Till Time's Last Sand

by David Kynaston

  6

  The Effects of Tight Lacing

  ‘I do most sincerely congratulate you and Sir Robert Peel on the good which has already resulted from the bold & comprehensive measure of the last session,’ William Cotton – in many ways the co-architect of the Bank Charter Act – wrote to Henry Goulburn in January 1845 shortly before stepping down as governor. ‘I think it is generally admitted by the great money dealers,’ he added, ‘that the effect of the measure up to the present time has been eminently beneficial.’ Much of Cotton’s valedictory letter was about the financial aspect to the Bank of the working out of the Act; but he ended with some sentiments hard to imagine coming from the pen of many Victorian governors:

  You will I am sure rejoice with me in knowing, that, for many years, we have not had so small a number of prisoners in gaol at this season of the year. In the manufacturing districts the past year has been profitable beyond any former example. Some of the Cotton-spinners have, I understand, made a profit of £100,000. I wish they would devote a tithe of their profits to improve the spiritual & temporal condition of those who have been working for them.

  Closer to home, a key concern for Cotton and his successors, in the new world of the Bank Charter Act, was what would be known in due course as Bank rate. Given that the Act meant that the Bank’s power over its note issue was now much reduced, the obvious concomitant was to put the discretionary emphasis instead on short-term interest rates; and indeed it was later in 1844 that the decision was taken to fix the discount rate on a weekly basis, with the Committee of Treasury noting that such an approach would be ‘essential for the proper management of the circulation’. More generally by this time, the second quarter of the century, a new phase had been developing in the Bank’s relationship with the money market – especially from 1830, when the Bank had consented to bill brokers, forerunners of the discount houses, opening discount accounts with it, formally embedding an arrangement by which these specialist dealers in bills of exchange could come to the Bank and exchange bills for Bank notes. ‘The realisation by the Bank of England,’ reflects W. M. Scammell, historian of the London discount market, ‘of its own position as the ultimate source of cash; of the need for a means of channelling cash to the economy in times of need; and the conscious choice of the discount market as that means, marks a definite step in the direction not only of the modern discount market but of the modern banking system as a whole.’ Over the next three decades, the 1830s through to the 1850s, the discount market expanded considerably, largely on the back of the ‘call loan’ system, by which the rapidly growing joint-stock banks lent large sums to the bill brokers; and the Bank’s relationship with those bill brokers, now armed with a right to rediscount at the Bank, would become far from unproblematic.1

  This was so not least during the immediate years after the 1844 Act, as the Bank – now invested with apparently complete freedom on the banking side of things – discombobulated the money market by pursuing an unexpectedly competitive discounting policy on its own behalf. The Bank’s directors, commented the Bankers’ Magazine in April 1845, were ‘now anxious to push their business, as bankers, to an extent hitherto quite unknown to their system of management’; and undoubtedly the policy played a part in stimulating the growth of easy money and fuelling the railway mania, at its peak that year. By 1846 stormclouds were on the horizon, as the mania conclusively burst and the repeal of the Corn Laws took place against a background of rapidly deteriorating corn supplies (European and Irish crops failing, the English harvest poor), requiring by the end of the year rising imports of increasingly expensive wheat and the start of a serious drain of gold. The Bank would subsequently be much criticised for its seemingly irresponsible discounting policy, coupled with equally aggressive short-term lending, with Wilfred King, pioneering historian of the discount market, reflecting in the 1930s that ‘the frantic railway speculations did not, apparently, raise even the faintest doubt in the minds of the Bank directors as to the expediency of their free policy, far less any suspicion that it might be the actual cause of the prevalent excesses’. It is possible, though, that such criticism was not wholly fair; and in the fullest examination yet of the causes of the 1847 crisis, H. M. Boot has argued not only that the Bank’s ‘new’ discount policy was in reality appreciably more passive than has generally been assumed, but that anyway ‘the low market rates of discount charged between 1844 and 1846 were not the result of the Bank’s discounting activities but of the large inflow of bullion arising from the strong balance of payments surplus of these years’. Even so, Clapham probably has the right of it. ‘Corn and railways; these were at the back of the crisis of 1847 – corn and railways, and to a certain though disputable extent the Bank’s new competitive policy and its failure to realize the amount of control that it might exercise over the market.’ And in a striking metaphor true to the nautical preoccupations of the merchant directors: ‘The Bank had not whistled for the wind that brought up the storm, though it had carried on too long with no reef in its topsails, and by example had encouraged others to do the same.’2

  The ‘too long’ criticism especially applied to the early – and in retrospect disastrous – months of 1847 itself. Notwithstanding the stark fact of falling reserves between the start of the year and early April (note reserves down from £8.2 million to £3.7 million, and bullion down from £14.3 million to £9.6 million), the Bank signally failed to tighten its monetary policy, prompting The Times to note on 7 April that ‘the extraordinary apathy of the Bank of England from January last up to the stage we have now reached in our monetary affairs is beginning to excite universal comment, and to be regarded with universal apprehension’. The far from flattering explanation for this policy failure is revealed in George Warde Norman’s autobiography:

  During the course of the year [1847] I did not fail to impress upon the Court my views of the propriety of acting earlier, and more efficiently by raising the rate of discount. I did this especially by a formal motion in March of this year, by which and my subsequent conduct, I acquired no little obloquy and unpopularity on the part of certain members of the Court, some of whom had overtraded and regarded an easy state of the money market as vitally important to them. The fact that I was out of business, and could thus look without alarm as to my private interest upon the storm raging around, did not tend to make my counsels more acceptable.

  ‘Among my fiercest objurgators,’ added Norman, was the former governor James Pattison, ‘with whom I had one regular shindy, having put up with a great deal, before I thought it right to stand upon my defence.’

  The volte-face, when it came, was abrupt and, because it had been delayed so long, more severe than it would otherwise have been. First, on 8 April the Bank raised its minimum discount rate to 5 per cent (compared to 4 per cent since January and the historic low of 2½ per cent the previous autumn). Then, immediately afterwards, it took (in Feavearyear’s words) ‘violent action’:

  In London only very short bills were taken at 5 per cent, and others were charged at 5½ per cent or 6 per cent, while at the branches the Bank fell back on the old-fashioned method of restricting discounts, agents being told to cut the amount of paper taken in by half. There was some peremptory calling in of advances, and £1,275,000 of Consols were sold for cash and bought back for the account.

  Unsurprisingly, all this induced widespread panic about the shortage of available credit, as the pressure on bill brokers like Overend Gurney became intense and trade at large more or less ground to a halt. To an extent, of course, the about-turn did its job, with doubts disappearing for the moment about the Bank’s ability to maintain convertibility, as its ratio of bullion reserves to deposits recovered from under 20 per cent in mid-April to well over 30 per cent by early June; but at the same time, with substantial gold outflows still continuing in order to pay for imported grain, the cost of credit remained inordinately high. So much so that in early July a ‘Petition of the Merchants, Bankers, and Traders of London against the Ba
nk Act’ was presented to government, describing the ‘extent of monetary pressure’ as ‘without precedent in the memory of the oldest living merchant’ and, as the petition’s title suggested, blaming the City’s woes on the 1844 Act – of which, it had been said in April, only three defenders were left in the square mile. Staunchest of all defenders remained Samuel Jones Loyd, who that summer did not hesitate to pin the blame on the Bank’s earlier failure to protect its banking reserve of notes during the months of unavoidable bullion drain. ‘I could at any time,’ he wrote in June to the Whig chancellor of the exchequer Sir Charles Wood, ‘convulse Manchester by gross mismanagement of my banking business – and the Bank of England, acting with infinitely larger powers, can and recently has convulsed the whole Country by mismanagement of its banking affairs.’ Against this, he insisted, ‘the Bill never pretended to afford any protection’.3

  The new factor in play by the second half of the summer was the much improved corn situation – welcome to most, but producing havoc in the corn trade, as the price of wheat almost halved. The Bank’s recently elected governor, William Robinson, was senior partner of the merchants W. R. Robinson & Co; and on 19 August his firm’s bankers Prescott, Grote & Co, alerted to ‘imprudent operations in Corn’, spent most of the day inspecting the books. Naturally the bankers wanted to avoid the failure of a house in such a ‘high position’, but eventually (stated their subsequent report) they were ‘compelled to inform Mr Robinson, that they could not assist him, as they took an unfavourable view of his affairs’:

  It would seem that we have entertained a very erroneous impression of the amount of Mr Robinson’s private property; we entertained the idea, from whence we derived we know not, that he was a Man worth upwards of £100,000, independent of his business; whereas it would appear his private property, including his Directorial qualification [his holdings of Bank stock] and a landed Estate in Gloucestershire, cannot be estimated at more than £25,000. His capital in the business is not more than £22,000; the stoppage of the House we fear is inevitable.

  So it was, and with his firm went Robinson’s governorship, being replaced in due course by his deputy, James Morris. The sense of shock in the City was profound – ‘it has created an extraordinary sensation’, reported one eye-witness on 24 August – while, according to an unsympathetic Loyd, the governor’s fall was due to ‘extensive Corn Speculations, entered into and very foolishly conducted by his Son and partner and not properly controlled by himself’, though Norman more generously reflected that ‘his official duties have kept him from his counting-house in critical times’.

  Worse followed in September, with a whole run of mercantile failures, including two firms closely associated with Bank directors: Gower, Nephews & Co (merchants over-committed in Mauritius sugar estates) and Reid, Irving & Co (East and West India merchants); and as a direct result, both Abel Lewes Gower and Sir John Rae Reid had to follow Robinson’s example and walk the plank, temporarily leaving three vacancies on the Court. Compounding the crisis atmosphere was the stoppage, with liabilities of over £2.6 million, of the bill brokers Sanderson & Co. Never, declared on 24 September one well-informed City figure, John Abel Smith, had he known such ‘general alarm, discord, and distrust’; five days later Punch published a pointed cartoon, ‘The Effects of Tight Lacing on the Old Lady of Threadneedle Street’, showing the Bank (its gold reserve less than £9 million) about to go pop unless the constraints of the Bank Charter Act were relaxed.4

  Things did not improve in October, with Magniac, Jardine & Co informing Hong Kong on the 11th that ‘since the departure of the last mail the money difficulties have been progressively becoming worse, & the additional failures of important mercantile houses have been to an alarming extent’. A list followed, and then came the crux:

  You may suppose how severely such disasters must cripple the means of other houses, while, though the resource of the Bank of England have been liberally afforded to the extent of its safety, the pressure has been so great as to compell the Directors occasionally to suspend assistance entirely, and other usual sources of accommodation are locked up. We confess we cannot see how the evil is to be arrested, unless by Government interference with the stringency of the currency act, of which there appears to be no present prospect. Want of confidence is extreme.

  Two days later saw the first significant bank failure (Abingdon Old Bank), before on Saturday the 16th there assembled at the chancellor’s all the key players: Wood himself, the prime minister (Lord John Russell), the colonial secretary, governor Morris, deputy governor Henry James Prescott, his brother the private banker W. G. Prescott, the Bank directors Norman and Cotton, and the inevitable Loyd. ‘The Governor stated,’ noted the record kept by W. G. Prescott, ‘that it was quite within the means of the Bank of England, as far as that establishment itself was concerned, to carry out the provisions of Peel’s Bill [that is, maintaining convertibility], but that they could not consistently with their own position as Bankers afford further extensive aid.’ Accordingly, explained Morris, ‘they would afford what aid they could, but their present power of assistance was in fact limited to the amount of their daily receipts’. Eventually, after Loyd had stressed that ‘no aid which did not effect the restoration of confidence would be of any service’, all were agreed that ‘there was no remedy for this within the law’ – and accordingly, ‘after much discussion the conclusion was arrived at that the government might direct an unlimited issue of Bank Notes by the Bank of England on condition that no advance was made by them under a high rate of Interest’.

  For the moment, though, no action was taken. And during the following week, Monday the 18th to Friday the 22nd, other provincial banks (including the Royal Bank of Liverpool) stopped payment; the money market ‘suffered severely’ (with 9 and 10 per cent commonly charged on best short bills, and one merchant telling another, ‘I would not advise you to take bills on Barings even’); the Stock Exchange remained ‘a scene of continued alarm and excitement’; deputations from all over the country steadily poured into Downing Street; and at the Bank itself, which had lent well over £2 million since mid-September, the banking reserve was down by the Friday to £2.3 million, of which only £1.6 million was in London.5

  Saturday the 23rd began with John Horsley Palmer writing from his home at Hurlingham House a lengthy letter to Sir Robert Peel, no longer in office but still a powerful political presence. Not quite resisting the obvious I-told-you-so temptation, the former governor reminded Peel that in 1844 he had pointed out to him and Goulburn ‘the possibility of such a discredit as we are now sustaining’; asserted that since that fateful year ‘every endeavour has been made to carry out the principles of the Bill with no other effect than the creation of that general panic which pervades the whole Country’; claimed that the Bank was now ‘placed in a critical position unable to sustain the increased demand without endangering its own safety, or by refusing the requisite accommodation to mercantile solvent firms, incurring the hazard of an universal stoppage’; implicitly called on Peel to support a relaxation of the Act; and finally, after declaring that ‘the enormous sacrifice of property daily made by the mercantile community is literally heart-rending’, concluded with all due solemnity: ‘In my 50 years experience I never witnessed so perilous a position as that in which the Country is now placed. The reports from the North today are full of danger.’

  In Downing Street, meanwhile, similar sentiments were being expressed by a high-level City deputation, before at noon Morris and Norman waited on the ministers:

  The Governor stated that in his opinion, the Bank was still in a position to maintain itself within the limits of the Act of 1844, but that he did not feel confident that this could be done without resorting to some active measures such as a Sale of Securities, or, the limiting accommodation in the way of Discounts.

  Lord John Russell and the Chancellor of the Exchequer considered any restrictions in the way of Discount &c &c to be highly inexpedient and expressed a strong wish, t
hat the Bank should act liberally today, with an emphatic assurance that happen what might, the letter authorising a possible deviation from the Law of 1844 should be sent to the Bank on Monday morning.

  Such was the Bank’s own record of a historic meeting, at which Morris had come as close as he could to asking for suspension of the Act without actually doing so. ‘The Question was put to me over and over again whether we were able to take care of the Bank,’ he would recall about that and previous conversations with ministers. ‘I always stated that, so far as the Bank itself was concerned, we had no Difficulty; but that, whether Her Majesty’s Government might have any political Reasons, such as Fear of Mills being stopped, or Riots in the Country, was a Question for them to decide, and one which we could not answer.’ In any case, after whatever version of winks and nudges, a Treasury letter to the Bank was duly published on 25 October. This in effect suspended the Act, with Russell and Wood encouraging the Bank to grant as much accommodation as it needed to, free of concerns (including financial concerns, with the promise by government of an indemnification arrangement) about increasing the fiduciary issue above the legal maximum – a freedom which indeed it had been practising since the oral assurance of Saturday. ‘The deed is done; and I hope it will succeed, but, I never did anything so unwillingly in my life,’ the reluctant Wood wrote that Monday to Loyd. ‘I am very curious to know the effect in the city. I am afraid that it will be too much approved.’6

  In the event, de facto suspension did the trick immediately. ‘It was only after the Government suspended clause II of the Bank Act and allowed the Bank to issue notes to an unlimited quantity that the situation was brought under control,’ observes Boot. ‘The Government’s action effectively convinced the money market that the Bank’s reserve was inexhaustible. Once convinced of this, private institutions recognised themselves to be highly over-liquid and within a few days money was readily offered on the money market. By the end of November the market rates of discount had fallen to 6 per cent and there were complaints of difficulty in employing money.’ Altogether, commented Disraeli characteristically in the speech that he would claim made him Conservative leader, the process had been the equivalent to the liquefaction of St Januarius’ blood – ‘the remedy is equally efficient and equally a hoax’. Yet even as the general outlook rapidly improved, leading to the suspension being removed after only a month, there were those expressing regret. ‘It will be impossible to destroy a feeling which for many years must pervade the public mind,’ sternly predicted the Economist at the end of October, ‘that the pressure must only be severe enough, and the demands loud enough, in order to procure a suspension of any restriction which may exist.’ Others focused on how the deep commercial crisis – one that had brought down over thirty-three important mercantile houses in London alone, with liabilities of over £8 million – had happened in the first place. Committees of inquiry of both the Commons and the Lords were under way by February 1848, and inevitably much blame was attributed to the Bank for both its overly competitive discounting policy and its tardiness in changing tack. The Bank Charter Act itself, though, was still regarded by the Whig government as necessary to preserve, as indeed it was by the Bank.