|
The Credit Crisis - We've been here before... |
|
|
.. in 1857; the parallels are uncanny.
Towards the end of 1857 the commercial credit of the country was severely shaken. The great railway companies in America sank under the burden of debenture debts; when they failed to pay their creditors, the banks were unable to give gold in exchange for their convertible issue of notes, and then private firms of the highest standing rapidly tumbled into insolvency. The effect of these disasters on English commercial credit was most serious. Houses engaged in American commerce that had been rashly over-trading on the capital of their creditors, fell in rapid succession, dragging down others in their fall, the Western Bank of Scotland stopped payment, and spread ruin far and wide through the districts of which Glasgow is the business centre. The failure of this establishment revealed the fact that gigantic frauds had been perpetrated by the auditors, who had certified the existence of a fictitious surplus of £2,000,000. A panic in Ireland, together with these disasters in Scotland, brought the crisis to a head in England. The sudden demand for gold at the Bank of England alarmed the Government, which, on the 12th of November, suspended the Bank Act, limiting the issue of notes.
In 1847 when a similar course was adopted, the mere notification of it restored confidence, and the Bank did not take advantage of the licence granted to it. The crisis in 1857, however, was more serious, for fresh notes in excess of the legal issue were promptly put in circulation.* But the suspension of the Bank Charter Act by the Executive necessitated an application to Parliament for a Bill of Indemnity. Hence Parliament was summoned to meet on the 3rd of December. The Queen was under the impression that fresh light would be thrown on the crisis by the debates in both Houses; but there was really nothing new that could be said on the subject. As the Prince Consort observed in one of his letters, “Long prosperity had made all bankers, speculators, and capitalists careless, and now they are being unpleasantly reminded of natural laws which have been violated, and are asserting themselves”. Other matters besides the Indemnity Bill were mentioned in the Royal Speech; but, after passing that measure, Parliament separated on the 12th of January 1858, to meet again on the 4th of February.
* In 1847 the rate of discount had risen to 8 per cent, and the bullion in the Bank had fallen to £8,313,000. On 9th November 1857, the rate of discount rose to 10 per cent, and yet gold still flowed out till it sand to £7,171,000. The Bank was authorised to increase its issue by £21,000,000.
|
Opus Mitchell Consulting Ltd