of England, one of his immediate predecessors, and two other directors of the Bank failed. In London, in Liverpool, in Manchester, and in Glasgow houses. with a reputation for stability tumbled down amidst the general ruin.

These failures produced pressure on the Bank, which was compelled to contract its advances. Men unable to obtain accommodation in the market were forced to sell their securities. The price of consols, which had averaged 95 in 1846, fell to 82 in October 1847.1 Speculative stocks became actually unsaleable. Men unable to realise the shares in which they had placed their savings pressed their bankers for advances. The Bank, fearing the exhaustion of its resources, again hardened its terms, and at last, on the 1st of October, took the unprecedented step of declining to make any loans whatever, even on stock or exchequer bills.2

Then ensued a period of alarm which has rarely been witnessed in the City of London. The funds fell to 78. Banks whose solvency had been above suspicion were prostrated in the universal crash, and at one moment it seemed as if the Bank of England would alone remain erect amidst the ruins which surrounded it. Men, agitated by the universal collapse, and unable to reason calmly on the catastrophe, threw the blame on the Bank Charter Act, on Peel, and on the ministry. The opponents of the Bank Charter Act, however, laboured under a radical difficulty. The Chancellor of the Exchequer was a warm supporter of the Act of 1844; Peel, the most powerful member on the Opposition benches, was the statesman who was responsible for it. It was no easy 1 Statistical Abstract, second number, p. 75; cf. Ann. Reg., 1847, Chron.,

p. 120.

2 History of Prices, vol. iv. p. 315. For the defence of the Bank see Sir C Wood's speech in Hansard, vol. xcv. p. 398.