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THE COMMERCIAL CRISIS OF 1847.
COMMERCIAL DISTRESS AND THE BANK CHARTER ACT.
The following extracts are from the evidence taken before the secret committee of the House of Commons, appointed to inquire into the causes of the recent commercial distress in Great Britain, and how far it has been affected by the Bank act of 1844. The following were the members of the Committee appointed 3d December, 1847. Their meetings took place on the Sth February, and following days. Mr. Chancellor of the Exchequer, Sir James Graham,
Lord John Russell, Sir Robert Peel,
Mr. Thomas Baring, Mr. Spooner, Mr. Cobden,
Lord George Bentinck, Mr. Goulburn, Mr. Herries,
Mr. Cardwell, Mr. Cayley,
Mr. Alderman Thompson, Mr. Hume, Mr. Labouchere,
Mr. Thornley, Mr. D’Israeli,
Mr. J. L. Ricardo,
Sir William Clay, Mr. Glyn,
Mr. James Wilson,
Mr. Tennent. Mr. Home Druinmond,
Mr. F. T. Baring, Among the persons summoned, whose testimony upon the topics before the Committee was considered important, were the following merchants and bankers : Adam Hodgson and Charles Turner, merchants, of Liverpool ; Thomas C. Salt and Philip Henry Muntz, merchants, of Birmingham; Samuel Gurney, broker, and R. C. L. Bevan, banker, of London; J. Horsely Palmer, one of the Directors of the Bank of England, and Joshua Bates of the firm of Baring Brothers, Samuel Jones Loyd and Mr. Tooke.
Our space will not allow us to insert, at length, the testimony alluded to; the pamphlet occupying sixty-four pages, octavo: but we have selected the material portions of the replies submitted by Messrs. Hodgson, Gurney, Palmer and Bates, as gentlemen well known for their prominent positions in the monied circles of London and Liverpool.
The principles of trade, of banking and finance, are universal. Sound principles apply everywhere. Unsound views will work their own evil wherever followed. We furnish our readers with copious extracts from the pamphlet, because the principles laid down may be as well applied in this country as in Europe; and because some of the most distinguished and able men of Great Britain have been called upon to testify upon the causes of the late crisis in that country.
The gentlemen named have, in general terms, coincided as to several points brought before them, viz:
1. That the commercial distress was hastened and increased by the restrictive features of the Bank act of 1844.
2. That the Bank Directors (or Court, so called) should consist of men who are not large borrowers.
3. That the rate of interest by the Bank should not be at any period reduced below four per cent.
4. That the crisis was produced mainly by the failure of the grain crop, and in some measure by the heavy investments in rail roads, and in a smaller degree by the low rate of interest adopted by the bank, and leading thereby to speculation. 5. No system of currency can prevent occasional commercial distress.-[Ep. B. M.]
House of COMMONS, 8th and 11th February, 1848. The Right Honourable F. T. BARING, in the Chair.
Adam Hodgson, Esq., Examined. Chairman.—You are one of the directors of one of the joint-stock banks at Liverpool ?-Yes; I am one of the two confidential directors of the bank of Liverpool.
You were, I think one of the deputation to the Government in April, 1847?-I was.
And, I believe, I am right in saying that you have attended here at the request of some of the gentlemen at Liverpool in consequence of the desire of the Committee, communicated through Mr. Cardwell, that we might have inforniation of the commercial state of Liverpool ?I have.
Before we go into the history of the difficulties that have arisen, will you have the goodness to state to the Committee what you consider the state of trade at Liverpool to have been at the commencement of 1847?
- There was nothing at that period that had excited any particular attention; there had been a very unusually large increase in the spinning of cotton; but in Liverpool there was nothing to mark the period peculiarly.
I speak of trade, independently of the railway speculations ?-Yes, I quite understood you so; when we came up in April, there was a very strong feeling among all those who came up, that trade was generally in a sound state; that was generally stated to the government as the opinion of all the gentlemen in the deputation; there had been nothing in the accounts of the customers of our bank different from usual.
Is it your opinion now, after you have seen what has taken place since, that, at the commencement of 1847, trade at Liverpool, generally speaking, was in a wholesome state ?-I should say, generally speaking, it was; there were a few instances of very preposterous overtrading, but those, I think, were confined to a very few individuals.
The Crisis in April, 1847. Will you proceed to state to us what took place in April ?—The first circumstance that called our attention in any particular degree to any difficulties of the times was an announcement from the Bank of England that our discounts with them must be diminished one-half, as they ran off; that was in the last week of April, and, I believe a similar notice was pretty generally given; so we understood.
Perhaps you had better state to us what your arrangements were with the Bank of England as regards discounts ?- It is very necessary to state that, because we have two accounts, under our arrangement with the Bank of England; the one, an engagement to discount for us, under all circumstances and at all times, to the extent of £200,000, arising out of our original agreement with the Bank not to issue our own notes, and not to re-issue bills of exchange; that we call our contract account; but, in addition to that, we have always a general account which is not under any specific limit, but which, on this occasion, was suddenly reduced one-half.
Then the announcement of the Bank, as I understand, was confined to what you call your general account?-Yes; therefore it was not, in point of fact, diminishing our discounts to the extent of one-half, taking them altogether, but it was with reference to the general account that the discounts were to be diminished one-half.
It was that announcement which you consider to have produced the first effect at Liverpool ?—Yes, it gave very general alarm.
Mr. Spooner.-Will you state the proportion which the discount under your special, bore to the discount under your general account?The other was about £136,000.
Mr. Chancellor of the Exchequer.-At the time when you received the announcement?
—Yes, at the time, or within a day or two after. Chairman.-At what rate of interest is your contract account?-It used to be called our three per cent. account; it was originally three per cent.; it has latterly been four per cent.
Mr. Spooner.-At what time did it become four per cent ?-I cannot recollect the exact time when it was altered, but it was altered in this way; the original three per cent. account was the one which we had when the Bill of 1844 was passed; that gave us certain rights arising out of that three per cent. account; those rights we commuted for the power of having the account which I have now mentioned, instead of one per cent. on all the notes we could keep out, which the Act gave us the right to; we commuted that right with the Bank of England for the power of having £200,000 at one per cent. less than the London rate; the maximum to be four per cent.
Chairman.—Will you proceed to state what followed this announcement?—The announcement alarmed us a good deal, and some other bankers came to us, and several merchants to consult what should be done, and it was decided that a deputation should be sent immediately to the Government to tell them the awkward position in which the Bank had placed us; for though we were prepared to meet our own engagements, it very greatly indeed crippled our power of helping the merchants.
You attended that deputation ?-I did; I may perhaps state that the announcement operated with peculiar hardship on this account, that the payments into Liverpool had latterly been much more in bills than in cash; and the merchants who generally brought to the Bank a large proportion of cash with which to pay their aeceptances, had latterly been able to bring only bills which they had received for their cotton and other produce, and that increased very rapidly as the difficulties increased; but we saw that it would make the restriction operate much more severely.
Mr. Chancellor of the Exchequer.-What description of bills were those ?—The bills were cotton, or other bills, not exceeding three months' date; that is the rule for cotton payments. The acceptances I refer to, which the Bank had to pay for the merchants, were acceptances drawn chiefly upon them from abroad, and they have been accustomed to meet those acceptances by whatever payment they received for their produce.
What was the description of bills that the merchants brought to you in lieu of cash, which they usually brought?— They were bills of various dates, and of various descriptions; a considerable number of them were bankers’ bills, of three months' date, the large bulk being cotton bills; but they were of every description of bills almost that can be mentioned.
Mr. Hume.-Were they in payment of goods shipped abroad, or were they bills originating in England ?- They were almost entirely bills originating in England, and received by merchants in payment for the produce sold by the merchants.
Mr. Chancellor of the Exchequer.-By whom were those bills accepted generally ?-A considerable number of them were bankers' bills, accepted by London bankers, and by merchants in every trade that we could mention—the Brazilian, the American, the Canadian, the West Indian, and almost every description of foreign trade that our connexions might happen to be in.
Then, in lieu of payments in cash, the merchants drew upon each other, and substituted payments, by means of those bills, for payments in cash?—No, not at all; the merchants did not draw upon each other; but the parties in the interior, who had purchased produce from the merchants, remitted to the merchants bills on London Bankers, or bills on various parties in London, or bills upon anybody; they were almost every description of paper that is usual in the interior trade, and in the general commerce of the country; they were what we call promiscuous bills; bills of every description.
By the Chairman.—You were stating the effect of the announcement of the Bank of England to diminish your discount account to half; will you proceed with your statement ?—That led to a deputation to London, when we had the pleasure of waiting on Lord John Russel and the Chancellor of the Exchequer, and stating the circumstances to them; and the following day we were recommended by the government to go to the governor of the Bank of England, and we found that they were prepared to make some very slight relaxation; they had previously seemed to think that they could not do it, but afterwards they agreed to make a slight relaxation.
Can you recollect at what date this was?-I think it would be the very end of April, or the beginning of May. The relaxation which they agreed to was this: instead of reducing our discounts to one-half of what we had had before, they said “We will agree that you shall have whatever you had last Saturday night;" they asked whether we were satisfied with that, and we said, until we knew what proportion that bore to our ordinary amount, we really could hardly tell; they told us that what we had had on the previous Saturday night was £136,000, and that to that extent we might go again.
That £136,000 was upon your general account :-Yes; that the total amount of discounts at any one time should not exceed that sum; with the general date of the bills that we pay in, it would be something like £13,000, the weekly discount on our general account; and in the same way, upon the £200,000 it would be something like £20,000, and those two added together would be equivalent to a discount of £33,000; it is dependent upon the date of the bills we pay in, but that would be the average.
The limit on the two accounts would be £336,000?_Yes.
You saw the government, and you laid before them the state of trade, and the position of Liverpool at that time:-Yes; we stated to them that what we were very anxious to obtain was relief from the immediate pressure which had been suddenly occasioned by the action of the Bank of England; that we did not consider that we were smarting under the operation of any particular Act of Parliament then; but that there had been a sudden action of the Bank which had created a sudden alarm, and seemed to have dried up the current of bank notes, and we wished to be relieved from the effects of that sudden alarm; that sudden action having been spoken of very strongly in the House of Commons a few nights before.
And the Bank relaxed to the extent which you have stated ?—Yes; the effect of that relaxation, though it was small, was very important; we wanted only the slightest thing to restore a certain amount of confidence, which had been very greatly destroyed by the sudden announcement of the Bank of England; and when we went back, and said we had had a small relaxation, it did restore confidence. There was a great deal of tightness and inconvenience afterwards, but the peculiarity of the crisis at that time was this; if no relaxation at all had been given, I think a great many solvent houses, with bills in their cases, would have stopped payment. We stated that to the Government; and I firmly believe now, that that stoppage was averted by the slight relaxation which the Bank gave, and that is a peculiarity which, when we come to October, will deserve to be remembered, because it was not the peculiarity of the crisis of October.
What effect had this relaxation upon discounts?-It was not a question of the rate of discount at all, it was a question simply of the power of discounting; it enabled us to do a little more : but there was a good deal more in the amount of confidence it inspired; and I may be allowed to say, that nothing is more material through the whole of this examination for us to remember, than the extreme importance, and the ultimate effect on prices of a state of alarm, or a state of ease, and that it is not simply the amount of what can be got, but the removal of the apprehension, that by-and-bye, if the alarm continues, nothing will be got.
Had it practically any effect upon the amount of your discounts ?-I think it had; I think it enabled us to go a little further.
A little further than you had gone?-A little further, probably, not than we had gone, but than we should have gone, after the announcement of the restrictive measure, if this slight relaxation had not been made.
Proposed Reform of our Monetary System. Chairman.-How far do you think the Bill was successful in restricting the issue of local banks?--think it was perfectly successful, and that it was most important to attain that object.
Do you think that that object was attained by the Bill ?-I think it was fully secured by the Bill.
With regard to securing the convertibility of notes, what is your opinion of the Bill ?—I do not think it has secured the convertibility of notes at all: the notes remained convertible up to the suspension of the Bill; but I believe that if the Bill had not been suspended then, or some similar measure adopted, notes would have ceased to be converti