THE

MERCHANTS' MAGAZINE

AND

COMMERCIAL REVIEW.

OCTOBER, 186 7.

CAUSES OF FLUCTUATIONS IN THE BANK OF ENGLAND RATE OF INTEREST.

Nothing is more certain than that we cannot make money easy and enforce a low rate of interest by legislative enactment; still one of the important necessities of modern commerce is a moderate equable interest for money borrowed, and if we can secure this to any country we shall confer a benefit which it is not easy to overestimate. Napoleon I., therefore, was not so far wrong when he said that the chief use of a great National Bank, and almost the only excuse for its existence, was that it should lend money at a low steady rate of interest. There is no doubt that in our times, under the existing methods of organizing industry, severe and sudden fluctuations in the price exacted between borrowers and lenders of floating capital, are likely to inflict heavy losses on individuals, to check the growth of national wealth and productive power, as well as to become the fruitful cause of disappointment, bankruptcy and suffering to the industrious and enterprising classes of the community. It is one of the proud characteristics of the Bank of France, that whatever else may be said to its disparagement, its rates of interest have been raised very little and very seldom from the average of four per cent. during the present generation, and it is one of the most grave and damaging charges which has ever been brought against the Bank of England and against the British system of financial machinery, of which the Bank forms a controlling part, that its minimum of interest has fluctuated from 2 to 10 per cent. with a frequent violence which has

baffled all forecast; and that ever since 1844, when the present Bank Charter was passed, such spasmodic anomalies have been much more remarkable than ever before. On this account that charter has been held responsible for all the mischief. The arguments post hoc ergo propter hoc is an easy one to urge, and too often a difficult one to refute. The general expectation has been that the British Parliament would appoint a commission for taking such evidence as the panic of 1866 might evolve to throw light ou the increase of monetary stringency by the operations of the Bank. It is to be regretted that in the reform agitation which has convulsed England during the past session, these financial questions have been crowded out and forgotten. Meanwhile, valuable facts are fading from sight. The memory of such events soon becomes confused, and the evidence conflicting. Theories dominate facts, and at some future time, when the inevitable inquiry is to be made, we shall come to it in a cooler and more judicial temper, perhaps; but with a less vivid recollection and a less adequate view of the evidence to guide us to right conclusions.

We have said that it is impossible to regulate the rate of interest by act of Parliament. If we were to go further, and affirm that the Bank Charter Act of 1844 is not responsible in any direct manner for the perturbations of the money market which have followed it, we should not concede that an inquiry into the operation of the act would be unnecessary or fruitless. The bank charter is one thing, and the action of the Bank directors under that charter is a very different thing. The former may be good, while the latter may be more or less bad. The fact is that all the legislation of the English Parliament relative to the Bank since the celebrated Currency Act of Mr. Peel in 1819, has avoided intermeddling with the rate of interest, and has been directed to a totally different object-namely, the preservation of the nation from the currency troubles which were so serious during the first two decades of this century.

What that legislation has aimed to accomplish is to keep the currency of England at par with gold, and to prevent its bank notes from ever again depreciating or falling to a discount as compared with coin. The object has been fully secured for nearly half a century, and it has been done by the application of the safeguard for whose virtue and efficiency this journal has always contended in regard to our own currency. The safeguard is founded on the principle that the amount of the cur rency afloat in any country regulates the value or purchasing power of that currency. It being acknowledged that if more currency is afloat than the business of the country requires on a par basis, the value of the currency will fall below par, the currency-issuing institutions of England are put under stringent restrictions. And the only increase that currency can receive beyond a fixed amount must be issued to represent gold coin or bullion actually in the vaults of the Bank, and ready to be paid out on demand. The great aim of the Parliament then has been to prevent depreciation, or, as it is sometimes expressed, "to secure the convertibility of the note;" and this aim, we repeat, the successive legal enactments have fully accomplished for fifty years during which they have been in force. This point has indeed been urged as an argument against further investigations by parliamentary commissions, in addition to those which have taken place in past years.

Another argument against the appointment of an investigating committee at present, is that similar researches and inquiries of former Parliaments have been so full as to preclude the necessity for anything further of the same sort. But this reasoning is evidently faulty. Former inquiries have not led to a remedy. The evils of a treacherous money market are too appalling for us to conclude that they are incurable. And the only hope of cure lies in inquiry and examination. There are, moreover, various well-known features in the panic of 1866 which differ from all other financial revulsions which have been known in England. These facts, when brought into a fuller light, may perhaps be suggestive and useful as factors for the solution of the problem. For these and other reasons the long agitated Bank investigation will doubtless be made next session. At this distance it is not our intention, nor have we the requisite control over the sources of information, to venture to point out the directions which the future inquiries may take. There are two points only which we will suggest.

The first is the action of the Bank of England under a drain of gold. It is well known that when, from any cause, the gold reserve of the bank falls there is but one remedy applied, namely, to raise the rate of interest. The evil which has caused the drain of gold may be in its nature either financial or political, it may arise from foreign complications, or from internal or domestic causes-but no matter. The remedy which the directors apply is always one and the same. They know of no other method to attract gold into their vaults than by checking the activity of business, and giving in this way a turn to the foreign exchanges. Now, the act of 1844 does not prescribe any such method of replenishing the gold reserve. The Bank of France has on several occasions made up its failing reserve by other methods than this. Such methods are, perhaps, more costly to the bank, but infinitely less costly to the nation. We do not say they are capable of adoption in connection with the gigantic foreign trade of England, but we do say that we expect the report of the Parliamentary Commission will give us more explicit and exhaustive information on this special point than any of the previous blue books that have been issued.

The only remaining question we shall raise connects itself with the Joint Stock banks. Since 1834, when the first of these institutions opened its doors, they have received a prodigious increase of power, and the doubt is whether that power does not need regulation. We have before pointed out that the chief trouble in respect to the sudden variations of the rate of interest dates from 1844. And it is a noteworthy fact that these institutions have grown up during the same period. In 1835 the joint-stock deposits were only £266,000, in 1845 they aggregated £10,053,000, in 1855 they had increased to £29,109,000, in 1861 to £50,783,000, and now they amount to £68,609,548. From these figures it is easy to see that the relations of these institutions to the British money markets have undergone a complete revolution since the bank act of 1844 was enacted. Then their operations were comparatively small. They had only 10 millions to use besides their own capital. Now they have nearly 70 millions of borrowed money which they control, or more than three times as much as the individual deposits of the Bank of England. The joint-stock banks have therefore been justly

pointed out as probable sources of some of the trouble we are investigating. We do not under-value the usefulness of these institutions, or the high reputation some of them deservedly enjoy. But the evidence against them is confirmed by several facts, amongst which are the following: First, their earnings are too large not to suggest doubts. Dividends of twenty-two per cent., or twenty-five per cent., or even twentyeight per cent. a year are not to be made without more risks than are consistent with safe, legitimate banking, especially as the rate of interest being 2 per cent., 1 per cent. is bid by the banks for deposits. Secondly, to enable themselves to pay such large dividends, the paid up capital is kept very small in proportion to the risks incurred and the business done. The aggregate paid up capital of the 7 banks is only £6,609,804, while the deposits are £68,609,548. Including surplus they have thus 78 millions sterling to use, of which only nine millions is their own money. On these funds they do the following business. They hold of government securities 8 millions, and of private securities 67 millions, and to guarantee their solvency they report 12 millions of cash reserve, of which nearly 3 millions are in a single bank, which says that this sum includes cash "in bank, at Bank of England," and at call.

If, leaving the aggregates, we examine the individual banks, we shall find ample room for the expectation that in case of any flurry in the money market these institutions, by their alarm, and by their efforts to strengthen themselves would be likely to increase the trouble. Take, for example, the London and County Bank, which is regarded as one of the most respectable. Its paid up capital is £880,864, while its deposits are £12,033,334. It has thus some 134 millions sterling to employ with a view to make dividends on a paid up capital of considerably less than a million. These funds are invested in government securities to the extent of £968,796, while in other securities £10,334,328 is invested, and a cash reserve is kept of £3,284,352.

It will be observed that we do not question the stability and ultimate solvency of these joint-stock banks. To discuss that point is foreign to the object we have in view, and would lead us away from the point we have raised, which is simply the behavior which might be expected from them in time of sudden pressure, and the results of that behavior on the course of the money market. We may recur to the subject hereafter, and will do no more in this place than suggest that institutions having so vast an aggregate of funds continually flowing into and out of their vaults, should be compelled to keep a larger reserve of cash in hand, and should be placed under more obligations of publicity, by being required to publish a weekly statement, like that required of the Bank of England and the Bank of France.

THE SUEZ CANAL.

This great work, "a connecting link between two worlds," appears, according to the last report of the company, just made public, to be progressing satisfactorily. One after another the difficulties which have been denominated insurmountable by the faithless and doubting, have been met and overcome, until now it is thought that only about two years

more will be required before what has so long existed as a grand idea only, may become an accomplished fact. This favorable opinion is at present not only expressed by those pecuniarily interested in the work, but widely known English Engineers, who have hitherto been so skeptical, admit at length its feasibility, and profess confidence in its speedy accomplishment.

It is difficult to estimate the importance of this work to commerce and civilization. Bringing, as it does, Europe into immediate and direct communication with Asia and Africa, it cannot but exercise an incalculable influence in disseminating western civilization among the teeming population of the East, while at the same time it furnishes to the immense trade with those countries, the stimulus of a rapid and economical means of transit. The Mediteranean Sea, as our readers well know, is separated from the gulf of Suez by a narrow isthmus of land only seventy-five miles wide. That gulf gradually widens into the Red Sea and Sea of Arabia and, finally, into the great Indian Ocean, which lies between the Western coast of Africa, India, China and Australasia. The present channel for commerce between Europe and those countries embraces a wide circuit of the navigable globe around the Cape of Good Hope, and occupies from five to seven months. But the direct route even over that extensive course cannot be taken, since ships leaving Europe or the American Atlantic ports for India, China or Australasia must make immense detours by the Canaries or Azores in order to get into or avoid the monsoons or winds that blow steadily in one direction for months, and promote or retard their passage. Hence it is evident that if vessels could cross direct from the Mediterranean to the Gulf of Suez the distance to India would be shortened nearly threefourths with a corresponding saving in the cost of transportation, while at the same time the dangers attending a voyage round the Cape of Good Hope would be wholly avoided.

Under these circumstances it can be easily understood how the opening of such a channel between the Mediteranean Sea and the Gulf of Suez should have long enlisted earnest attention, and still more earnest efforts for its accomplishment. In the early days of Egyptian civilization a canal was commenced by Pharaoh Necho, and finally completed by Da rius, the remains of which still exist. It was destroyed during the fierce wars of Mahommedan conquest, and has since to such an extent been choked up by the shifting sands of the desert, as to be so utterly worthless that the new canal now in progress does not even follow the original route. The restoration of this ancient work was among the earlier plans of the First Napoleon, who projected it as a means of counteracting British ascendancy in India, and gaining for France a portion of the commerce of the East. The project has been frequently revived since his time; but it was reserved for M. Ferdinand de Lesseps, the celebrated French engineer, to initiate the work, and carry it, as he probably will, to a successful termination. The difficulties in the way would have deterred a less ardent and earnest man. He had to overcome the apathy of some, the active opposition of others, and provide the capital requisite for the undertaking.

It was in 1852, we believe, that this French enthusiast, as some then called him, first attempted to form a company for the construc