ART. IX.-1. La Banque de France, et l'Organisation du Crédit en France. Par ISAAC PEREIRE. Paris: 1864.

2. Des Banques. Par LOUIS WOLOWSKI. Paris: 1864. A YEAR ago a sagacious observer of our financial condition

6

wrote: The pecuniary year 1864 opens under remark'able circumstances. The year 1863 has left us a legacy of 'three powerful mercantile causes. First, we are buying cotton largely in new countries; secondly, we are promoting companies in vast numbers; thirdly, we are considerably extending our general export trade, not only with a few 'countries, but with almost all countries-with the world at 'large. It is right that we should consider clearly what the ' combined effect of these three causes is likely to be.' The writer concluded with a prophecy which we are now in a position to review, 'that the year would be a serious, though not an alarm'ing year, that our trade would probably be very large and very 'profitable, but that against this we should have to set the pos'sible consequences of a long period of dear money.'

It may be thought that the late year has been not only serious, but even alarming, Probably in no former instance has there been so much agitation without any actual crisis. Not only has money been dear, but, if we except the few weeks in 1857 during which the rate of interest rose to 10 per cent., even dear beyond precedent. The average rate of 1864 exceeded seven per cent., a considerably higher average than that of any year within English banking memory. Trade has been carried on under a continual sense of pressure and coming danger. We have witnessed all the well-known symptoms of an anticipated panic. During weeks and months a general tone of anxiety and foreboding pervaded city articles and financial journals, and not in financial circles only, but generally throughout society, a vague impression prevailed that there was something wrong in the city. Abroad the same feeling was prevalent, and Paris, Frankfort, and Amsterdam, not only trembled for themselves, but above all things trembled for London. In all quarters, under the belief that some change for better or worse must immediately arise, and that a continuance of the existing state of things was unnatural and impossible, there was a growing tendency to exaggerate and misinterpret every symptom, till under the lassitude of increasing apprehension, the crisis which seemed for ever impending and never to come, was almost invoked. Manchester cried that her industry was paralysed.

Liverpool, if the Bank Act were not suspended, prophesied the collapse of her trade. The provinces telegraphed anxious inquiries to London about failures which had not occurred, and London retaliated by curtailing her credits to the provinces. Banks were almost ruined by the repeated assertion of their incapacity to meet their engagements, and men made up their minds that it would be impossible to clear off the aggregate liabilities of commerce without a catastrophe. The experience of former years was constantly appealed to, in order to prove that the same phenomena portended the same end, and that the sequence of events in 1847 and 1857 would also be the sequence of 1864.

For this almost universal anxiety there was undoubtedly some ground. Without question the engagements of the country had been unprecedentedly large, and that at a very critical time. The interruption of the cotton trade, far from contracting the liabilities of the country, as it might naturally have been expected, had on the contrary actually increased them by the new forms of foreign commerce to which it gave birth. Egypt and India and other countries comparatively new to the cotton trade, taxed the paying powers of this country far more than America. For America in the general course of trade took payment not in bullion but in manufactured goods; and a comparative want of organisation in the infant trade prevented that economy of circulation, which the old-established curient of commerce between America and this country had carried to so high a perfection. Besides this, the general trade of the country, in spite of high rates of interest, in spite of the constant apprehension of danger, had continued to all appearance on an undiminished scale. We need hardly observe, that the transactions of our general commerce cannot be suddenly curtailed. Our engagements under the present system of credit necessarily extend far into the future, so that a time of pressure cannot at once visibly produce the phenomenon of a sudden and general contraction; and as an immediate contraction was supposed to offer the only escape from a money crisis, the slow progress made in the reduction of our liabilities could not fail to produce anxiety. The effect of these somewhat disquieting circumstances was heightened by the apprehension felt with regard to the working of the new financial companies which in the year 1863 suddenly attained such an extraordinary expansion. Would these companies, it was asked, be guided by the same rules of prudence which the experience of former critical years had taught older establishments, or would the hopes of enormous dividends, and the consciousness of the

limitation of risks under a diffused liability, render them callous to the signs of the times? Would they, if they could, could they, if they would, escape from the vast undertakings to which they seemed pledged even by their very names? At a time when it was almost looked upon as a disaster that the ordinary scale of ordinary transactions could not be contracted with sufficient rapidity, the gigantic operations of the new companies naturally seemed to justify still deeper distrust.

But there was one consideration which, independently of any just appreciation of its causes, oppressed the public mind. Men were not satisfied to know why money was dear, they were alarmed at the fact independently of its causes, and above all they were disturbed by the long continuance of the fact. Of late years, it is true, the antiquated notion that 5 per cent. was to be the limit and criterion of financial respectability, has lost much of its force. High rates of interest, such as 6 or 9 per cent., no longer produce the same shock upon the nerves of the trading community. But it was one thing to endure high rates for a few weeks, or at the outside a couple of months, and a very different thing to witness the continuance of rates ranging from 6 to 9 per cent. through the course of an entire year. An average rate of 7 per cent. seemed indeed intolerable. The instinctive belief that any dearness of loanable capital is in itself, apart from any causes whatever, a commercial calamity, appears almost invincible, and the patience and resignation with which it is endured in city circles properly so called, who living close to our banking centre are better able to see, as it were with their own eyes, how the system works, provoke the sneer of the manufacturer and the retail trader, that high rates of interest naturally find favour there. The traditional exasperation always hitherto caused by any long-continued scarcity of capital prevails unabated, and the public, undervaluing the force of other theories, pertinaciously fastens that scarcity on our banking legislation. The Bank Charter Act is the universal scape-goat. That Act is, directly or indirectly, looked upon as the cause of all the evil. The amount of bank notes must be insufficient. Has not every kind of transaction almost indefinitely multiplied and increased, and why then is the circulating medium fixed? Have not other monopolies been abolished, and why should the most odious and searching of all monopolies, a monopoly which penetrates into every corner of the national commerce, and cripples every energy in the country, be maintained? Liberty of trade we have, and why not liberty of banking?

These familiar phrases, recalling ideas, long ago and over and

VOL. CXXI. NO. CCXLVII.

over again refuted, involve, in whatever form presented, the fallacy, that in a country like ours, whose export and foreign trade is the very fountain-head of its prosperity, and whose liabilities to foreign nations bear so large a proportion to its total engagements, the means of fulfilling those engagements could be made, or ought to be made, artificially or legislatively abundant. It is not too much to say that in many quarters it was hoped that the Bank Act of 1844, which had already been suspended twice, would break down again, a catastrophe which it was believed on all hands would have given the death-blow to the obnoxious system. The day was almost invoked, when another deputation of bankers and money-dealers might wait on the Government with threats of a universal suspension of payments, if the magic letter were not conceded to put an end to that intolerable system— doubtless the deputation would have called it a cast-iron system-whereby men are prevented from fulfilling engagements into which they have knowingly entered beyond their

means.

The sketch we have given, though necessarily brief, forms, we think, no exaggerated picture of the state of feeling during the past financial year. While we write this public feeling is only just emerging into another phase, and men breathe more freely because the year which began at 7 per cent., and threatened to close at 9, actually closes at 6. Nevertheless, 6 per cent. is still considered a high rate of interest, which it would be pleasant to be able to characterise as an abnormal, an unnatural rate. The prediction of a long period of dear 'money' has already been abundantly justified, but is it really at an end? Can it be reasonably hoped that the halcyon days of 3 per cent.,--days when the lender humbly sued the borrower to accept a loan, and the borrower actually conferred a favour on the lender by taking his money,-are ever likely to return? We shall best find the answer to these queries, if we attempt to unravel the causes of the scarcity of loanable capital which has so long prevailed, and endeavour to ascertain how far it may be attributable to the prolonged operation of causes essentially temporary nevertheless, or how far the new phenomena may perhaps in reality be due, not so much to temporary causes, as to fundamental and possibly permanent changes in the relation of the aggregate of English capital to foreign demand, and to the daily multiplication and growth of the channels through which the former is sucked out and absorbed by the latter.

Upon the temporary causes we have already touched. No

1865.

Seven Per Cent.

doubt the export of bullion to pay for cotton raised in foreign countries, unaccustomed as yet to take manufactures in payment, has exercised a very powerful influence on the moneymarket, and has possibly more than counterbalanced the large excess in the supplies of the precious metals which under the effect of a depreciated currency has reached us from the United States. No doubt also the general increase in our trade tends. to raise the value of loanable capital, and the congratulations on the flourishing returns of the Board of Trade are seldom unmixed with a tinge of misgiving at the accompanying posIn connexion with sibility of a rise in the rate of interest.

this view of the subject, it deserves to be noticed, that in the autumn of the late year, when these trade returns showed the first signs of a falling-off, the first symptoms of a fall in the price of money had also become apparent.

But although the causes we have briefly reviewed might account for some of the recent financial phenomena, it was universally admitted they could not account for them all. And it was argued that our financial system was at fault, that a system which permitted the long-protracted scarcity of a commodity so indispensable as money must be unsound, and that the present condition of things must arise out of artificial and abnormal causes, which, as they had been artificially created, could be artificially removed.

We think, on the contrary, and we will endeavour to show, that the present condition of affairs has arisen not out of artificial and abnormal, but normal and natural causes-in other words, that the high rates of interest which have lately and so long prevailed, are the result not of any artificial tampering with the natural course of things, but precisely on the contrary, of giving the natural course of things free play. It will be found, we think, by those who patiently study the subject, that the rise in the price of loanable capital is, above all things, due to the growing availability and diffusion of English capital for foreign purposes, and that this growing availability and diffusion are in their turn the consequence of the new organisation provided by the comparatively sudden and vast expansion of the Joint-Stock system, and of the birth of so many financial companies capable of undertaking the largest operations. At first sight it may seem that the searching competition of the new companies which sucks into the money-market and condenses into large and available streams countless rills of savings scattered up and down the country, which were not reached before, ought, by bringing more unemployed capital into the market, to lessen its value and lower