between securities such as these, wholly dependent on future and uncertain events, to happen at distant and irregular dates, and liable to become worthless by the premature stoppage of the undertaking, and the class of securities which long experience has shown to be best suited to the requirements of bankers and money dealers is not marked in its character, but so wide and glaring as to prepare any prudent person to expect mischief.'

Of all finance companies, however, that which created the greatest interest was the Overend, Gurney & Co. Limited.' For many years the House of Gurney had been held in the highest estimation in the city of London, both on account of its reputed wealth and for its well-known business capacity. As a billbroker and a great discount house, the firm exercised an enormous influence in the financial transactions of the country, and certainly for upwards of sixty years it was in a position to afford facilities second only to those within reach of the Bank of England. Its profits were enormous. So late as 1860 the partners divided among themselves an annual sum of 190,000l. Unfortunately the two pillars of the house were removed: the head of the house, Samuel Gurney, died in 1856, and David Barclay Chapman retired in 1857, and their successors made considerable advances of a very doubtful character, which placed the firm in a position of difficulty. Finding themselves therefore in the possession of a well-established business, the goodwill of which was valued at half a million, yet wanting fresh capital, the representatives of the house resolved to convert the business into a limited liability, and having communicated the state of affairs to a select number of friends they jointly brought out a prospectus, and issued shares of 50l. each towards a capital of 5,000,000l. The public were of course altogether unacquainted with the condition of the house, and having no doubt respecting its wealth, eagerly accepted the offer, and Overend, Gurney & Co. Limited' took its place among the banking and financial companies of London.

The magnitude and worthlessness of many of the projects afloat might indeed have created alarm. In a few years as many as 300 companies were formed in the United Kingdom with a nominal capital of 1,000,000l. and upwards each, or an aggregate of 504,000,000l. And what became of them? Many existed only in the imagination; a fifth of them were abandoned before starting, and 87 more were speedily wound up. In a short time, out of 300 companies as many as 178 ceased to exist and 122 remained. And out of 504,000,000l. supposed to have been invested by these large companies more than two-thirds disappeared, some through bankruptcy, some through winding up, and some by a sudden disappearance from the market. Nor was the condition of the smaller companies more satisfactory. Many of the insurance compa: ies and amalgamations were of a most unsatisfactory cha

racter, and considerable doubt was entertained respecting a variety of undertakings stimulated by the facility of issuing shares provided by limited liability companies.

Side by side with the formation of these numerous companies there was a large development of every branch of commerce and industry in the United Kingdom. In 1856 the total value of imports was 172,000,000l. In 1860 it increased to 210,000,0007. and in 1866 to 295,000,000l. The exports, which in 1856 amounted to 139,000,000l., rose in 1860 to 164,000,000l. and in 1866 to 239,000,000l. And as another evidence of buoyancy, numerous bills passed through Parliament authorising the construction of public works, requiring a capital in 1865 of 126,000,000l. and in 1866 of 175,000,000l. The demand of capital for investment both at home and abroad became very considerable.

But another circumstance must be taken into account as exercising considerable influence on the financial condition of the country, and that is the drain of the precious metals to the East. The balance of trade between India and the United Kingdom, or still more accurately between the East and West, has been for years in favour of the East; the imports of produce and manufactures into India and China being far less in amount than their exports. In 1841 the value of merchandise imported into India was 8,400,000l. and its exports 13,500,000l. In 1851 the imports were valued at 11,500,000l. and the exports at 18,000,000l. In 1861 the imports of merchandise into India amounted to 23,500,000l. and the exports to 33,000,000l. When, however, a sudden and extraordinary impetus was given in India to the growth of cotton for export, to supply the void created by the American insurrection, the disproportion of exports increased enormously; so that whilst in 1865 the imports of merchandise into India amounted to 28,000,000l. her exports were valued at 68,000,000l. This was an enormous difference, and unfortunately no other means existed for balancing it than the transmission of treasure, which in the case of India was always in the shape of silver.2 What became of the silver in India, and why they prefer silver to gold, are important questions, not easy to solve. In any case, the drain of silver to India alone could not fail to exercise an enormous influence on the money market in England.

Given, then, a large number of joint-stock companies for banking, financial, assurance, and other purposes, involving the nation in liabilities at home and abroad for enormous sums, an excited state of trade increasing yearly at a rapid pace, a heavy drain of bullion to the East, and a considerable amount of specula

2 The exports of gold and silver to Egypt in 1862 was 12,629,8307.; in 1863, 12,289,433. In 1864 the exports of the precious metals to France increased largely. In 1863 they amounted to 4,760,9847.; in 1864 they amounted to 21,5247.; and in 1865 to 10,555,3617. Gold was sent to France that France t send silver to India.

tion, and we cannot wonder if the value of money increased considerably and the financial condition of the country became in every way very critical. The first result of all this activity was a considerable increase in the rate of interest. It is a singular fact that, although in London there is always the largest amount of disposable capital, the rate of interest has for many years been higher there than in Hamburg, Francfort, Amsterdam, and Berlin. From 1855 to 1864, whilst the average rate in London was 4.57 per cent., in Hamburg it was 3.05, in Francfort 3.51, in Amsterdam 3.75, in Berlin 4.41 per cent. And the rate of interest was actually higher after the discoveries of gold in California and Australia than before. Divide the twenty years from 1844 to 1864 into four periods of five years each, and we have in the first period the average rate of 31. 118. 7d.; in the second 3l. 58. 11d.; in the third 4l. 118. 8d.; and in the fourth 4l. 158. 3d. per cent.

The rate of interest, it should be remembered, is composed of three distinct elements. First, there is the interest proper, that is the natural produce, rent, or increment of capital; second, the insurance for risk; and, third, the expenses of management. The first depends in the same manner, as in the case of any other commodity, on supply or demand. The second varies with the state of credit and the class of securities. The third is great or small as the lender deals on a large or on a small scale, as the capital is dealt out from a great receptacle, like the Bank of England, or from the scanty resources of the smallest money dealer. The most important of these three, however, is the relation of supply and demand. Let it not be imagined that the supply of capital is indefinite, and that a banker has nothing to do but to issue paper currency to put into circulation to create any amount of capital. Capital is that portion of wealth already acquired which is appropriated to reproductive employment. When a bank lends notes to its customers it lends capital which it borrows from the community. In whatever form a loan takes place it always represents so much capital, either actually accumulated, or advanced on the mortgage of future accumulations.

In our highly developed system of banking most of the reserve fund of the country finds its way to the banks. Instead of each individual investing his spare money in a private and direct manner, the bankers become the intermediate agents between a numerous class of lenders and a numerous class of borrowers, and the funds held by them on deposit may be said to constitute by far the greater part of the available resources of our merchants. The amount of such deposits increased enormously in recent years. Those at the London joint-stock banks have grown from 180,000l. in 1836 to 12,000,000l. in 1850, 41,500,000l. in 1857, and to 90,000,000l. in 1865. The country and private banks may have had some 20,000,000l. more and the Bank of England had a very

H H

large amount of public and private deposits, especially of bullion always on hand. And this may be said to be, generally speaking, the loanable or available capital for investment in the United Kingdom. Besides this there are always, of course, a vast stock of goods, a large amount of railway property, and foreign securities; but these are not available as a loan fund. Present liabilities cannot be discharged with them. That which regulates the rate of discount in England is the aggregate of the deposits and bullion on hand. This is what constitutes the supply of capital.

And what is the demand? First of all there is the large amount drawn for home and foreign trade. In a state of quietness and prosperity, even without any positive speculation there is a great deal of buying and selling. In expectation of higher prices the stock of merchandise is enlarged, and credit and currency are in proportionally increasing demand. Secondly, whenever large public works are undertaken they require the conversion of a considerable part of the floating into fixed capital, and consequently leave so much less for the general wants of trade. The formation of public companies for enterprises abroad has the effect of collecting large proportions of the savings of the people for investments in fixed property in different countries, and foreign loans have the same effect. In this manner, there are occasions when the demand made upon the floating loan fund is excessive, when enterprises are undertaken demanding capital far beyond the power of the country, and when therefore a strait takes place which is indicated by a very high rate of interest.

Bearing in mind these important economic facts which must regulate the value of capital, of which money is merely the symbol or representative, let us see what has been the policy pursued by the Bank of England on the subject. So long of course as the usury laws were in force, the current rate of interest gave no indication whatever of the value of money. From 1704 to 1837 the rate charged by the Bank of England seemed extremely steady; it was never higher than 5 per cent., nor lower than 4, but that was not what needy borrowers paid, nor was it any evidence of the firmness of the value of money. It was only when the incubus of the Usury Laws was removed that the rate began to represent the real value of capital. During the pressure of 1839 the Bank raised the rate to 6 per cent., at which rate it remained for several months. At one time an erroneous opinion obtained that the rate of interest might be kept pretty equal at the pleasure of the Bank of England. But the futility of the attempt was seen, and in 1844 a new era was inaugurated. It being vain to think of a uniform rate on the face of the constantly varying nature of money, the Bank of England then resolved to charge for its accommodation a rate of interest in direct relation to the supply and demand of money, taking the state of the reserves, which to a certain extent is the

index of the amount of unemployed capital, as its guide. It was objected that constant fluctuations are of great injury to trade, that an even rate of interest was a great desideratum, and that in any case for reasons of general policy and as a matter of prudence the Bank should never lower its rate below 4 per cent. But how can these fluctuations be avoided? Money as a commodity must necessarily be subject to perpetual change of value, and no restriction can make that value immovable.

The relation of the rate of discount to the reserve at the Bank of England having always been very direct, on the passing of the Bank Act the country was in a state of great prosperity, capital had largely accumulated and the reserve was large. It amounted to 9,032,000l. against 13,305,000l. deposits, or to 67 per cent. Consequently the rate of discount fell from 2 to 3 per cent. This gave great stimulus to speculation, and the mania for railways followed, which required large investments. Unfortunately the potato failure thereafter succeeded, which caused the necessity for a large importation of grain; and the result was, that on October 16, 1847, the reserves diminished to 3,071,000l. against liabilities on deposits of 15,072,000l., being only 20 per cent., which rendered it necessary for the Bank to raise the rate to 8 per cent. From 1848 to 1852 the rate kept very low, in consequence of the discoveries of gold in California. and Australia; and on May 1, 1852, there were 12,069,000l. reserve against 18,774,000l. liabilities, being in the proportion of 64 per cent. Again, however, from that time, under the operation of free trade, and in consequence of the opening of new markets, commerce largely expanded and investments increased. The Russian war demanded large sums for the Crimea. The East became more than ever entitled to large remittances for fibrous materials. The mutinies in India followed, and another crisis set in, when it was found that the reserve had diminished to 4,400,000l., against liabilities of 21,860,000l., or to only 20 per cent. And, consequently, the directors of the Bank increased their rate to 10 per cent. After this the rate declined, but it did not fall very low. For a short time only in 1859 the rate was 24 per cent., but it soon increased to an average of 5 per cent. in 1860, and to 6 per cent. in 1861. From 1862 till towards the end of 1863, the rate remained at from 3 to 4 per cent. When, however, in the week ending December 3, 1863, it was found that there remained only 6,400,000l. bullion and notes in reserve to meet a liability in deposits public and private and seven days bills, of 19,670,000l., the rate was raised to 8 per cent. But matters did not seem to mend by such a step; the deposits, public and private, were increasing, the reserves still diminishing; and, in September 1864, the Bank was constrained to go higher than at any previous time, by fixing 9 per cent. as a minimum charge for accommodation :