THE BANK CHARTER ACT OF 1844, AND ITS SUSPENSIONS
After the renewal of the Charter in 1833, the directors of the Bank of
England laid down as a principle on which their future operations were
to be guided, that one-third of their liabilities should be kept in
cash and bullion, and the remaining two-thirds in securities. If this
principle had been acted on, the Bank would have been saved from many
of the troubles which shortly assailed it; but though the intentions
of the directors were good, circumstances were too strong for them,
and the actual proportions of cash and securities to liabilities
respectively, often differed materially from the standard laid down.
This was notably the case during the periods of financial pressure
which were experienced in the years 1836 and 1837.
In the year 1839 matters assumed a very serious aspect. In the early
part of this year the amount of cash held by the Bank was about
one-third of the amount of securities, but during the year the amount
invested in securities increased at the expense of the amount held
in cash; and by September we find that securities stood at nearly
£29,000,000, while the cash was reduced to a tenth of that figure, and
stood at £2,936,000 only. In order to avert a calamity which appeared
to be impending, the Bank arranged loans in Paris and Hamburg to the
extent of between three and four millions.
This manifest exhibition of weakness on the part of the Bank led to
the appointment of a committee of the House of Commons to inquire into
the matter. The committee condemned the principles on which the Bank
was working, but were powerless to effect any alteration, owing to the
Charter of the Bank not expiring till 1844.
On the expiry of the Charter, however, Sir Robert Peel brought forward
his famous Act for remodelling the Bank, and regulating the issues of
the country banks throughout England and Wales.
The Act was passed on the 19th July, 1844, and continues without
alteration to the present day. The main provisions enacted thereby,
briefly stated, are as follows:—
I. The Issue Department and the ordinary Banking Department of
the Bank of England were to be entirely separated as from the
31st August, 1844.
II. On such separation taking place, securities to the value
of £14,000,000 (including the debt due to the Bank from the
Government) were to be transferred to the Issue Department,
together with so much gold coin and bullion that the total
so transferred should equal the total amount of notes then
outstanding. Thereafter (with the exception noted below) the
Issue Department must not issue any notes in excess of a total of
£14,000,000 except in exchange for gold coin or bullion.
III. The Issue Department might not at any time hold more silver
than one-fourth part of the gold held. As a matter of fact, the
Issue Department holds no silver.
IV. Notes might be demanded from the Issue Department by any
person in exchange for gold at the rate of £3 17_s._ 9_d._ per
standard ounce.
V. If any banker having the power of issue on the 6th May,
1844, should relinquish such issue, the Issue Department may be
authorised to increase its issue of notes against securities to
the extent of two-thirds of the issue so relinquished; but all
the profits on such increased issue against securities were to
belong to the Government.
VI. The Bank must issue a weekly statement of the position of
both its Issue and Banking Departments, in a prescribed form.
VII. Bankers having the right to issue their own notes on the 6th
May, 1844, might continue such issue under certain conditions,
and to an agreed amount; but no provision was made compelling
such bankers to keep any reserve either in cash or securities
against their issues. If any issue lapsed, from any cause, it
could not be resuscitated; and no institutions could acquire the
right of issue in the future.
VIII. Banks consisting of more than six partners, though within
the sixty-five-mile radius of London, might draw, accept, or
endorse bills of exchange not being payable to bearer on demand.
The first return issued by the Bank in accordance with the regulations
of the new Act was that of the 7th September, 1844, and was as
follows:—
ACCOUNT OF THE LIABILITIES AND ASSETS OF THE BANK OF ENGLAND
_For the Week ending 7th September, 1844_
_Dr._ ISSUE DEPARTMENT _Cr._
---------------------------------+--------------------------------
£ | £
Notes issued 28,351,295 | Government debt 11,015,100
| Other securities 2,984,900
| Gold coin and
| bullion 12,657,208
| Silver bullion 1,694,087
----------- | -----------
£28,351,295 | £28,351,295
=========== | ===========
_Dr._ BANKING DEPARTMENT _Cr._
---------------------------------+--------------------------------
£ | £
Proprietors’ capital 14,553,000 | Government
Rest 3,564,729 | securities 14,554,834
Public deposits 3,630,809 | Other securities 7,835,616
Other deposits 8,644,348 | Notes 8,175,025
Seven-day and | Gold and silver coin 857,765
other bills 1,030,354 |
----------- | -----------
£31,423,240 | £31,423,240
=========== | ===========
For comparison we append the Return of the 2nd September, 1903.
_Dr._ ISSUE DEPARTMENT _Cr._
---------------------------------+----------------------------
£ | £
Notes issued 51,831,835 | Government debt 11,015,100
| Other securities 7,434,900
| Gold coin and
| bullion 33,381,835
| Silver bullion Nil
---------- | ----------
£51,831,835 | £51,831,835
========== | ==========
_Dr._ BANKING DEPARTMENT _Cr._
--------------------------------+-----------------------------
£ | £
Proprietors’ capital 14,553,000 | Government securities
Rest 3,740,209 | 18,260,841
Public deposits 7,393,580 | Other securities 24,969,260
Other deposits 41,872,061 | Notes 22,322,875
Seven-day and | Gold and silver coin
other bills 113,465 | 2,119,339
---------- | ----------
£67,672,315 | £67,672,315
========== | ==========
The provisions of the 1844 Act, above noted, are the principal
ones which affected banking in general, and the Bank of England in
particular—they were the food for much debate and discussion before
they became law, and it may be added that several of the provisions
then enacted have been the food for much debate and discussion ever
since. Taken as a whole the Act has worked well, and has succeeded, in
combination with greater knowledge and foresight, in maintaining our
banking system in a sound condition.
The regulations as to the country bank-note issues were framed with
the idea of ultimately eliminating entirely such issues; but though
the amount of private notes in circulation has decreased, and also the
number of bankers who have the power of issue—by lapses, bankruptcy,
and amalgamations—the time when there are no country bank-notes has
not arrived, notwithstanding that the framers of the Act confidently
anticipated that such a result would be achieved long before now.
The main point of contention between the supporters and opponents
of the Act lies in its want of elasticity in time of need. Under
no circumstances can the Bank increase its issue of notes against
securities beyond the prescribed limit, without a breach of the law;
but on three occasions in the past the law has been broken, though
with the consent of the Government, and subsequent confirmation of
Parliament.
Under the laws regulating the Imperial Bank of Germany such procedure
would not have been necessary. The German Bank Law has been framed
largely on the same lines as our own, but it gives the Reichsbank power
to increase the amount of notes issued against securities on a payment
to the Government of a fine of 5 per cent. per annum on the excess
issue. This fine is sufficient in ordinary times to act as a complete
check on overissue, but in times of trouble it acts as an efficient
safety-valve by relieving the minds of business people from the fear
that “there will not be enough to go round.” If it is known that money
can always be had at a price, the probability of a crisis developing
into a panic is almost entirely obviated.
We will now briefly review the three occasions on which the Bank Act
was suspended, and the effect of such suspensions.
The first of these occasions was during the panic in the year
1847—known as the “railway panic.” Shortly previous to this year a
great accumulation of capital had led to a demand for new investments,
which were duly provided for the public by those concerned with such
matters. Added to this, interest rates had ruled low for some time, and
this conduced to a period of speculative activity. Too much capital
was put into fixed investments—chiefly railways—and in one session of
Parliament sanction was asked for various railway schemes involving a
total capital of £340,000,000. Wild gambling in railway stocks ensued,
credit was inflated above all reason, and then the turn came. This
was primarily due to a bad harvest and potato crop causing a heavy
importation of corn, and consequent export of gold.
During the panic which ensued, the reserve of the Bank of England fell
to £1,600,000, but when the panic was at its height, the Act, passed
only three years before, was suspended. The Bank was authorised to
increase its accommodation to the public by exceeding, to an indefinite
extent, the limit fixed for the issue of notes not secured against
gold. The effect of this suspension of the Act was immediate and
complete. The fear that “there was not enough to go round” passed from
men’s minds. As a matter of fact, the issue on this occasion did not
exceed the normal limit, the mere knowledge that the Bank was empowered
to exceed this limit proving sufficient to allay the panic.
The second suspension of the Bank Act was due to the crisis of 1857, a
crisis that was brought about by reckless overtrading, and came upon
the public very suddenly and with practically no warning. The reserve
of the Bank of England had been allowed to fall dangerously low during
the course of the year, and large financial operators had carried
on vast transactions with hardly any capital—only credit—relying
for assistance on the Bank. Bad news came to hand from America in
September, detailing how there had been a serious financial collapse
in that country; failures had occurred, shaking commercial credit to
its core, and about one hundred and fifty banks had stopped payment.
A heavy drain of gold from here to America commenced, and by the middle
of October credit was curtailed, and distrust was rife in England.
Within a very short space of time many of our banks and financial
houses were crippled and failed. In November heavy demands were made
for gold for Scotland and Ireland, and on the 11th November the failure
of Sanderson and Company—a great London discount house—was announced,
with liabilities of upwards of five millions. Utter rottenness appeared
to pervade the commercial world, and general bankruptcy seemed
imminent, when for the second time the Bank Act was suspended. This
took place on the 12th November, and at once had the effect of quieting
the public mind. On this occasion the Bank had to make use to a large
extent of its temporary authority to issue notes above the normal limit
without holding gold against them. The severity of this crisis can
be seen by the fact that in November the Bank reserve fell to under
£600,000, while the bankers’ balances at the Bank of England alone
stood at about five and a half millions, and the Bank Rate was as high
as 10 per cent. This was also the rate charged by the Bank of France
at the time, showing that the panic had spread, and was not solely
confined to ourselves and America.
The third suspension of the Bank Act took place in 1866. Many elements
of disturbance to the Money Market had been in force during two or
three preceding years. The Civil War in America had resulted in gold
being sent to this country; but the stoppage of the supply of cotton
from America, owing to the war, disorganised one of our staple national
industries, and supplies of cotton had to be obtained from elsewhere
at high prices, and paid for in cash. Hence a drain of gold set in
on a large scale. In addition, a large speculation had been built up
on credit in the stocks and shares of the many new limited liability
companies which were formed at that time.
General uneasiness began to prevail towards the end of 1865; in
January, 1866, the Bank raised its discount rate to 8 per cent., and a
crisis began to develop rapidly.
Speculators tried to sell their securities and found no market for
them, several large railway contractors failed, and many of the newly
formed limited liability companies succumbed and were wound up. The
failure of the Joint Stock Discount Company, followed shortly by that
of Barned’s Bank of Liverpool, brought matters to a head; the distrust
became universal and culminated in panic. On the 9th May the Bank Rate
was raised to 9 per cent. On the 10th May the failure of Overend,
Gurney, and Company—for upwards of ten millions—was announced, and
the Bank Rate went to 10 per cent. This failure was not made known
till after business hours, so it was not till Friday, the 11th May,
1866—known as “Black Friday”—that the crisis reached its height.
The stoppage of this large house affected the whole world, and general
failure seemed imminent, when, in the afternoon of the day on which
the failure became known, it was announced that the Bank Act was again
suspended, and calm began to take the place of mania. But though the
panic was allayed, many failures shortly took place, which delayed
the quick restoration of a sense of security. Among these failures
may be mentioned the Bank of London, the Consolidated Bank, and Agra
and Masterman’s Bank. All these three institutions were perfectly
solvent as a matter of fact, but they found themselves in the dangerous
position of having no _available_ assets. The two last-named banks
subsequently resumed business.
From the above brief records of the financial tragedies of the past,
we see that on each occasion reckless speculation and overtrading had
been allowed to reach a dangerous height before any steps were taken
to check them, and on each occasion the check came too late. But we
also see the marvellously quick effect which the suspension of the Act
had on the situation. Although a period of nearly half a century has
elapsed since the time of the last suspension, the position remains the
same, and it is only owing to greater knowledge and greater caution
that such catastrophes have been averted.
In contemplating any future catastrophe of the kind which may come upon
us, it is generally assumed that the Act would be again suspended; but
delays are dangerous. By the time the situation had developed to such
an extent that the Government might deem it expedient to give the Bank
the necessary powers, a panic such as has never before been known might
overtake us; whereas if the suspension of the Act were to a certain
extent automatic, and responsible people knew for certain that money
could always be had at a price, the probability of such a termination
of any crisis would be very remote.